AI data centre boom and tariff cost squeeze: Four questions for Australia’s engineering and construction industry in 2026

AI Data Center Boom and Tariff Cost Squeeze: Four Tests for Australia's Engineering and Construction Industry in 2026

Deloitte's latest "2026 Engineering and Construction Industry Outlook" paints a year that is stronger early and weaker later: in the second quarter of 2025, real value added in the US engineering and construction (E&C) industry rose to $890 billion, up 1% year over year; but in the same period, real gross output was $1.732 trillion, down 0.6% year over year. By July 2025, total construction spending had fallen nearly 3% year over year, with commercial construction down 8.2% and manufacturing construction down 7%, constituting the main drags.

What warrants more attention from corporate decision-makers is not the aggregate volume, but the price spread. Deloitte notes that the industry simultaneously faces sticky inflation, high interest rates, tariff uncertainty, severe labor shortages, supply chain disruptions, and sharp jumps in material prices; the direct result is narrower profit margins and longer project schedules. At the same time, bright spots are concentrated in AI-driven data center construction and the resulting demand for energy infrastructure; advanced manufacturing, healthcare, and defense activity also provide selective growth windows. Deloitte expects structures investment to turn from a decline in 2025 to moderate growth of about 1.8% in 2026, and AI-related data center spending will continue to support E&C workloads.

The report's data backbone is in the United States, but it describes a globally shared cost structure, supply chain, and technology capital expenditure cycle. For Australian engineering contractors, mining service providers, data center developers, and grid owners, the question is not "Will this affect us?" but "Where do we stand in this round of structural reallocation?"

Key Takeaways

• Growth in the engineering and construction industry in 2026 is not an aggregate recovery, but a shift in demand structure: commercial real estate and manufacturing plants are cooling, while data centers and power infrastructure take over.
• Tariffs have become a new cost baseline: tariffs on steel and aluminum reach as high as 50%, while the effective tariff rate on construction goods rises to 25% to 30%, a 40-year high.
• Labor shortages have turned digital delivery from a "bonus" into a "capacity substitute" and are driving industry M&A consolidation.
• For Australia, the opportunities lie in upstream resources and energy engineering, while the constraints lie in grid connection speed, skills supply, and elevated equipment and material costs.

Background: Three Constraint Lines Tighten at Once

Cost line and tariff line. Deloitte notes that recent tariffs—especially tariffs of up to 50% on steel and aluminum—have significantly raised construction material costs. In 2025, the effective tariff rate on construction goods climbed to 25% to 30%, the highest level in 40 years; material prices continued to rise from May to August 2025. For engineering and construction firms already operating on thin margins, with clients highly sensitive to price and schedule, such increases and the resulting procurement delays are quickly amplified.Labor and Capacity Line. Deloitte lists labor shortages as one of the industry’s persistent constraints. In Australia, the supply of engineering and construction skills has long depended on the vocational training system and skilled migration. Once the project pipeline is concentrated into the same time window—data centers, transmission lines, renewable energy grid connections, and resources projects advancing simultaneously—labor costs and schedule risks rise in tandem.

Policy and Demand Structure Line. Traditional demand engines are slowing. The pullback in commercial buildings and manufacturing plants is partially offset by the expansion of data centers and power infrastructure. This is not a cyclical rebound, but a substitution of demand structure.

Deep Analysis

1. Commercial Level: Who Gets Opportunities, Who Bears Pressure

The beneficiaries are relatively clear: general contractors and MEP subcontractors with data center delivery capabilities; engineering companies specializing in power grids, transmission, substations, and cooling systems; specialty contractors serving advanced manufacturing, healthcare, and defense projects; and engineering firms able to use data and AI to compress schedules and rework rates.

Those under pressure are equally clear: contractors dependent on the commercial real estate cycle; construction firms that use large amounts of imported steel, aluminum, and MEP equipment; and small and medium-sized subcontractors in a weak bargaining position—they often cannot pass tariffs and material price increases downstream.

For Australian companies, two types of exposure need to be distinguished. First, direct exposure: engineering and equipment companies with operations in the US or participating in the supply chain of US projects, whose project cost baselines have been raised by tariffs. Second, indirect exposure: cost pass-through from imported steel, equipment, and components in domestic projects. Both will change bidding strategies—shorter price validity periods, stronger price adjustment clauses, and earlier procurement lock-in are shifting from “negotiation tactics” to “contract standards.”

