THE CONSTRUCTION MARKET
Constrained by cost and capacity
Despite a sluggish end to 2025 for construction driven by Budget uncertainty, total annual new construction work in the UK grew for the first time since 2022, and planned new work orders suggest positivity in the coming years. Yet in the near-term, sentiment surveys show a nervousness in bringing projects forward and conversion to work on site has been slow as increased costs put pressure on schemes. This uncertain and volatile pipeline has limited capacity in the contracting market, meaning that appetite for work is not always guaranteed and projects need to consider how they meet the market.
After a few years of contraction in total new work output in the construction industry, it returned to growth last year (FIGURE 3). However, much like the overall economy, the first half of 2025 was better than the second, with growth tapering off throughout the year. Considerable uncertainty surrounding the Autumn Budget led new work output to fall by 2.6% at the end of the year, marking the first quarterly decline since Q2 2024.
Growth in the construction market continued to be driven by the public and industrial sectors, while private housing saw a welcome return to growth in 2025 after a difficult few years. The private commercial sector experienced another year of contraction driven by falls in two of its main subsectors – offices, and leisure entertainment. As the housing and commercial sectors represent a significant portion of total output in the construction industry, their performance plays a significant role in determining the industry’s overall well-being.
New orders data from the ONS is widely regarded as a leading indicator of future demand. Whilst new work output measures the value of construction work that has already taken place, data from planning applications (termed New Orders by the ONS) have increased by 12.7%. New public housing was the largest area of potential growth (owing to a significant fall last year), along with continued expansion of the infrastructure sector. Commercial new orders saw a second year of growth, with 4.0% growth in 2025, following 15.8% in 2024, which suggests that output may recover in the near future.
Source: ONS
Looking ahead with cautious optimism
Entering 2026, sentiment across the construction sector was cautiously beginning to improve after two years of suppressed activity driven by high borrowing costs, inflation and weak private demand. Most forecasters expected the year to mark the bottom of the cycle, with limited growth in the first half followed by improving momentum later in the year with a more significant return to growth in 2027 or 2028.
Growing confidence was supported by moderating inflation and clear signals that interest rates had peaked, although financial conditions were still restrictive and project pipelines remained slow to convert into starts. Data from Glenigan suggests that work starting on-site in March was 18% below 2025 levels.
However, by the second quarter of 2026, market momentum is weaker than expected, mainly due to events in the Middle East, which have disrupted confidence. S&P Global’s Construction Purchasing Managers’ Index (PMI) in March showed a notable decline in confidence and a lack of new projects. Despite this, the headline index rose to 45.6 from 44.5 in February but remained below the neutral 50.0 value for the fifteenth consecutive month. All sectors remain in negative territory; commercial has declined more slowly than civil engineering or residential. This continued pattern of weakness has led companies to lower their growth forecasts, though 37.0% of companies still expect output to rise in the next year.
Several factors could influence a recovery in construction, building on the confidence seen at the beginning of the year, if the situation in the Middle East de-escalates. In the meantime, project teams will need to work collaboratively to manage viability.
"Viability is not about doing less, it’s about being deliberate: choosing where quality truly matters, where flexibility can be built in. In this environment, early planning, data-led decision making and a clear understanding of trade-offs are no longer advantages. They are prerequisites."
Dave Carr, Associate Director
Capacity concerns as a binding constraint
Despite recent low levels of output, contractor appetite in the contracting market is not guaranteed due to capacity constraints and a high level of risk aversion. Construction insolvencies have fallen in the last couple of years but remain elevated above pre-pandemic levels. Analysis by EY-Parthenon warned in February that profit warnings by listed construction companies rose to the highest level since the pandemic, with 18 profit warnings in 2025, a steep increase on the five seen in 2024. Leading factors for these warnings were order delays or cancellations (including delays caused by regulatory change), geopolitical uncertainty and rising costs.
The administration of some key contractors, particularly in specialised sectors, has created tight markets in some sectors or regions. Remaining contractors have continued to become increasingly selective over tendering opportunities and the terms and conditions they are willing to accept.
When the pipeline returns more meaningfully, labour shortages, loss of experienced site-based capability and a strained contracting market will be viewed as the binding constraint on growth and the ability to deliver work.
"The UK is entering a unique period in which several nationally significant programmes, including the New Hospital Programme (NHP), major defence investments, large‑scale energy expansion, and ongoing housing delivery targets, are set to progress simultaneously. Each of these initiatives will rely on the same pool of construction materials, specialist labour, and manufacturing capacity within a relatively short timeframe.
This concurrent demand poses a risk of exceeding the capacity of the domestic supply chain, particularly when considered alongside the market pressures and constraints.
Viability in the decade ahead won’t be achieved by reducing margins alone. It will be won by those who secure capacity early, industrialise delivery, instrument projects with data, and treat suppliers as long-term partners. The sooner we pivot, the more predictable, and investable, our outcomes will be."
Kyle Stead, Project Director
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