Middle East Conflict Adds Uncertainty to Canadian Construction Costs, Says Turner & Townsend Economist

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The ongoing conflict in the Middle East is expected to further complicate material costs in Canada for 2026, according to Turner & Townsend's economist Kris Hudson. As the construction industry faces various economic pressures, insights into labor market conditions and demand dynamics are crucial.

The conflict in the Middle East is introducing an additional layer of uncertainty to material costs expected in 2026, according to Kris Hudson, an economist and director at construction forecasting consultancy Turner & Townsend, based in Toronto. In a recent discussion on market cost conditions, Hudson referenced the firm's Q1 report, Canada Market Intelligence, published in April. This report indicated that growth in input costs has re-emerged, primarily driven by tariff constraints and supply chain disruptions.
The report highlights the risks posed by elevated oil prices, which could impact the construction industry's cost base in 2026. Hudson noted that while certain buffers, such as increased slack in the labor market and sufficient existing inventories, may help mitigate these pressures for the time being, the implications of rising oil prices are multifaceted. He explained that higher energy costs would not only directly influence energy expenses and fuel used in construction projects but would also have significant knock-on effects on operational costs for machinery and equipment, ultimately affecting logistics and supply chain dynamics.
Hudson emphasized that the strength or weakness of the market plays a critical role in shaping costs. "In a softer and weaker market, there might be undercutting in pricing," he stated. He pointed out that both the Ontario market and the broader Canadian market are currently not as buoyant as they have been in recent times. As a result, for material price increases to persist, there needs to be a corresponding sustained rise in demand, leading to selective tendering where contractors choose the projects they wish to pursue.
Given the current market conditions, Hudson observed that cost increases may not be fully transmitted throughout the supply chain. The report from Turner & Townsend suggests that the slackness in the construction labor market is likely a temporary phenomenon linked to reduced demand rather than a fundamental shift in the employment landscape. However, Hudson noted a distinction between skilled and unskilled labor, highlighting that mechanical and electrical trades, among others experiencing heightened demand, will face cost pressures associated with that talent pool. This disparity is not uniform across all projects and skill sets.
He identified labor as the primary challenge facing the Canadian construction sector, particularly as the industry anticipates a wave of federal project stimulus spending. Hudson remarked, "We have been navigating an uncertain and volatile environment for quite some time, but the industry has adapted and learned valuable lessons to manage projects under such challenging conditions. For materials, adjustments can be made in procurement and project scopes. However, when it comes to the labor force, particularly for hands-on roles, quick changes are not feasible, and solutions are not straightforward."
The report provides a bid-price inflation estimate of 2.5 percent for 2026. Looking ahead to 2027 and 2028, analysts predict renewed escalation in costs and increased capacity constraints as infrastructure demand grows and backlogs begin to clear.
In Ontario, the infrastructure and institutional sectors continue to form the backbone of the provincial construction outlook, bolstered by significant multi-year commitments in transit, healthcare, long-term care, and education. However, Hudson expressed caution regarding the education sector, noting that tightened immigration policies have resulted in fewer international students. Investment in building construction (IBC) rose by 4.9 percent in 2025, reflecting the sector's total expenditures and providing a more comprehensive picture of construction performance than construction GDP alone.
Despite the implementation and potential threats of new tariffs from the U.S., Hudson stated that the Canadian construction industry has not yet faced significant cost pressures. However, he acknowledged concerns about the upcoming negotiations related to the Canada-U.S.-Mexico trade agreement, saying, "There remains apprehension about how tariffs might evolve."

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