While the full impact of the recent devastating wildfires in Los Angeles is still unknown, the fires have destroyed at least 12,000 structures and displaced over 100,000 residents in Southern California. The demand for labor and materials will be heightened by other factors, including major infrastructure and transportation projects, preparation for the 2028 Los Angeles Olympics, and increased private development fueled by recently declining interest rates. The construction industry faces mounting challenges amid the rebuilding efforts, and these challenges seem likely to be exacerbated by a dynamic environment including executive orders and other policy changes that will heavily impact California construction.
What does this mean for the construction landscape in California going forward?
Unprecedented demand for contractors and labor due to fire rebuilding
The devastating Palisades and Altadena fires in Los Angeles in January destroyed thousands of homes and businesses, creating an urgent need for reconstruction and restoration on an expedited basis. This will increase the demand for qualified contractors and skilled labor, as well as the potential for disputes over insurance claims, permits, and quality standards.
The upcoming Olympics in Los Angeles in 2028
The city of Los Angeles is also preparing to host the 2028 Summer Olympics, which will require investment in upgraded facilities, and public transportation, in addition to parallel private development.
Public and private infrastructure that will stretch the subcontractor base
California has a backlog of infrastructure needs, such as roads, bridges, rail, water systems, and energy grids, which will also increase the competition and pressure on a subcontractor base strained by the labor shortage and the pandemic-related disruptions.
Further shortage in the labor market due to increased immigration enforcement
The construction industry relies heavily on immigrant workers to fill the gaps in the labor market. According to the National Association of Home Builders, approximately 40% of California construction workers are immigrants (the vast majority documented but with some undocumented). The new administration has vowed to ramp up immigration enforcement and border security, which could affect the availability and cost of labor, as well as expose contractors to legal and reputational risks if they are found to employ unauthorized workers or violate labor laws.
Shortages and increased prices in the materials market due to threatened tariffs and global competition issues
The construction industry depends on the supply and price of various materials, such as steel, lumber, concrete, and glass, which are subject to global market forces and trade policies. The new administration has currently paused for 30 days the tariffs recently announced on some of the major trading partners of the US, Canada, and Mexico, set to go into effect on February 4, 2025. 10% tariffs against China went into effect on February 4, 2025, with China quickly responding with a counter tariff of 15% on coal and liquefied natural gas products and a 10% tariff on crude oil, agricultural machinery, and large-engine cars. The National Association of Home Builders estimates that approximately 27% of the residential construction materials in the US are imported from China, 11% from Mexico, and 8% from Canada. These tariffs, if and as enacted, have the potential to disrupt the supply chains and increase the costs of materials. Moreover, the US faces increasing competition from other countries, such as China and India, that are investing heavily in their own infrastructure and construction sectors, which could affect the availability and quality of materials.
In light of these challenges, there will be an increased need for proactive project planning and thorough contracting practices. With greatly increased demand, constraints on the labor market, and a disruption to global materials pricing, it seems inevitable that projects will take longer and cost more. Contractors and owners will need to carefully assess the feasibility, scope, and budget of their projects, as well as the qualifications, performance, and compliance of other project participants. They will also need to negotiate and draft clear and enforceable contracts that address the allocation of risks, responsibilities, and remedies in case of delays, defects, disputes, or changes in the market conditions including change order, escalation, delay, termination, force majeure and change in law clauses.
The attorneys in the Construction and Real Estate Litigation group at Nixon Peabody have experience on projects of all sizes, both public and private, and running the gamut from project planning, contract drafting and negotiation, project counseling, and disputes. We are uniquely positioned to help our clients navigate the complex and evolving construction landscape in California. We are committed to providing our clients with practical, cost-effective, and strategic solutions that protect their interests and achieve their goals in this challenging climate.