California: A Construction Overview

Introduction

The construction industry is a driving engine of both the national and California economies. According to an analysis by Ken Simonson, Chief Economist of AGC of America, using Bureau of Economic Analysis data, in 2021 the nation’s gross domestic product (GDP), the value of all goods and services produced in the country, totaled USD23 trillion, of which construction contributed USD959 billion (4.2%). During the same period, construction contributed USD129 billion (3.7%) of California’s GDP of USD3.36 trillion.

In an industry that responds to natural conditions and disasters, such as fires, and evolves with innovative projects, such as data centers, construction requires careful balancing of consumers, builders and legislators. We discuss below two of the most impactful trends and developments affecting the construction industry and citizens of California.

Dynamic Trends – Impact of Catastrophic Fires

Nationwide, fire losses have had a profound impact on the construction industry. Environmental conditions and intentional acts triggering fires, and the resulting destruction, have led to local building demands that increase labor and material costs and drive updates to building codes, not to mention the increased pressure on national supply and material needs.

Although catastrophic fire losses have not been limited to just Southern California, the Palisades and Eaton fires caused the loss of 38,000 acres and 16,000 structures across the Los Angeles communities they affected. (See A Year After the LA Fires: Pacific Palisades and Altadena Communities Recover | Cal OES News; January 7, 2026.)

The economic losses are difficult to comprehend. Worldwide, wildfires burned just shy of 1 billion acres in 2025, equivalent to 92% of the European Union’s land area, yet the costliest event of the year, the Palisades and Eaton fires, burned just 56,810 acres while causing more than USD53 billion in damage. By comparison, the second most expensive disaster in 2025, Myanmar’s magnitude 7.7 earthquake, caused an estimated economic loss of USD12 billion but resulted in the loss of more than 4,500 lives, with thousands more injured. (See The invisible costs of wildfire disasters in 2025; January 13, 2026.)

Since those fires, reconstruction has started and created its own challenges. Those include the increased demand for skilled labor and materials, despite the construction industry facing a labor shortage and higher costs for building materials due to scarcity. Costs have also increased because of stricter fire safety regulations throughout the state.

In the aftermath of the Palisades and Eaton fires, a surge of legislation was passed to address the fire losses and help prevent similar events in the future. That has included changes to the process for obtaining building permits, fire-rated construction requirements and other efforts to protect human life and property, all of which have an impact not only on the cost of construction, but also on insurance.

Emerging Developments – Data Centers

A “data center” is a building or group of buildings used to house large numbers of networked computers and servers to create a data storage infrastructure that stores, processes and shares digital information, which we all access when we use the internet, stream videos or save files to the cloud. More recently, data centers have become synonymous with “training” AI. This “training” demands substantial amounts of electricity, water and land. As the demands have increased, the alleged negative impact of data centers on communities has become part of daily conversation.

The global data center market is projected to reach close to USD700 billion by 2034, growing from USD269.79 billion in 2025 and about USD300.64 billion in 2026, reflecting a compound annual growth rate (CAGR) of about 11.10% during the forecast period. (See Data Center Market Size, Share & Industry Analysis, August 10, 2026.)

Data center construction presents risks that are distinct from those associated with other large-scale commercial projects. These centers incorporate off-site preassembly work and, at times, phased construction, creating a complicated schedule for completing a center so that it can operate without delay. The value of a data center is not limited to the building itself but includes the sophisticated equipment necessary for its operation, including servers, generators and uninterrupted power supply systems, not to mention the data it collects and controls.

These systems are sensitive to environmental threats, even during construction. Water, for example, is critical to a center’s cooling system but poses a danger throughout construction and operations. During construction, the failure of temporary climate control systems can lead to condensation, causing significant damage and delays. Once a center is operating, failures of its cooling systems, including leaks, can lead to catastrophic damage.

These same risks and defects can lead to litigation. The projects are costly and present challenges involving water intrusion, delays and disruptions. The financial stakes in these cases are significant, as even a temporary shutdown of a large data center can cost upward of USD540,000 per hour. (See The Cost of IT Downtime.)

Because many data centers are in regions facing severe water stress, these projects have become a significant concern for homeowners and environmentalists alike, with millions of gallons of water consumed yearly. In fact, the amount of water consumed and data centers’ demands for more water, have led to a lawsuit over access.

According to Tom’s Hardware, Imperial Valley Computer Manufacturing recently filed a lawsuit seeking access to 287 million gallons of Colorado River water annually to cool a 330 MW data center. The water is otherwise earmarked for local residents and farming activities.

For the construction industry, the rapid expansion of data centers can result in defects related to labor shortages, delays, foundation issues and cooling systems, all of which place a tremendous and increasing burden on the construction industry.

The State of California has introduced legislation to study ways to mitigate data centers’ electricity demand, with recommendations due in January 2027, and propose disclosure requirements for direct and indirect water consumption before data center licenses are issued or renewed.

With increasing litigation and social discontent around data centers, the continued expansion of “AI infrastructure” will require a careful balance between technological innovation, resource constraints, community impact and legal oversight.

Handling Construction Disputes

When issues or claims arise from fires, data centers, and other matters, they are initially focused on investigation, causation and conclusions. These issues are addressed in different manners.

California legislation in 2026 significantly reshaped private construction contracts, public works and environmental review. This includes legislation for housing reform, wildland-urban interface, new electrical laws and amendments to building codes.

Civil litigation

In California specifically, litigation may begin in the Superior Courts of any of the State’s 57 counties. The lawsuit is filed seeking damages and setting forth the basis for those damages. Importantly, however, there are alternatives to the judicial system that should be considered, including the following.

Arbitration

Arbitration is a private proceeding paid for by the parties involved to resolve a dispute outside of the traditional court system. Generally viewed as a more time-efficient process, arbitration is often provided for in the contract documents, both in the prime contract between the owner/developer and the general contractor, and in subcontract documents. The rules of arbitration can be predetermined by the arbitration provider or amended by the parties based on the nature of the dispute. While arbitration is viewed as a more expedient process, it can, at times, involve significant cost and generally requires the parties’ agreement to surrender their right to appeal.

Judicial reference

Similar to arbitration, judicial reference is a private proceeding paid for by the parties and specified in the contract documents. In California, judicial reference also incorporates the Code of Civil Procedure for discovery between the parties and typically includes retaining a retired judge as the referee. In another significant difference from arbitration, the “losing” party in this proceeding may “appeal” the ruling directly to the California Court of Appeal.

Mediation

Regardless of the above venue, mediation is available to aid the parties to resolve their dispute. It is a confidential process that allows the parties to speak more freely and work through their differences in a protected setting. It begins with the selection of a neutral party to guide the process, especially when multiple parties are involved, including owners, designers, contractors, subcontractors and suppliers.

Conclusion

The construction industry continually responds to various and changing factors, including catastrophic losses, technological advancements in business and the structures that support them, and shortages of labor and supplies, while balancing the needs of builders and consumers with the requirements of emerging legislation. When these issues give rise to claims involving defective construction and resulting damages, the parties must also determine the appropriate avenue for resolving those disputes.