Amid opportunities and questions, the U.S. construction industry continues to evolve in dynamic but sometimes challenging ways.

The first half of the 2020s was a study in contrasts for contractors. As the country and construction industry emerged from the slowdown and economic tumult caused by the COVID-19 pandemic, supply chain disruptions drove costs higher. Labor shortages sapped the workforce. As a result, many outfits expressed concerns that profits would slip in the near-term, according to Associated Builders and Contractors. 

Yet despite those headwinds — real and perceived — the U.S. construction industry remained strong in the first half of the decade, especially when compared with other countries. A similar dichotomy exists as the second half begins. 

Evolving interest rates and labor pressures.

One reason for companies’ cautious optimism may be the Federal Reserve’s shifting approach to interest rates. After a rapid run-up followed by initial cuts in 2024 and 2025, rates have entered a more uncertain phase. Rather than moving in a clear direction, policy has become more measured and data-dependent, reflecting ongoing questions around inflation, economic growth and the strength of the labor market. The Fed continues to balance the risk of cutting too quickly against holding rates higher for longer. For construction firms, that uncertainty has translated into a mixed demand environment, where some projects are moving forward while others are delayed or re-evaluated. 

Rising costs tightening the screws on subcontractors.

Rising material costs, shifting tariff policies, unpredictable supply chains, and the ongoing labor shortage will no doubt continue to squeeze contractors’ and subcontractors’ already-slim profit margins, with the latter shouldering much of the burden. 

Strengthening resilience in an unpredictable market.

Setting aside factors that are harder to control, such as the economy or tariffs, contractors should focus on a few key areas to strengthen their ability to weather the unpredictability, such as managing bidding and contracting risk to ensure project viability and prevent cost overruns and scheduling delays. Cybersecurity should continue to be a priority as well. More than two in five contractors report experiencing increases in phishing, data breaches and ransomware attacks in the previous year.  

Technology driving a safer jobsite.

Construction comes with more than just business risks. On even the most well-managed jobsites, workers are exposed to many potential physical hazards, from falls to electrocutions, and injuries and deaths have remained high for more than a decade. The construction industry accounted for 1,075 workplace fatalities in 2023, the most recent year for which data is available. That’s the highest number of annual deaths in construction since 2011. 

However, firms have a range of new devices and technologies from which to choose for providing their workers with a safer workplace, such as monitors, sensors and location geofencing. Developing and maintaining a culture that prioritizes safety over speed and conscientiousness over corner-cutting can reduce accidents by signaling to employees that their well-being comes before profit.  

Data center demand meets real-world constraints.

Data center construction remains one of the most closely watched areas in the industry. Demand tied to cloud computing and artificial intelligence continues to drive investment, but the pace and shape of that growth are becoming less predictable. Long-term projections still point to significant expansion. However, in the near term, developers are navigating a more complex environment. Power availability, land constraints, permitting challenges and rising construction costs are all influencing how and where projects move forward. In some cases, these factors have led to delays, cancellations, phased builds or redesigned projects that better align with available infrastructure. 

Energy has becoming the defining factor. Data centers — especially those supporting AI workloads — require significant and reliable power, and meeting that demand is emerging as one of the industry’s biggest challenges. In response, developers and utilities are working to expand generation capacity, upgrade grid infrastructure and explore alternative energy strategies to support future growth. 

The AI impact.

As is the case in almost every other industry, AI is also poised to change how construction firms work — though to what degree and how quickly are still up for debate. In theory, incorporating AI into day-to-day operations could have many advantages. Construction produces a tremendous amount of data every day, including cost estimates, project schedules, safety reports and material usage. Gaining truly usable insights from that data, however, is challenging and time-consuming for anyone, much less someone managing multiple crews across dozens of jobsites. Well-designed algorithms, however, can find patterns in that data and provide actionable insights for increasing efficiency and addressing challenges in everything from cost estimating and site safety to automating contract review.  

Mergers and acquisitions momentum accelerating.

Mergers and acquisitions activity in the construction industry remains significantly up, according to Capstone Partners’ 2025 Construction Services Market Update. Driven primarily by the data center boom and pent-up demand for new residential construction, transactions increased for the third year in a row — and by a wide margin. Those tailwinds contributed to a 33.8% jump in deals year over year, with companies ramping up acquisitions of businesses that expand market share or broaden service capabilities across key end markets. 

The case for modular in a strained market.

One modest — but growing — sector to keep an eye on is the modular construction industry, which accounted for just over 5% of the overall construction activity in 2024. Modular construction has a handful of characteristics that make it attractive in the current economic environment and account for the Modular Building Institute (MBI) and FMI Consulting’s prediction that the industry will grow at a compound annual growth rate of 4.5% over the next five years to $25.4 billion, outpacing the overall construction sector by 1.3%. Chief among those characteristics is lower cost. Also, because the vast majority of a modular construction project occurs indoors, it can also typically be completed much more quickly than a traditional site-built project. 

Why 2026 may be a turning point.

Perhaps the best word to describe the state of the construction industry in 2026 is “transitional.” Though demand for new construction is strong, high material costs, shifting policies and economic conditions, and stubborn supply chain complications continue to hold the overall market in check. 

For a more in-depth analysis of 2026 construction financial forces, find our full industry report here. 

No matter the challenges your business faces — and the questions that come with them — you don’t have to face them alone. At Commerce Bank, we’ve been helping businesses of all sizes find the solutions they need since 1865. Because nothing matters more to us than your success. Learn more at commercebank.com/SolutionsThatMatter. 

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