The construction industry is facing a wave of rising costs and project uncertainty caused by aggressive tariff policies that target core building materials, such as steel, aluminum, copper, and lumber. These tariffs are triggering a chain reaction that’s reverberating across residential, commercial, and industrial sectors.

As material costs climb, the price per square foot of construction is rising fast, making it harder for contractors and developers to stick to budgets, plan purchases, and finish projects smoothly. Building anything, from a house to a hospital, is costing more money than it did last year.

How Are Trump’s Tariffs Affecting the Construction Industry?

With the Commerce Department’s recent announcements and pending Section 232 investigations into timber and lumber, contractors, subcontractors, and developers must prepare for sustained volatility and rising costs.

Earlier this year, the U.S. government added new tariffs on a wide range of imported goods, starting with a 10% global baseline increase in April, followed by a sharp hike to 50% on steel and aluminum in June. Then in August, 407 derivative products made from these metals were added. These include tools, building parts, machinery, HVAC systems, transformers, and metal framing. Click here for a complete list of the 407 product categories.

Also in August, a new Section 232 action went into effect that imposes 50% tariffs on semi-finished copper and copper-intensive derivative products, which will increase costs for electrical gear, HVAC/plumbing tubing, and connectors.

Meanwhile, lumber is under scrutiny. A Section 232 investigation launched in March is expected to conclude within several months, possibly by year-end, potentially triggering new tariffs on timber and wood-based goods. Separately, countervailing duties on Canadian softwood lumber are effective now, ranging 12.12%–16.82%. Since Canada supplies nearly 80% of U.S. lumber imports, any changes in trade have a big impact on the construction industry.

What Does This Mean for Builders?

Builders across the country are seeing project costs rise, driven largely by tariffs on commonly used building materials. These cost pressures are leading to delays, rebids, and even cancellations, especially in residential and light-commercial sectors, where margins are tighter.

To compensate, builders are engaging in more frequent value engineering (VE) cycles. This often involves switching to more affordable materials or reconfiguring building layouts to reduce expenses.

What Should Contractors and Developers Do?

While builders manage on-the-ground costs, contractors and developers must protect project viability through smart planning and contract management. Key actions include:

• Monitoring updates from the Bureau of Industry and Security, which publishes lists of tariff-impacted products.
• Using contract mechanisms like price escalation clauses to adjust for tariff-driven cost increases and higher Guaranteed Maximum Prices (GMPs) to avoid out-of-pocket overruns.
• Updating bids and budgets based on current material costs and market trends.

Strategic Relief from the One Big Beautiful Bill Act

The recently passed One Big Beautiful Bill Act (OBBBA) offers construction companies several tools and a timely counterbalance to deal with rising costs. For contractors, developers, and specialty trades, the bill introduces several tax breaks and incentives to improve cash flow, reduce tax burdens, and support long-term investment in equipment, innovation, and infrastructure.

Key provisions that affect the construction industry include:

100% Bonus Depreciation: Builders can now fully expense qualified machinery, vehicles, and tools in the year of purchase.

Expanded Section 179 Expensing: Small and mid-sized companies can now deduct up to $2.5 million for expenses like software and equipment.

Qualified Production Property Deduction: If you’re building a qualified factory or production facility, you can write off the full cost if construction begins between January 19, 2025, and December 31, 2028.

Permanent 199A Deduction: If you’re eligible and your company is a pass-through entity (like an LLC or partnership), you may claim a 20% deduction on qualified business income.

Expanded Exemption for Residential Construction Contracts: Builders of qualifying projects, including apartments, senior housing, and similar developments, can use a simplified accounting method that helps defer taxes and improve cash flow.

Section 174 R&E Expensing: If your company spends money on domestic research and experimentation (R&E), you may be able to write off those costs right away.

Section 163(j) Interest Deductibility: Many companies can now deduct more interest on loans, which may influence lease-versus-buy decisions and capital structuring strategies.

For a more in-depth look at the what the OBBBA means for builders and contractors, check out our related article.

We Can Help

At Elliott Davis, we support construction clients with:

• Margin protection and cost modeling to understand how tariffs flow through the supply chain and impact your bottom line.
• Resilient supply chain strategy to explore sourcing alternatives and inventory positioning.
• Experienced tax planning to guide clients through multi-state sales and use tax implications.

Contact us today to start the conversation.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

Internal Controls over Financial Reporting (ICFR) are designed to support the accuracy and reliability of financial statements, aiming to prevent material misstatements due to fraud or error. Risk assessments, control activities, and monitoring provide comfort to stakeholders regarding the integrity of financial reporting, building trust in the financial information presented.

For a broader perspective on modernizing your control environment, see our earlier article: Rethinking internal controls for your financial institution.