2. Industry Level: From “Construction” to “Connected Construction”

The four key trends Deloitte lists in this outlook outline changes in the shape of the industry: tariff evolution and supply chain resilience building, digitalization and “connected construction,” data center expansion, and how strategic M&A is reshaping project acquisition, financing, and delivery methods.

Connected construction, as it is called, essentially connects data across design, procurement, construction, and operations and maintenance, using AI to assist scheduling, resource allocation, and risk early warning. In a labor-scarce environment, this is not “icing on the cake” but capacity replacement. Running parallel to this is M&A: as project sizes grow, financing structures become more complex, and technical thresholds rise, industry consolidation is almost inevitable—mid-sized companies with digital delivery capabilities and energy engineering expertise may become acquisition targets, or use capital to achieve a leap in capabilities.

At the supply chain level, steel and aluminum tariffs and procurement delays are pushing “just-in-time” toward “multi-sourcing + regionalization.” For Australia, this means domestic manufacturing and assembly segments may gain some reshoring opportunities, but only if costs and delivery reliability can match.

3. Trade Level: Transmission Mechanisms to Asia-Pacific EconomiesFrom a mechanism perspective, rising U.S. construction material costs spill over to Asia-Pacific through several pathways:

• China: The price competitiveness of exports in mechanical and electrical equipment, PV modules, energy storage, and steel structures is affected by both tariffs and compliance costs; however, insufficient domestic U.S. capacity may also generate substitution orders.
• Japan and South Korea: EPC contractors and high-end equipment suppliers see more order opportunities in data centers and energy projects, and their project financing capability becomes a competitive advantage.
• India: As a supplier of engineering services, design, and technical talent, the global shortage of engineering labor will strengthen its role in outsourcing and offshore delivery.
• ASEAN: Its capacity to take on manufacturing plants and data center construction is rising, making it one of the main beneficiaries of supply chain regionalization.

For Australia, the key variables are resources and energy. LNG, copper, bauxite, and critical minerals are upstream inputs for this round of power and data center capital expenditure. Rising engineering and construction costs will squeeze project economics in the short term; but if the global power investment cycle is prolonged, mid-term support for upstream resource demand will instead become more solid.

IV. Investment Dimension: Why Capital Pays Attention to the "Shovel Sellers"

Capital focuses on the engineering and construction sector for three reasons. First, data centers and power assets have relatively high cash flow visibility, and E&C companies are an essential conduit for this capital expenditure. Second, the industry's valuation has long been constrained by low margins and cyclicality; once digitalization and M&A bring structural margin improvement, room for valuation re-rating opens up. Third, amid an uncertain interest rate environment, companies with stable backlogs and strong contract terms are more favored.

Future funds may flow to areas including: power and grid connection engineering, data center cooling and energy efficiency systems, modular and prefabricated construction, engineering and construction software, and private credit and infrastructure funds related to energy infrastructure.

Long-Term Trends: Five Judgments for 2026 to 2035

1. Electricity becomes the new bottleneck resource. The binding constraint on AI compute is shifting from chips to electricity and grid connection speed. Whoever can deliver usable power capacity in a shorter time will hold pricing power. 2. The productivity problem in construction is being repriced. Labor shortages are not a short-term phenomenon; AI, robotics, and modular construction will move from "pilots" to the "default option." 3. Tariffs become normalized. Companies need to treat tariffs as part of the cost baseline, rather than waiting for them to disappear. 4. Supply chains regionalize. Trade in intermediate goods and flows of engineering services within Asia-Pacific will further strengthen. 5. Financing structures become more complex. Project delivery increasingly depends on a combination of private capital, infrastructure funds, and long-term power purchase agreements, and contractors need to have financial-institution-like capabilities.

ConclusionThe most important observation in this outlook is not “2026 will grow 1.8%,” but that the structure of growth has undergone a replacement: moderate aggregate growth, sharp internal divergence. Commercial real estate and manufacturing plants are contracting, data centers and power infrastructure are expanding, and the cost baseline has been permanently raised by tariffs.

For Australia, this round of capital expenditure is both an opportunity and an exam. The opportunity lies in demand from upstream resources, energy engineering, and data center construction; the exam lies in three constraints—grid connection speed, skills supply, and equipment and materials costs raised by tariffs. Only companies that can maintain delivery certainty under these three constraints will truly share in the returns of this cycle.