2026 Engineering and Construction Industry Outlook

The engineering and construction industry is navigating a complex landscape of rising material costs and shifting demand as it heads into 2026. While overall construction spending saw declines in 2025, particularly in the commercial and manufacturing sectors, the industry is buoyed by a surge in AI-driven data center projects and energy infrastructure. These developments are forcing firms to adopt more resilient procurement strategies and digital transformations to protect margins against persistent inflation and labor shortages.

In 2025, the engineering and construction (E&C) sector faced significant headwinds, with real gross output falling 0.6% to $1.732 trillion and total construction spending dropping nearly 3% year-over-year by July. This downturn was largely driven by an 8.2% decline in commercial construction and a 7% drop in manufacturing activity. Despite these figures, Deloitte reports that real value added reached $890 billion in the second quarter of 2025, and the industry expects a pivot to 1.8% growth in structure investment by 2026. This recovery is anticipated to be led by the rapid expansion of data centers and associated energy infrastructure, alongside selective growth in healthcare and defense.

A primary concern for E&C firms is the sharp rise in material costs, exacerbated by tariffs on steel and aluminum that have reached as high as 50%. The effective tariff rate for construction goods hit a 40-year high of 25% to 30% in 2025, contributing to an 88.2% year-over-year increase in project abandonment activity as of August 2025. These financial pressures are squeezing margins and forcing developers to revisit budgets. Michelle Meisels, Deloitte’s E&C practice lead, and other experts note that firms are increasingly grappling with fragile supply chains due to geopolitical tensions, leading to a shift from ad hoc procurement to systematic, no-regret strategies.

To mitigate these risks, contractors are evolving their business models through digital transformation and updated contract language. Many mid-market builders are now incorporating tariff-adjustment or escalation clauses to pass cost increases to project owners, avoiding the pitfalls of fixed-price agreements that leave contractors vulnerable. Additionally, firms are prioritizing U.S.-based sourcing, pre-purchasing materials to lock in prices, and investing in cloud-based supply chain visibility tools. According to Deloitte's Sami Alami and Patricia Henderson, the adoption of an AI-first mindset and connected construction technologies will be critical for optimizing bottom-line performance and managing the persistent labor and material challenges defining the 2026 outlook.