Execution over allocation: closing the delivery gap

When the Infrastructure Investment and Jobs Act (IIJA) became law in 2021, the municipal and infrastructure markets felt optimism. A legislative windfall followed?$1.2 trillion in total budget authority to rebuild America's infrastructure. State and local governments spent the last four years competing for funding and announcing grant awards with press releases and capital program amendments. As 2026 arrives, a new narrative is emerging, shifting from the pursuit of resources to the demands of implementation. The era of "announcement" is over; the era of "execution" is here. The market now confronts three interconnected obstacles to project delivery: escalating costs, regulatory bottlenecks, and imminent federal funding deadlines.

Execution challenges

The core problem facing issuers and borrowers is time and math. For example, a municipal fiber expansion budgeted at $100 million in 2023 may now cost $125 million due to inflation in labor and materials. This time-cost asymmetry creates a sources-and-uses imbalance. IIJA-funded projects scoped and budgeted in the early-cycle cost curve of an assumed transitory inflation period are experiencing budgetary shortfalls. Construction costs have not mean-reverted; they have reset at levels well above the historical baselines of the award period. This delta creates a funding gap. And the funding gap creates a potential leverage trap.

When projects lack sufficient gap-funding, owners and sponsors often incur additional debt to complete construction. This additional borrowing impairs key project metrics, including debt service coverage, liquidity, and profitability. If a project suffers from weaker credit fundamentals, capital markets price incremental debt at higher rates. As a result, credit spreads widen and risk premia rise. These changes constrain leverage capacity and compress equity returns. Moreover, as total project costs rise, the fixed amount of the federal grant accounts for a declining percentage of overall funding. This dynamic reduces the effective yield on the federal award. Each new layer of debt amplifies these adverse effects, forming a self-reinforcing leverage trap that raises the cost of capital, compresses project margins, and limits the value generated from each dollar of investment.

While inflation erodes the purchasing power of project budgets, a second challenge has emerged as a critical path constraint: regulatory compliance. Although recent reforms aim to accelerate federal environmental permitting (NEPA), procurement compliance now presents a significant bottleneck. The Build America, Buy America (BABA) rules are already contributing to delays, inflating costs, and disrupting supply chains in construction projects. As staggered implementation continues through 2026, challenges will intensify as transition waivers expire and program-specific compliance dates take effect. For manufactured products, BABA requires that the product is manufactured in the United States and that the cost of components mined, produced, or manufactured in the United States exceeds 55 percent of the total cost of all components?a threshold that forces earlier sourcing decisions and sharper pricing discipline. This regulatory shift reconfigures the supplier base and alters contracting strategy, reducing schedule certainty and increasing critical path risk. For example, the federally funded electric vehicle (EV) charging buildout experienced procurement slowdowns and schedule delays as domestic manufacturing and cost-of-components requirements phased in under BABA. Several states adjusted award schedules or extended proposal validity periods to address these constraints, extending construction and commissioning into 2025?2026. Despite these adjustments, funding remains conditioned on certified, documented BABA compliance, and noncompliance can trigger federal funding clawbacks or disallowances. Proactive owners and sponsors are already prequalifying domestic suppliers and pricing BABA compliance into procurement plans. Those that don't risk losing time, margin, and funding eligibility.

These BABA-induced supply chain delays also carry potentially significant credit implications. For owner-directed projects, these delays can arise during construction?after financing is secured?causing project economics to quickly depart from underwritten assumptions. For P3 and fixed price design-build procurements, contractors fix the price at contract award or commercial close and hold that price through financial close, with only limited, pre-agreed adjustment mechanisms. However, BABA-induced sourcing, component cost, and manufacturing uncertainty can heighten the risk that the awarded price becomes commercially uneconomical relative to the bid baseline when the agreed adjustment mechanisms are out-of-scope, time-barred, or capped. This exposes contractors to under-recovered costs. In each instance, construction contingencies erode, reserve accounts face drawdowns, and cost-to-complete headroom narrows within the construction budget. This stress can precipitate technical defaults, result in rating watches or downgrades, and trigger remedial actions?including equity injections, covenant waivers, and heightened lender oversight during construction. Ultimately, these cascading effects underscore the imperative for robust contingency planning to safeguard credit integrity amid execution uncertainties.

In addition to cost escalation and regulatory complexity, a third pressure?statutory discontinuity?further complicates project delivery. Absent successor legislation, the IIJA authorizations for surface transportation and core infrastructure programs expire on September 30, 2026. While valid obligations preserve these authorized funds beyond the statutory sunset, strict deadlines apply to obligation?the point at which a legal commitment creates an enforceable liability against available appropriated funds. For federal financial assistance, obligation occurs when the awarding agency executes and delivers a binding grant or cooperative agreement with the recipient; pre-award actions such as application acceptance or selection announcements do not obligate funds. Without this binding status, any unobligated balances risk becoming stranded in a federal lapse?making the execution of binding project agreements the strongest shield against legislative uncertainty. Concurrently, the rush to complete American Rescue Plan Act (ARPA) projects before the December 31, 2026 expenditure deadline is tightening competition for contractors and limiting labor availability. If not managed proactively, investors and creditors may increasingly view unobligated IIJA balances and unexpended ARPA awards approaching statutory deadlines as contingent liabilities rather than assets. The strategic priority is no longer chasing new allocations, but obligating existing entitlements before statutory cutoff dates render them inaccessible.

These converging pressures?cost increases, regulatory complexity, and deadline constraints?precipitate yet another market factor: bid shock. Throughout 2025, many owners and sponsors experienced a surge in bids that exceeded allocated funding. This trend of elevated pricing is expected to persist through 2026. As a result, traditional delivery models may fail. Owners may be forced to scrap failed procurements and pivot toward alternative delivery models?such as progressive design-build?that allow early contractor engagement to optimize design and cost within funding constraints. By streamlining procurement, integrating project phases, and creating early collaboration, these models can help deliver schedule certainty, optimize risk allocation, and support timely project completion. However, while alternative delivery offers solutions, it also creates new market constraints. Top-tier contractors are increasingly selective, prioritizing owners with budget realism, decision-making efficiency, and regulatory preparedness. Additionally, as inflation increases aggregate contract values, mid-market contractors may reach their bonding capacity, hitting surety limits that restrict their ability to secure additional contracts. This dynamic is reshaping the competitive landscape, forcing owners to compete not just on project attractiveness but on their own operational credibility. Owners leveraging flexible delivery models can enhance certainty of project completion; those insisting on re-bidding rigid plans risk the costly cycle of rejection and delay.

Winning formula

The fundamental challenge is clear: priorities must shift from securing allocations to securing completion. This will demand three core competencies: delivery model flexibility, compliance management, and targeted risk allocation. The market will divide into winners and losers based on execution capability. Losers will be trapped by stranded federal awards?grants that have transformed from assets into liabilities due to cost overruns, regulatory delays, or missed obligation deadlines. Winners will master these competencies, proactively engage stakeholders, and innovate in procurement to secure superior pricing, attract tier one counterparties, and maintain cost-effective access to capital markets. Their legacy will rest not on grants secured, but on infrastructure delivered.