The U.S. construction industry is operating at two distinct speeds in early 2025, with a booming data-center sector masking significant weakness across the broader contractor base. While headline figures show construction backlog holding near historic highs, a closer examination reveals a troubling divergence: contractors without exposure to data-center work face declining pipelines, weakening sales expectations, and margin pressure from rising input costs that threaten profitability well into 2026 and beyond.
According to the latest Associated Builders and Contractors (ABC) Contractor Confidence Index, average construction backlog declined to 8.1 months in the first quarter of 2025, down from 8.4 months in the previous quarter. More revealing than the headline figure, however, is the sharp contrast between the 12 percent of contractors actively working on data-center projects—who report robust pipelines and strong sales expectations—and the 88 percent who do not. For the majority of contractors, particularly those focused on commercial office, retail, institutional, and traditional infrastructure work, the picture is considerably bleaker.
Why Is Construction Backlog Declining Outside Data Centers?
The construction backlog decline among non-data-center contractors stems from a confluence of demand-side and cost-side pressures that have intensified over the past six months. On the demand side, higher borrowing costs continue to delay or cancel commercial projects, particularly speculative office and retail developments. Institutional clients, including schools, universities, and municipal governments, face budget constraints that have slowed project approvals and stretched timelines. Infrastructure work, while supported by federal funding, has been hampered by permitting delays, environmental reviews, and labor shortages that push delivery dates further into the future.
At the same time, construction input costs have resumed their upward trajectory after a brief period of stabilization in late 2024. According to the Associated General Contractors of America (AGC), prices for key nonresidential construction materials have posted steep increases in recent months. Steel mill products are up 6.2 percent year-over-year, aluminum mill shapes have surged 12.8 percent, and fabricated structural metal products have climbed 5.1 percent. Copper and brass mill shapes—critical for electrical systems and MEP installations—have increased 8.4 percent, while prepared asphalt and tar roofing materials are up 6.7 percent.
These cost increases are particularly problematic for contractors who bid fixed-price contracts six to twelve months ago and are now executing work at significantly higher material costs. Unlike the data-center boom, where project urgency and deep-pocketed tech clients often permit cost pass-throughs and change orders, contractors working on traditional commercial and institutional projects typically absorb cost overruns or negotiate modest change orders that fail to cover the full extent of inflation. The result is compressed margins, reduced profitability, and greater reluctance to bid aggressively on new work—all of which contribute directly to the construction backlog decline visible in ABC's confidence data.
Data Center Boom Versus Broader Construction Market
The data center construction demand phenomenon has created an unprecedented distortion in construction market indicators. Driven by artificial intelligence, cloud computing expansion, and enterprise digital transformation, data-center construction has exploded over the past eighteen months. Major technology firms and hyperscale operators are competing for design-build capacity, electrical contractors, and specialized MEP firms capable of delivering the massive power infrastructure these facilities require.
For the fortunate 12 percent of contractors with data-center exposure, backlogs remain strong and sales expectations are optimistic. These projects typically feature:
- Accelerated schedules with premium pricing for early delivery
- Well-capitalized clients willing to absorb material cost escalation
- High-value electrical, mechanical, and structural scopes that support healthy margins
- Multi-year development pipelines that provide revenue visibility through 2027 and beyond
However, for the 88 percent of contractors outside this charmed circle, the data-center boom offers little direct benefit and may actually exacerbate their challenges. Data-center projects are absorbing electrical contractors, structural steel fabricators, concrete suppliers, and skilled craft labor that might otherwise be available for commercial, institutional, or infrastructure work. This talent and capacity drain puts upward pressure on subcontractor pricing for non-data-center projects while simultaneously lengthening procurement lead times for critical materials.
The divergence is particularly acute in markets like Northern Virginia, Phoenix, Dallas-Fort Worth, and the Research Triangle, where data-center construction has reached fever pitch. Contractors in these regions report difficulty securing competitive bids from electrical and mechanical subcontractors, who are fully committed to data-center work for the next 18 to 24 months. For excavation contractors, the impact is mixed: data-center projects generate significant demand for site work, grading, and utility installation, but the concentration of activity can strain local dump sites and fill dirt availability, pushing costs higher for all projects in the region.
How Rising Construction Input Costs Affect Contractor Margins
Understanding how rising construction input costs affect contractor margins requires examining both direct material expenses and the secondary effects of longer lead times and supply uncertainty. Steel, aluminum, and copper price increases directly impact project budgets, but the more insidious challenge lies in procurement timing and risk allocation.
AGC data shows that lead times for structural steel have extended from 12-16 weeks in early 2024 to 20-26 weeks in early 2025, depending on product type and regional supply. Electrical components, particularly transformers, switchgear, and large-capacity distribution equipment, now carry lead times of 40 to 60 weeks—well beyond typical project schedules. These extended timelines force contractors to order materials earlier in the project cycle, locking in costs before final design is complete and increasing financial exposure if projects are delayed or redesigned.
