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Construction Costs Jump 6.2% as Energy Prices Squeeze Development Budgets — and Why Vertical Integration Is the Only Real Hedge Left
By Daniel Kaufman
Construction input costs are climbing at the fastest pace we've seen in years, and the pressure on development budgets is no longer theoretical. It is showing up in every pro forma that crosses my desk, in every contractor change order, and in every conversation with lenders who are watching their underwriting assumptions erode in real time.
Here is where the market actually sits today, and what we at Kaufman & Company are doing about it.
By the Numbers
Construction input prices climbed 6.2% between January and April 2026, according to Associated Builders and Contractors' analysis of BLS data. To put that in perspective: that four-month jump outpaced the cumulative 4.8% rise recorded over the previous three years combined. We compressed three years of inflation into one quarter.
What's Fueling the Wave
Energy commodities did most of the damage in April. A combination of broader inflation, tariffs, and rising tensions tied to the Iran conflict pushed costs higher across transportation, manufacturing, and the construction supply chain.
The data is stark. Crude petroleum jumped 11.3% month-over-month and is now up 61.8% year-over-year. Unprocessed energy materials rose 9.2% in April and are up 48.9% annually. Natural gas prices climbed 4.9% month-over-month and 27.3% year-over-year.
These aren't isolated commodity blips. They flow directly into asphalt, steel, glass, transportation, equipment fuel, and the operating cost of every fabricator and supplier in the chain.
The Climb Continues Across Core Materials
Overall construction materials costs are now 7% higher than a year ago, with nonresidential construction materials up 7.4% annually. Beyond energy, several core building materials posted notable April increases:
• Softwood lumber rose 5.5% month-over-month
• Hot rolled steel bars increased 4.1%
• Steel mill products and industrial controls equipment both climbed 3.8%
Between March and April alone, overall construction input prices increased 1.7%, with nonresidential input costs slightly higher at 1.8%. ABC Chief Economist Anirban Basu noted that the pace of increases this year has been unusually sharp — a clear warning to developers already navigating tighter financing conditions and uncertain economic forecasts.
The construction sector's price increases also mirror what's happening in the broader economy. Per the WSJ, wholesale inflation rose 1.4% in April from the prior month — significantly above economists' expectations and double March's increase.
The Real Problem Isn't Just the Inflation. It's the Layers.
Here is the part the headline numbers don't capture. Most developers don't actually pay the BLS index. They pay the BLS index plus the markup their general contractor applies. Plus the markup the GC's subcontractors apply. Plus the markup the suppliers apply to the subs. Plus the design fees, the procurement fees, the pre-construction fees, and the architectural and engineering fees billed by separate firms — each with their own overhead, their own profit, and their own incentive to inflate scope.
When raw materials rise 6.2%, the developer often experiences something closer to 12–18% by the time those costs travel through four or five layers of stacked margins. That's the silent killer of underwriting in this market. Energy prices set the floor; the industry's fragmented, opaque structure builds the ceiling.
How Kaufman & Company Is Built to Absorb This
We anticipated this dynamic years ago, and we deliberately structured Kaufman & Company to eliminate the cost-stacking problem rather than just complain about it. We are fully vertically integrated — and not in the loose, marketing-brochure sense of the word.
We own and operate every stage of the development lifecycle in-house:
• Pre-development
• Engineering
• Design
• Architecture
• Procurement
• Construction
That means when a steel quote comes in, it goes straight to our procurement team — not through three intermediaries who each clip a fee. When a design decision needs to be value-engineered against a real-time materials cost, our architects and engineers are sitting in the same room as our construction leads, working off the same budget. When energy-driven price increases hit the supply chain, we negotiate directly with mills, fabricators, and suppliers, without a GC's markup riding on top.
The result is twofold:
1. We eliminate the markups and the price gouging.
Every layer of middleman margin that an outside developer absorbs, we simply don't have. In an environment where input costs have jumped 6.2% in four months, removing 10–20 points of stacked overhead is not a small advantage. It is often the difference between a project that pencils and one that dies on the underwriting spreadsheet.
2. We operate with radical transparency.
Our partners, lenders, and capital sources see the real numbers — actual material costs, actual labor costs, actual procurement invoices. There is no black box. No mysterious "GC contingency" line item that swells whenever the market moves. When energy prices spike, we can show exactly where it hit, exactly what we did to absorb it, and exactly what it means for the project's returns.
The Takeaway
Developers hoping for cost stabilization are getting the opposite. With energy and commodity prices climbing again, construction underwriting is becoming significantly tougher — especially for projects with thin margins, long timelines, or fixed-price contracts that were inked under a very different cost regime.
In this environment, the developers who survive — and the ones who keep delivering attractive risk-adjusted returns to their capital partners — will be the ones who control their own supply chain, eliminate stacked markups, and tell their stakeholders the truth about what things actually cost. That is precisely the model Kaufman & Company is built on, and it is why our projects continue to pencil in a market where many simply cannot.
The era of passing inflation through five layers of intermediaries and hoping for the best is over. Vertical integration and radical transparency are no longer competitive advantages. They are the price of admission.