Construction costs are moving quickly—and not always at the same pace as contractors’ bids.
In September 2026, input costs for new nonresidential construction were up 11.9% from a year earlier, while a broad measure of prices contractors charge for new nonresidential buildings increased 5.4%. The figures do not represent every contractor or every project, but they illustrate a challenge facing the industry: costs can change significantly after a bid has already been submitted.
That creates an important question for contractors.
What happens to the projected profit on a job if materials increase another 5%? What if a supplier quote expires? What if labor takes longer than expected, a delivery delay extends the schedule or additional working capital is needed?
Rather than relying on one projected margin, contractors can use scenario planning to understand how much adverse movement a project can absorb before it no longer meets the company’s expected return.
Job costing and work-in-progress reporting remain essential tools for understanding project performance. But they largely tell management what has happened and where the project currently stands.
A stress test asks a different question:
What could happen next?
The goal is not to predict the exact future cost of steel, copper, labor or financing. Instead, contractors can identify the assumptions that have the greatest effect on profitability and estimate what happens if those assumptions move against the project.
For example, a contractor may model:
The result is a range of possible project outcomes rather than a single forecast.
One of the most important parts of stress testing is separating the original project budget from the costs that remain exposed to change.
Suppose a project originally included $5 million of material costs. If $4 million has already been purchased at committed prices, applying a 10% inflation assumption to the entire $5 million would exaggerate the current risk.
The relevant exposure is the $1 million that remains uncommitted.
The same concept applies to labor, subcontractors and other project costs. As work progresses, some assumptions become fixed while others remain uncertain.
Contractors should periodically ask:
What costs are still exposed, and what happens if those costs move?
That helps management focus attention on the portions of the project that can still affect the final result.
A material increase does not always stop with the purchase price.
Consider a supplier that cannot deliver a critical component when expected. The contractor may need to purchase from a more expensive alternative source. The delay may also extend the schedule, increasing supervision and general conditions. Billing could be pushed back, creating additional working-capital needs and financing costs.
One disruption can therefore create several financial effects:
Higher material cost → schedule delay → additional project overhead → delayed billing → greater cash requirements
That is particularly relevant in the current market. Recent construction-industry data has shown significant increases across steel, copper, aluminum, freight and other inputs, while contractors have also reported availability constraints for certain materials.
Stress testing can help contractors evaluate the combined effect rather than considering each risk independently.
Labor risk involves more than wage increases.
A contractor could accurately estimate the hourly wage rate and still exceed its labor budget if the work requires more hours than anticipated.
That might occur because of:
A relatively small decline in productivity can materially affect a labor-intensive project.
For that reason, labor-rate assumptions and labor-productivity assumptions should be tested separately.
Stress testing becomes most useful when management establishes a minimum acceptable return before problems occur.
Consider a simplified example.
A contractor has a $10 million project with expected costs of $8.5 million. The projected gross profit is $1.5 million, or a 15% gross margin.
Assume the company has determined that, based on its own risk profile and economics, it does not want the project to fall below a 12% gross margin.
That means the job has $300,000 of profit cushion before reaching the company's minimum threshold.
Now consider several relatively ordinary changes:
Individually, none of those events may appear particularly damaging. Together, however, they could consume the entire $300,000 cushion and push the project below the company's acceptable return.
The important insight is not the specific percentage used in the example. Every contractor will have different margins, costs and risk tolerances.
The value comes from knowing the break point.
Instead of simply saying, “Material prices are a concern,” management can determine how large an increase the project can withstand before action is required.
Profitability and cash flow should also be evaluated together.
A project may remain profitable while requiring substantially more working capital than originally expected.
For example, a contractor may need to:
Those changes may not immediately eliminate the project’s profit, but they can increase financing costs and place additional pressure on the company’s liquidity.
A stress test should therefore consider both the revised project margin and the potential cash required to support the downside scenario.
A stress test is only useful if management knows what to do with the results.
Contractors can establish project-specific trigger points that prompt a closer review.
For example:
These do not need to be universal industry benchmarks. The thresholds should reflect the contractor's own financial position, history and risk tolerance.
The purpose is to identify problems while management still has options.
Scenario planning should not end when the contract is signed.
The risks change as the project progresses.
A material purchase that has been locked in removes one source of uncertainty. A schedule delay may introduce another. Labor productivity may improve or deteriorate. Financing needs may change. A pending change order may become approved—or remain unresolved longer than expected.
Contractors can revisit the stress test at important points throughout the project, including:
The model should become more accurate as uncertainty decreases.
Stress testing project margins does not require a complicated financial model.
For many contractors, a straightforward base case, downside case and more severe downside case can provide meaningful insight.
The objective is to understand three things:
In a volatile construction environment, those questions can be more valuable than trying to predict exactly where every input cost will be six months from now.
Porte Brown’s construction specialists can help contractors evaluate project assumptions through bidding analysis, cash flow management, benchmark and trend analysis, financial and operational KPI advisory services and strategic CFO support. By connecting estimating assumptions with ongoing financial forecasting and project reviews, contractors can gain a clearer understanding of where margins are most vulnerable—and when it may be time to act.
Get in touch today and find out how we can help you meet your objectives.