For contractors working on excavation-heavy projects—including site development, infrastructure, and industrial facilities—the cost pressures extend to fuel, equipment parts, and specialized materials. Diesel fuel prices remain volatile, affecting both equipment operating costs and transportation expenses for hauling fill dirt, removing unsuitable material, and accessing remote dump sites. Contractors who rely on rental equipment face higher day rates as equipment suppliers pass through their own cost increases for parts, maintenance, and financing.
The cumulative effect of these pressures is a fundamental reassessment of bidding strategy. Contractors are building larger contingencies into estimates, requesting shorter bid-validity periods, and seeking contractual protections for material price escalation. Unfortunately, these risk-management measures make bids less competitive in a market where many owners remain price-sensitive and unwilling to accept cost uncertainty. The result is fewer wins, lower backlog, and a self-reinforcing cycle of caution that dampens construction contractor confidence across the industry.
Nonresidential Construction Outlook: A Two-Speed Recovery
The nonresidential construction outlook for the remainder of 2025 and into 2026 is best characterized as a tale of two markets. For contractors with data-center exposure, the outlook remains robust, albeit with emerging concerns about power availability, utility interconnection timelines, and whether permitting bottlenecks will ultimately constrain the pace of development. Several high-profile data-center projects have been delayed not by lack of demand or financing, but by insufficient electrical grid capacity and multi-year timelines to bring new substations and transmission lines online.
For the broader contractor base, the outlook is considerably more challenging. ABC's confidence data shows weaker sales expectations and staffing plans among non-data-center contractors, suggesting that many firms anticipate softer conditions in the second half of 2025 and into early 2026. Commercial office construction, in particular, faces structural headwinds from remote work and elevated vacancy rates in many markets. Retail construction remains selective, concentrated in necessity-based formats and last-mile logistics rather than traditional shopping centers. Institutional work is heavily dependent on state and local budgets, which face pressure from slower tax revenue growth and competing priorities.
Infrastructure construction, while supported by federal programs including the Infrastructure Investment and Jobs Act (IIJA) and CHIPS Act, continues to move slowly from appropriation to actual construction activity. Environmental reviews, permitting requirements, and workforce availability constraints mean that many federally funded projects will not break ground until late 2025 or 2026, providing little near-term relief for contractors seeking to rebuild backlogs.
For excavation contractors and those focused on site work, earthmoving, and utility installation, the outlook depends heavily on regional market composition. In data-center markets, demand for grading, excavation, storm drainage, and sanitary sewer work remains strong, but competition is fierce and material logistics—particularly access to suitable fill dirt and permitted dump sites—can be challenging. In markets without significant data-center activity, excavation contractors are seeing softer inquiry levels for commercial and residential land development, with many projects delayed pending improved financing conditions or stronger pre-leasing commitments.
What Contractors Should Expect Through 2026 and Beyond
As the industry moves through the balance of 2025 and into 2026, contractors should prepare for a market environment characterized by persistent uncertainty, margin pressure, and continued divergence between data-center and non-data-center work. Several key themes will shape the construction backlog 2026 landscape:
Material cost volatility will continue. While some input costs may stabilize, geopolitical uncertainty, trade policy changes, and demand from data-center and manufacturing construction will keep upward pressure on steel, copper, aluminum, and electrical components. Contractors should prioritize supplier relationships, consider forward purchasing for large projects, and build robust escalation clauses into contracts wherever possible.
Lead times will remain extended. Supply chain improvements have been uneven, and the surge in data-center and manufacturing construction has absorbed available capacity for many critical materials and components. Contractors should plan procurement schedules around 20- to 60-week lead times for major items and communicate these constraints clearly to owners during preconstruction.
Data-center demand will face new constraints. While underlying demand for data-center capacity remains strong, power availability and utility interconnection timelines are emerging as binding constraints in many markets. Contractors should monitor regulatory developments around utility capacity allocation, grid modernization, and energy policy, as these factors will determine how much of the theoretical data-center pipeline translates into actual construction starts.
Margin discipline will be essential. In a market characterized by input cost inflation and competitive pressure, contractors who pursue revenue growth at the expense of margin discipline will find themselves in financial difficulty. Selective bidding, rigorous cost control, and willingness to walk away from unfavorable risk allocation will separate successful firms from those that struggle.
For contractors without data-center exposure—the vast majority of the industry—the path forward requires patience, financial discipline, and strategic positioning for the eventual recovery in commercial, institutional, and infrastructure work. While the current environment is challenging, construction fundamentals remain sound: the nation needs new schools, healthcare facilities, manufacturing plants, and infrastructure. The question is not whether demand will return, but when financing conditions, policy clarity, and owner confidence will align to translate that need into actual project starts.
In the meantime, contractors should focus on maintaining financial flexibility, investing in workforce development, and building capabilities that position them for success when the broader market recovers. For excavation specialists, this may mean developing relationships with data-center developers and general contractors, pursuing infrastructure projects funded by federal programs, or diversifying into adjacent markets such as solar farm development or battery storage facilities that share some of the same site-work characteristics as traditional construction.
The construction backlog decline among non-data-center contractors is a warning sign that deserves attention, but it is not a reason for panic. By understanding the drivers of the two-speed market, managing costs and risks proactively, and preparing for the eventual broadening of construction demand, contractors can navigate the current uncertainty and emerge stronger when conditions improve.