The Role of Internal Controls in Financial Services

In the financial services sector, the importance of ICFR is amplified due to the complexity and high volume of transactions, which increase the risk of errors and fraud. Additionally, these institutions operate under stringent regulations, requiring robust internal controls. A well-structured environment builds trust and supports informed decision-making by reinforcing the reliability of financial statements for investors, regulators, and other key users.

A deficiency in ICFR is a flaw in the design or operation of a control that could prevent timely detection or correction of financial misstatements. When ICFR deficiencies are not remediated, the risk of material misstatements in financial statements increases, along with broader risk exposure across the organization. See below for categories of deficiencies:

Key ICFR Deficiencies in Financial Services

To improve internal controls, it’s important to recognize key deficiencies. These include:

1. Inadequate Risk Assessment

Institutions often fail to correctly identify and assess risks due to a lack of understanding of the current business environment and processes, leading to an increased risk of control gaps.

Examples:

• A bank outsources mortgage servicing but fails to assess vendor-related reporting risks. As a result, errors in escrow and interest calculations go undetected, leading to misstated liabilities and income.
• A bank expands its use of Level 3 fair value instruments without reassessing valuation risks and model assumptions. The lack of updated risk analysis leads to insufficient controls over valuation and misstated investment balances.

2. Weak Control Environment

Insufficient leadership commitment to integrity and ethics, in addition to poorly defined roles, can undermine the effectiveness of oversight and execution.

Examples:

• Senior management bypasses loan approval protocols to push through high-risk commercial loans at quarter-end to meet earnings targets.
• The financial and risk departments share responsibility for fair value validation but lack clear accountability, creating confusion and inefficiencies.

3. Deficient Control Activities

Inadequate segregation of duties and missing protocols around complex transactions increase the risk of fraud and reporting errors.

Examples:

• A single employee handling both initiation and approval of wire transfers increases the risk of unauthorized transactions.
• A hedge fund lacks adequate procedures for valuing complex derivatives, resulting in inaccurate asset reporting.

4. Inadequate Information and Communication

Poor data quality and ineffective communication channels can lead to errors and misstatements.

Examples:

• Outdated customer records cause billing errors and flawed account summaries.
• Data pulled from multiple legacy systems without reconciliation leads to inconsistencies in reported balances.

5. Insufficient Monitoring

Lack of ongoing evaluations and failure to promptly address identified deficiencies allows weaknesses to persist.

Examples:

• A credit union neglects to review its loan approval process, missing changes in market conditions that affect credit risk.
• A bank identifies a weakness in its fraud detection system but delays corrective action, leaving it vulnerable to fraudulent activities.

By addressing these weaknesses, organizations can take proactive steps to strengthen their ICFR frameworks for more reliable financial reporting.

Strategies to Avoid ICFR Deficiencies

Financial services organizations can strengthen their internal control frameworks by implementing the following approaches:

• Build a Strong Oversight Culture: Promote integrity and accountability with clear leadership and defined roles.
• Refine Risk Assessment: Regularly update risk assessments and use analytics to identify emerging threats.
• Strengthen Safeguards: Define roles clearly and restrict system access to protect sensitive data and support accurate reporting.
• Enhance Communication: Invest in reliable systems that deliver timely financial data and create clear channels for reporting issues.
• Improve Monitoring: Conduct regular internal audits and reviews, with structured follow-up on identified deficiencies.

These strategies help reduce ICFR gaps, support reliable financial reporting, and build trust with stakeholders.

Case Studies on ICFR Deficiencies

Case Study 1: Large Bank's Restatement Due to Revenue Recognition Errors

A multinational bank was forced to restate its financial statements after uncovering material errors in revenue recognition. These issues stemmed from weak oversight of complex financial products and gaps in governance.

Challenges:

• Complex Offerings: The bank lacked effective safeguards around intricate financial products, complicating accurate revenue recognition.
• Limited Oversight: Insufficient supervision of the revenue recognition process allowed errors to persist undetected until a restatement was necessary.
• Inadequate Documentation: The documentation requirements were not robust enough to support accurate financial reporting.

Resolution:

• Enhanced Review Processes: The bank implemented stronger controls and documentation requirements, with regular reviews by senior management.
• Improved Risk Assessment: A comprehensive risk assessment was conducted to identify vulnerabilities and reinforce financial reporting practices.

Lessons Learned:

• Tailored Safeguards: Risk mitigation strategies should be customized to address the complexity of financial products.
• Continuous Monitoring: Regular oversight helps identify and correct errors early.

Case Study 2: Mid-Sized Bank's Challenges with Q Factor Deficiencies in CECL

A regional bank encountered difficulties integrating qualitative factors (Q factors) into its CECL model, leading to inconsistent credit loss estimates.

Challenges:

• Inadequate Identification: The institution struggled to identify relevant Q factors for its diverse loan portfolio.
• Subjectivity and Lack of Documentation: Adjustments were based on judgment with minimal supporting records.
• Inconsistent Use: Departments applied Q factors inconsistently, undermining reliability.

