The construction industry is poised for significant changes this year, with finance and accounting practices evolving to meet new challenges and opportunities.
This article explores several key trends driven by changes in market dynamics, significant technological advances, evolving business practices, and regulatory shifts.
Economic Outlook & Market Dynamics
Construction spending is expected to increase in 2025, with forecasts predicting growth between 2% and 8.6% across various sectors.1
History shows that the cycle for full recovery in construction is driven by rebounds in the following order:
- Housing
- Commercial construction
- Industrial
- Public works
Based on professional experience, these rebounds must occur with a two-year lag from peak to peak (Exhibit 1).
In 2025, housing starts are expected to modestly rise, kicking off a new phase in the construction cycle. While there will still be significant economic spend in the public works segment (largely due to the Infrastructure Investment and Jobs Act), housing is the key to a soft recovery. This market cycle is supported by the June 2025 forecast from ITR Economics (Exhibit 2).2
There are expectations of lower interest rates, with predictions of up to two rate cuts throughout 2025;3 however, significant economic headwinds remain. Inflation has been sticky due to key issues such as the national debt level, low unemployment, supply chain uncertainty, and worldwide geopolitical unrest. Through two quarters, the Federal Reserve has, so far, declined to implement rate cuts.
Construction industry labor costs are expected to continue growth given the supply and demand constraints (not enough tradespeople, project managers, etc.). In addition, construction material costs are expected to rise 5-7%.4 Tariffs, or the expectation of tariffs, play a role in that.
The combination of interest rates (and therefore, carrying costs), rising labor, and material costs will make it more difficult for project pro formas — a projected financial statement that estimates the costs, revenues, and profitability of the project based on assumptions and forecasts — to plan and gain construction loan approvals. It will also be more difficult to generate internal rates of return that make economic sense relative to other investment alternatives for privately financed projects.
Technological Advancements
AI & Automation Integration
Artificial intelligence (AI) and automation will continue to play a crucial role in transforming construction finance and accounting practices.
The real challenge is identifying tools that can be easily integrated and provide a measurable impact by improving timeliness, accuracy, and completeness. With hundreds of AI tools, sorting them out can be difficult. Consider identifying tasks that have redundant data entry and start there.
The automation that AI will enable is expected to streamline tasks such as data entry, reconciliation, and financial reporting. The finance department is typically the first to use AI tools to rename invoices to match the company naming convention, automate routing for approval, collate all the reports needed to complete a month-end cost projection, and establish target billing amounts to reduce revenue swings and missed expenses.
Additional AI tools focused on preconstruction planning, procurement, project management, schedule optimization, and resequencing are already on the market. Add in drones and robotics, and the potential efficiency gains expand even further.
These tools can help contractors complete more work with fewer resources, which is great news for an industry with so much scarcity. AI is expected to reduce construction costs by as much as 15% — a notable figure for a multi-trillion-dollar industry.5
A whole new category of service offerings can be expected, with an emphasis on innovation and industry collaboration driving new solutions into the marketplace. The scope of these solutions will likely focus on how payments are made from GCs to subcontractors and vendors.
Another option is the deployment of contracts that have automatic payment upon completion of specific project milestones — think of what this would do for cash flow and revenue projections, with a goal of increased speed and transparency.
Cloud-Based Solutions
The adoption of cloud-based accounting software and software as a service (SaaS) platforms will continue to rise.
The advantages include real-time financial reporting, access to data, and collaboration opportunities through dashboards and key performance indicators (KPIs). These tools are readily available and reasonably simple to deploy.
SaaS
The SaaS model allows contractors to focus on what they do well: building. The model affords greater data security and recovery options and capabilities, particularly with all the cyber threats that exist today.
SaaS deployments are also making interconnectivity and integration among separate, disparate systems easier. The advent of sophisticated application programming interfaces, along with some platforms gaining significant market share, makes this more of a reality.
While some software offerings still overpromise future functionality, vendors are increasingly delivering on meaningful integration capabilities.
Cloud-Based Systems
Cloud-based systems substantially open the door to the development and deployment of mobile apps. And because a SaaS license is assigned to an individual dedicated to a project, many times the licenses can be passed through as an expense rather than included as a part of the fee. This can present minor margin benefits when structured appropriately.