Impact of Tariffs and Labor Shortages on Construction Costs in the U.S. and Canada

The recent imposition of tariffs by the United States on Canadian and Mexican imports, along with Canada’s retaliatory measures, is set to significantly affect construction costs in both Canada and the US, if a resolution is not found. These tariffs will increase the price of essential building materials and building services equipment, while ongoing skilled labor shortages on both sides of the border—exacerbated by the Trump administration’s intensified deportation policies—will further strain the industry. The combined impact of these economic and labor pressures could lead to substantial cost increases and project delays, with some regions being affected more than others.

Impact of Tariffs on Construction Costs

Regional Effects in the United States

The U.S. has implemented a 25% tariff on key Canadian imports such as softwood lumber and gypsum board—materials that are vital for residential and commercial construction. Since over 70% of these materials used in the U.S. come from Canada, this policy will create cost pressures that will vary by region:

• Northeast and Midwest: These regions are heavily reliant on Canadian lumber and gypsum. The tariffs will lead to significant price increases, making construction more expensive. Builders may struggle to find alternative suppliers, leading to delays and increased costs for homebuyers and commercial developers.
• Southern U.S.: This region has an active lumber industry, which could mitigate some of the tariff effects. However, if other regions shift their purchasing to local suppliers to avoid tariffs, demand could spike, driving up prices even in areas with a strong domestic supply.
• Western U.S.: While Western states import some materials from Canada, they also have access to Pacific Northwest lumber supplies. This could provide a partial buffer, though costs will still rise due to broader national demand shifts.

Regional Effects in Canada

Canada has imposed retaliatory tariffs on U.S. goods, including construction materials and industrial machinery, which will impact costs differently across the country:

• Central and Eastern Canada (Ontario, Quebec, Maritimes): These provinces import a significant portion of their construction materials from the U.S., such as steel, cement, insulation and plumbing products. Tariffs will raise costs for builders and developers, making housing and infrastructure projects more expensive.
• Western Canada (British Columbia, Alberta, Saskatchewan and Manitoba): This region has abundant timber resources and is more self-sufficient in construction materials. However, they do import construction materials such as steel and cement products. Also, interprovincial demand for lumber products could increase as other regions look for domestic alternatives, potentially raising local costs.

Impact of Skilled Labor Shortages on Construction

U.S. Labor Challenges

The construction industry in the U.S. already suffers from a skilled labor shortage, and the Trump administration’s push to deport undocumented workers could worsen this problem. A significant portion of construction workers in the U.S. are undocumented workers, and their removal would create severe labor gaps, leading to:

• Southwest and Southeast: States such as Texas, Arizona, and Florida rely heavily on immigrant labor. Deportations could cause major disruptions, leading to project delays and wage inflation as competition for legal workers intensifies.
• Northeast, Midwest and Northwest: While less reliant on immigrant labor, these regions will still feel the effects of a national labor shortage. With fewer available workers, construction timelines could lengthen, further increasing costs.

Canada’s Construction Workforce Crisis

Canada’s construction sector faces its own labor shortages, largely due to increasing housing demands and an aging workforce. With approximately 700,000 skilled tradespeople set to retire by 2028, the industry is struggling to attract new workers. The impact will vary by region:

• Western Canada (BC, Alberta, Saskatchewan & Manitoba): These provinces are experiencing rapid growth, increasing the demand for skilled labor. The shortage could lead to higher wages and project delays, further driving up construction costs.
• Central Canada (Ontario, Quebec): While facing similar challenges, these provinces have more extensive training programs and immigration strategies that could mitigate some of the labor shortages.
• Eastern Canada (New Brunswick, Nova Scotia, Newfoundland and Labrador, PEI): These provinces also have construction labour shortages, due to many factors including booming residential construction markets, such as Moncton’s and migration of skilled workers to other provinces.

Projected Cost Increases Due to Tariffs and Labor Shortages

If the tariff issue is not resolved in short order and the projected economic and labor trends persist, construction costs could rise substantially across North America over the next couple of years:

• United States: Regions heavily dependent on Canadian materials and immigrant labor (Northeast, Midwest, Southwest regions) could see construction cost increases of 15-20%. Other regions may experience slightly lower 10-15% cost hikes.
• Canada: Central and Eastern Canada, which relies on U.S. imports and is facing labor shortages, could see cost increases of 10-15%. Western Canada may experience 5-10% increases due to higher interprovincial demand for labor and materials.