Resolution:

• Standardization: Developed a standardized framework to guide consistent application across teams.
• Training and Recordkeeping: Implemented training and established detailed documentation procedures.
• Monitoring and Feedback: Set up regular reviews to refine Q factor adjustments.

Lessons Learned:

• Structured Framework: Promotes consistency and reliable estimates.
• Clear Documentation: Supports transparency and informed decision-making.
• Continuous Improvement: Keeps the framework aligned with changing conditions.

We Can Help

At Elliott Davis, we understand the unique challenges financial services organizations face in maintaining strong ICFR. Complex operations and stringent regulatory requirements can expose deficiencies in control environments, risk assessments, and reporting processes.

To mitigate these risks, our Financial Services Group works with institutions to:

• Evaluate your current ICFR framework
• Identify gaps in risk assessment, control activities, and monitoring
• Enhance reporting processes and reduce manual effort
• Align oversight mechanisms with business goals and regulatory expectations
• Support leadership with actionable insights and practical solutions

Let’s work together to build a control environment that supports accuracy, transparency, and confidence in your financial reporting. Contact us today to get started.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

Private equity (PE) firms and their portfolio companies (PortCos) face increasing pressure to drive growth, improve margins, and achieve business targets. Yet, even in the face of this pressure, many still underestimate the extent to which an increased focus on talent can drive value creation. But as capital remains expensive, holding periods extend, and competition for quality assets intensifies, talent is becoming a defining factor in performance and results.

Recent research suggests that PortCo leadership can impact financial outcomes by as much as 15% and market valuation by 30%, underscoring the benefits of investing in human capital. In fact, top-performing companies invest 50% to 100% more in organizational initiatives, helping them to generate returns 3 to 4 times higher than their peers. On the other hand, when talent is not a priority, disengagement can result. The latest Gallup data shows that U.S. employee engagement dropped to its lowest level in a decade in 2024, with only 31% of employees engaged and 17% actively disengaged – meaning 1 in 6 employees opposes their employer’s goals. This disengagement erodes financial performance, leadership stability, and long-term value creation.

Linking Talent and Value Creation

Historically, PE firms paid little attention to human capital beyond replacing C-suite executives. While many PE leaders acknowledge that strong leadership is essential to sustained value creation, most still rely on traditional, transactional workforce management rather than investing in long-term development. Yet investing in talent can deliver measurable financial returns. The following emerging trends are making the financial case clearer than ever:

• Higher employee engagement drives profitability. Organizations in the top quartile for engagement achieve 18% higher productivity and 23% greater profitability.
• Longer hold periods demand structured leadership succession. As PortCos stay under ownership for extended timelines, the risk of leadership gaps grows significantly. Despite this, 55% of PortCos and 54% of PE sponsors admit they have no formal succession plan.
• Workforce disengagement weakens execution. High turnover at both the executive and workforce levels undermines PortCo performance.

Competing for Top Talent

The competition for top talent is associated with several key challenges, including:

• The lack of a leadership pipeline. A weak pipeline signals future instability.
• High executive turnover. Without clear succession planning, retention strategies, or aligned incentives, PortCos struggle to retain top talent – leading to extended holding periods and loss of institutional knowledge.
• Limited operational expertise. 31% of PortCo executives say sponsors lack the industry knowledge needed to guide leadership effectively.
• Disconnect between investors and operators. Conflicting priorities between PortCo CEOs and PE sponsors can lead to execution delays, friction, and weaker value creation plans.
• Failure to act quickly on workforce issues. Many PE firms acknowledge that waiting too long to address leadership gaps results in underperformance.
• Cultural misalignment in mergers. Post-merger integration challenges, including unifying leadership and maintaining employee engagement, can derail value creation.

However, top talent isn’t the only thing PE firms are vying for – they also face increased competition for investments, the challenges associated with a dwindling workforce, and the complexities of integrating corporate cultures during acquisitions. These challenges are only compounded by economic forces like margin compression, inflation, high interest rates, and investors’ expectations for faster returns.

Building Talent Infrastructure for Growth

PE firms that prioritize talent as a value driver consistently achieve stronger PortCo performance. Key initiatives for success include:

• Defining clear expectations for leadership roles and succession plans.
• Aligning strategy, compensation, and performance metrics to motivate management.
• Investing in leadership development to build a strong pipeline of future leaders.
• Tracking leadership effectiveness through retention, engagement, and profitability.
• Providing continuous training to sustain long-term growth.

We Can Help

At Elliott Davis, we specialize in optimizing organizational and talent strategies to drive value creation for PE firms and their portfolio companies. Our expertise helps to align leaders and teams, develop high-performing managers, and create structured workforce strategies that reduce turnover, improve execution, and accelerate value creation.

Contact us today to learn how we can help you build and execute your talent playbook.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.