Construction Market Outlook: Cautious Optimism Heading Into 2026
Published on by Travis Knight in Construction
After a notable increase in the third quarter, the FMI Construction Industry Round Table (CIRT) held largely steady in the fourth quarter of 2025, declining slightly from 65.0 to 64.6. This consistency suggests recent gains weren’t short-lived, even as market conditions cooled modestly.
Market conditions and cost pressures
Backlog levels declined from 71.2 to 66.7 but remain favorable by historical standards. While the overall index is comparable to the fourth quarter of 2024, backlog levels a year ago were lower at 63.1, indicating that demand has remained relatively resilient. Broader economic indicators softened slightly, reflecting a more cautious outlook among respondents, with the overall U.S. economy indicator declining from 49.0 to 47.0 and local economic conditions easing from 58.7 to 57.0.
Design activity was a bright spot, with the Design Index rising sharply from 58.5 to 68.4, its highest level in 2025. Growth was driven primarily by increased residential activity, while nonresidential activity remained steady.
Cost pressures continue to evolve. Concerns around material costs eased meaningfully during the quarter, falling from 87.5 to 75.0 and continuing a downward trend from the second quarter peak of 98.2 tied to tariff-related uncertainty. Labor costs, however, remain a persistent challenge, with the labor cost index increasing slightly from 76.9 to 78.0.
From experimentation to everyday use
Technology and AI adoption continue to accelerate as construction firms look to improve efficiency and scalability heading into 2026. According to the report, 83% of respondents are currently using AI or machine learning tools, a sharp increase from 44% in the 2023 survey.
Today, the most common applications include contract and document review, improving access to information, and process optimization. Looking ahead one to two years, respondents identified scheduling, safety, and human resources as the top areas where they plan to further expand AI use.
As adoption becomes more widespread, attention is also shifting from how technology is used to where firms are choosing to invest.
Technology investments take shape
Software investment plans over the next three years reflect a continued focus on operational improvement. More than half of respondents expect to invest in project management and design, modeling, or BIM software, while more than one-third plan investments across a broader set of systems, including human resources, accounting and finance, scheduling, estimating, safety, and customer relationship management.
Notably, planned investments in estimating, safety, and CRM increased compared to 2023, potentially signaling both advancements in available tools and growing adoption in these areas.
However, increased investment and adoption are not without their challenges.
Progress comes with growing pains
At the same time, increased attention to technology and AI introduces new challenges. More than 50% of respondents cited concerns related to data security, limited understanding of technology capabilities, and employee adoption and buy-in, underscoring the importance of thoughtful implementation and change management.
These challenges are shaping how firms think about growth more broadly. From a growth strategy perspective, respondents continue to favor organic expansion over mergers and acquisitions. Only 10% reported having a dedicated M&A plan, with most organizations instead focusing on strategic hiring, talent retention, and business development to support long-term growth.
Looking ahead
As construction firms head into 2026, steady market conditions, evolving cost pressures, and accelerating technology adoption underscore the importance of thoughtful planning. Companies that take a proactive approach to strategy, operations, and financial decision-making are better positioned to navigate uncertainty and capitalize on emerging opportunities.
If you have questions about how these trends may impact your business, our team of construction pros are here to help. From tax planning and cash flow management to technology considerations and long-term growth strategy, we work with construction companies to bring clarity and confidence to their decision-making. Contact us today to schedule a free consultation and discuss how your current approach aligns with your goals for the year ahead. As always, we’re here to help.
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Looking for more insight? The CICPAC year-end tax planning guide for the construction industry explores accounting methods, depreciation strategies, credits, and other planning considerations in greater depth. Download your free copy now.
For a broader perspective, explore our free November 2025 Economic Report, which provides additional analysis on market conditions, labor trends, material costs, and the 2026 outlook for the construction industry.
Don’t forget to check out our latest Construction Benchmarking Study to see how your organization compares to industry standards in employee compensation and benefits.