Conclusion

The dual impact of tariffs and skilled labor shortages is creating significant headwinds for the construction industries in both the U.S. and Canada. While some regions will be more affected than others, overall construction costs are expected to rise, leading to longer project timelines and increased housing and infrastructure expenses. Addressing these challenges will require strategic policy responses, including investment in the workforce training, immigration reforms to bolster labor supply, and efforts to stabilize trade relations to ensure affordable material sources.

The Role of Professional Valuators in Supporting Successful Mergers & Acquisitions

The goal of any corporation is growth, whether achieved organically or inorganically. Globally, 30–50% of corporate growth is driven by inorganic methods such as mergers and acquisitions (“M&A”). This trend is particularly pronounced in high-technology, healthcare, and pharmaceutical industries due to high research and development (“R&D”) costs and the strategic appeal of acquiring existing intellectual property. For instance, Google (Alphabet) has experienced tremendous growth through over 200 acquisitions since its inception.

In North America, M&A activity slowed over the past two years due to high interest rates and uncertainty surrounding the U.S. presidential election. However, with interest rates now declining and the election concluded, M&A activity is projected to increase in 2025 and beyond. The table below illustrates the value of M&A activity in Canada and the U.S. over the past five years:

Business combinations, including M&As and partnerships, can accelerate growth more rapidly than organic strategies. However, they come with higher risks, such as integration challenges and substantial capital requirements. Moreover, significant due diligence is needed before acquisition and compliance requirements must be met, post-acquisition.

The Role of Valuation Professionals

Valuation professionals, including business valuators and tangible asset appraisers, play a critical role throughout M&A transactions. Their expertise supports the acquirer in both pre-acquisition and post-acquisition processes.

Pre-Acquisition Due Diligence

During this stage, valuation professionals can provide:

1. Business Enterprise Valuation (BEV):
   • Independent valuation of the target company to ensure accurate, unbiased assessments for purchase negotiations and future planning.
2. Tangible Asset Valuations:
   • Preliminary verification and valuation of property and assets slated for acquisition.
   • In horizontal acquisitions involving multiple facilities, accurate valuations on a per-facility basis can guide decisions about which facilities to retain, sell, or liquidate.

Post-Acquisition: Financial Reporting

Valuation professionals are essential for ensuring compliance with financial reporting standards, which differ slightly between the U.S. and Canada:

United States: Under ASC 805: Business Combinations (U.S. GAAP) acquired assets and liabilities must be measured at fair value on the acquisition date. This process, known as purchase price allocation (PPA), includes:

• • Identifying tangible and intangible assets.
  • Assessing liabilities, including contingent liabilities.
  • Calculating goodwill as the residual value after allocating the purchase price to the fair value of net identifiable assets.

Canada: Under IFRS 3: Business Combinations, fair value measurement and goodwill calculation requirements align closely with ASC 805.

Post-Acquisition: Tax Reporting

Valuation professionals also help meet tax reporting compliance requirements, including asset revaluation, depreciation, and assessing potential tax liabilities resulting from the transaction.

Valuation at Fair Value

Fair value measurement is central to both financial and tax reporting in M&A transactions. It involves:

1. Identifying and Valuing Assets and Liabilities:
   • Tangible assets: Property, plant, and equipment.
   • Intangible assets: Trademarks, patents, customer relationships, contracts.
   • Financial assets and liabilities: Investments, debt.
2. Valuation Methodologies:
   • Market approach: Comparison to similar transactions or market data.
   • Income approach: Discounted cash flows or other income-based methods.
   • Cost approach: Replacement or reproduction cost.

Additional Services Provided by Valuation Professionals

Professional valuators can also offer additional services, such as:

1. Fixed Asset Systems Integration:
   • Recording acquired fixed assets to align with the acquiring company’s systems (e.g., SAP).
2. Asset Management Support:
   • Recording production equipment technical details to support the implementation of asset management plans.
3. Insurance Appraisal:
   • Providing valuations for adequate insurance coverage.

Why Engage Qualified Valuation Professionals?

The complexity of valuation requirements, such as purchase price allocation, necessitates the engagement of experienced, independent valuation professionals. A well-reputed valuation firm can deliver services that:

1. Meet Regulatory Standards: Ensure compliance with financial and tax reporting standards.
2. Demonstrate Relevant Expertise: Have industry-specific experience and a proven track record.
3. Provide Comprehensive Solutions: Offer a “one-stop” service to eliminate inefficiencies, duplication, and gaps.

Mergers and acquisitions are high-risk, high-reward strategies for corporations seeking growth and diversification. A key component for success is engaging qualified valuation professionals who can provide accurate, compliant, and timely services. Their expertise not only supports informed decision-making but also ensures regulatory compliance, contributing to a smooth and successful transaction.

Benefits of an Insurance Appraisal and Loss Control Reporting in a Hard Market

The insurance industry is well known for its cyclical nature of “soft” and “hard” markets. Anyone in the industry, including brokers and insurers are very familiar with the “soft” and “hard” market terminology and the very different business environments they create. They experience “firsthand” the daily impact of these market cycles on all their lines of business and service offerings. In contrast, few people outside the industry are familiar with these terms, although most individuals as well as commercial and public entities are long-time consumers of many insurance services and are financially impacted by these insurance market cycles. It is therefore important to have a clear understanding of these concepts and how it impacts individuals or business entities, so they can better navigate through the challenging times of a “hard market”, minimizing its financial impact.

Soft Market versus Hard Market

Insurance markets are impacted by national and international financial conditions, and other global events. These include the general state of the economy, interest rates, stock market performance, natural catastrophic events, conflicts between countries, terrorists’ events, evolving cyber risks, and claim activity resulting from these events.

More precisely, a “soft market” is usually a result of:

• Stable, positive economic conditions;
• High interest rates;
• Less property claims activity;
• Insurers having the adequate capital to insure.

Stable economic conditions, translates into more potential clients for insurers, since most businesses, and individuals are doing well and have the financial ability to pay for appropriate insurance coverages. When interest rates are high, the insurers’ investments are also doing well. Lastly, if claim activity is as expected or lower, and the average claim costs are lower, this also has a positive impact on their financial position. Simply put, the culmination of these factors, results in insurers being well capitalized, giving them the capacity to underwrite a larger amount of insurance throughout most of their business lines. This also means there is greater competition among insurers for business, translating into lower premiums rates and more favourable terms for the insureds.

In contrast, a “hard market” is typically a result of:

• Unstable economic conditions;
• Low interest rates;
• Catastrophic events and high property claims;
• Negative global events (i.e., climate change, pandemics, trade wars, civil unrest, etc.).

During poor economic times, businesses and individuals are not doing as well, diminishing their ability to pay for various insurance coverages. Lower interest rates also mean insurers are making less money on investments. This unfavourable financial performance is compounded if they are experiencing high property claims, especially if the average claim amounts are larger than expected. These negative factors result in the insurers having a lower capacity to underwrite insurance in most of their business lines. Since they do not want to take on any high-risk coverages during these times, they become very selective on what risks they insure, charge higher rates, and impose much stricter terms and reduced coverages. They are also much less inclined to negotiate the terms of the policy.

The Current Hard Market and How We Got Here

The state of the insurance market had been “soft” for 15 years, until Q3 of 2020. We then had a convergence of events and factors that rapidly changed the landscape of the insurance market. There has been an increase in the severity of losses, further evidence of accelerated climate change and the impact of Covid on the global economy. Because of these events and the resulting costly claims, we are now well entrenched in a “hard insurance” market, with insurers having little appetite to take on risky policies. North American commercial insurance prices are experiencing significant premium increases for most lines of business.

What Can Businesses do to Mitigate the Impact of a Hard Insurance Market

There are several things that businesses can do to lessen the financial impact of placing insurance, in a hard market:

1. Review your Policy

Consult with your broker(s) to review and understand coverages. Property inclusions and exclusions should be carefully considered, along with the premises of the insured values. Redundancies should be eliminated, and any inadvertent property omissions added to the policy.

2. Implement Best Risk Management Practices

Implementation of a comprehensive risk management policy is a prudent step in decreasing the chance of a loss. This will also put a business or public entity in a much better position to be viewed as a “better risk” by insurers, making it easier to place a policy at better premium rates and more flexible terms. Two components of a sound risk management strategy include having your property appraised by a qualified appraiser and developing and implementing a loss control program that can include risk inspections with recommendations and follow-up (to ensure recommendations are being executed).

3. Assist your Broker(s) in Making a Better Submission

Currently, insurers are being inundated with submissions from potential clients having a difficult time placing a policy. Naturally, underwriters will select submissions that have the most complete information and tell a positive story about the client seeking coverages. It is important these submissions from the brokers highlight the risk-mitigating practices that have been adopted by their client and the positive loss history that has ensued. A current insurance appraisal and loss control report will significantly augment the submission and assist in differentiating the client from others in their industry.

4. Practice More Frequent and Better Communication with your Broker

The renewal frequency may be annual; however, property and economic changes are always ongoing. So, it is useful to have periodic communication with your broker(s), especially when circumstances have significantly changed since the renewal date. These changes need to be communicated so the broker(s) and insurers have up to date information. For clients that had insurance appraisals completed, property changes are best captured in an insurance appraisal update, that can be provided to your brokers.

Why are Insurance Appraisals and Loss Control Reporting of Property Viewed so Favourably by Underwriters?

We have discussed the importance of providing brokers and insurers current insurance appraisals and loss control reports. Why are these reports (appraisal and loss control) viewed as a very important part of the submission? As a background, post-loss analysis of recent years indicates that over 60% of commercial businesses’ property are under-insured. An accurate insurance appraisal and loss control reporting completed by qualified/experienced personnel, will eliminate this risk of under-insurance, and assist to mitigate a loss before it happens. To understand the benefits to insurers, it is helpful to look at the appraisal and loss control process and the information provided within the reports. As part of the appraisal process, the property is inspected, photos are taken, and principal assets are detailed in the appraisal report, providing underwriters granular documentation of the insured property.  For loss control reporting, the property is also inspected for hazards and risks that pose potential losses. Once these are identified, recommendations are made to reduce the risks, keeping with applicable standards (ex. National Fire Protection Association. This level of detail is very helpful in quantifying not only a total loss, but also a partial loss.  Combining appraisal and loss control service such as Construction, Occupancy, Property Exposure (COPE) reporting can be very useful to brokers and insurers for insurance placement, however, can also be very beneficial in the unfortunate scenario of a loss.

Finding the Right Firm for your Insurance Appraisal and Loss Control Needs

As a commercial business or a public entity in this “hard market” you should discuss with your broker(s) and jointly decide whether a current insurance appraisal and or loss control reporting for your property will be useful to assist with placement of the policy with potential underwriters. If you decide to proceed with these services, how do you go about selecting a service provider that is best for your needs? Many initial considerations must be made, including the type of property to be insured and the skill sets that will be required. Specific industries such as power generation, forestry, mining, high-tech manufacturing, metal working facilities, food, and beverages, require intimate knowledge of the assets of these industries to complete an accurate appraisal and/or perform loss control inspection and reporting.

A good place to start your service provider selection process is to consult with your broker. Since they have many clients, it is likely they are very familiar with appraisal and loss control firms that perform services similar to your requirements. Secondly, contacts in companies that are engaged in similar services to your business may be able to provide referrals to reputable appraisal and loss control firms. Once you identify the firm(s) that may be able to assist, you should make the following assessment:

1. Does the firm have a good market reputation? Can they provide a list of previous clients served in your industry, including recent references?
2. Does the firm carry Errors and Omissions insurance for the clients’ additional protection?
3. Does the firm have appropriate credentials in cost estimating and/or loss control, providing assurance of the technical knowledge required to complete the service accurately. For example, relevant accreditations include Accredited Senior Appraiser (“ASA”) designation from the American Society of Appraisers; Accredited Appraiser Canadian institute (“AACI”) from the Appraisal Institute of Canada; Canadian Certified Playground Inspector (“CCPI”) from the Canadian Playground Safety Institute; Associate in Risk Management (“ARM”) from the Risk Management Society.
4. Who would be the personnel assigned to the project? Do they have the relevant educational background and technical skill sets in appraising or completing loss control inspections for the buildings and machinery and equipment?
5. Will the appraisal include a site inspection, and documentation of the insurable assets to enable a current cost estimate, versus relying on indexing of historical costs from property records?
6. Will the loss control report include a site inspection, documentation of observed risks and hazards with appropriate recommendations to mitigate loss?
7. What type of report(s) will be provided? (It is not unreasonable to request a sample report of the deliverables and share it with your broker to ensure it meets their requirements).

Conclusion

Insurance appraisals and loss control reporting are always a key component of an entity’s risk management strategy. This is especially so in this current hard market, as insurers are much more selective as to which properties they underwrite. Further, with the current higher insurance rates, reporting of overstated values will translate into even larger premium overpayments. An accurate insurance appraisal and loss control report completed by an accredited, experienced, reputable firm, is your best option to assist with placement of insurance in this hard market.

For Assistance in this Hard Market, Call Suncorp Today.

CONTACT US