Our Forecasts

OUR FORECASTS

The UK construction market enters 2026 with tender price inflation expectations edging higher. Activity continues to be supported by legacy workloads, but there are early signs that delayed schemes are beginning to re-engage, with potential for a more meaningful release of deferred projects later in 2026. Improving visibility on interest rates, greater post-Budget clarity and gradual easing in approval processes are starting to support viability discussions, particularly for well-structured  schemes. 

Macroeconomic conditions continue to weigh on confidence, but the policy backdrop is gradually becoming more supportive, with the direction of travel tilted towards easing and the Bank of England signalling further rate cuts through 2026. While financing conditions remain restrictive, improvements on the cost of capital is beginning to stabilise sentiment and reduce downside risk to scheme viability — an important shift after two years of heightened uncertainty.

Market conditions remain selective and increasingly two-speed. Competitive tension and margin pressure persist across private building sectors, limiting the scope for demand-led inflation despite ongoing cost pressure. By contrast, activity in public and regulated infrastructure markets is providing firmer workload visibility, where scale and programme certainty are supporting pricing in capacity-constrained specialist trades. 

Tier 1 contractors generally remain well utilised and commercially disciplined, supporting firmer pricing, while Tier 2 contractors face more variable conditions, with selective competitiveness in viability-constrained sectors. The MEP market also remains particularly firm, driven by limited specialist supply capacity, labour being drawn into data- led and regulated projects, and elevated costs for copper, cabling and packaged electrical systems. Design risk and complexity are increasing for more sophisticated buildings, while a contracting supply chain — reinforced by elevated insolvencies — is reducing competitive depth. Importantly, there is little evidence of widespread price-cutting, with risk management and margin protection continuing to shape bid behaviour.

Against this backdrop, we have revised our 2026 UK average tender price inflation forecast up to 3.00% (from 2.5%). This reflects persistent cost pressures rather than a sharp uplift in demand. Together with post-Budget certainty and a pipeline of large, immovable schemes, these factors point to a period of moderate, cost-led inflation, with pricing pressure emerging unevenly as deferred projects unlock rather than through a broad-based growth cycle.

All forecasts in this report take account of all sectors and project sizes as a statistical weighted average, indicating an overall trend in pricing levels. It should be remembered that individual projects may experience tender pricing above or below the published average rate, reflecting the project specific components and conditions.

THE ECONOMY

The UK economy continues to exhibit a soft, uneven momentum profile as it moves into early 2026. Official data confirmed that GDP grew by just 0.1% in Q4 2025, signalling weak underlying demand and subdued investment momentum. This leaves annual GDP only slightly above its year-ago level, with real GDP per head falling for a second consecutive quarter. In effect, the economy has been moving sideways rather than forward. Most forecasters (and the Bank of England’s own latest projections) continue to suggest only modest expansion through 2026, as weak private demand, persistent global uncertainty and fiscal headwinds weigh on confidence.

Headline inflation has defied the stronger-than-expected downtrend that many forecasters projected through 2025. The Consumer Prices Index (CPI) edged up to 3.4% in December 2025, from 3.2% in November, driven in part by volatile components such as airfares and tobacco duties, with food prices still running significantly above average. Core inflation — excluding energy and food — remains sticky, reflecting persistent service-sector price pressures and wage pass-through effects. This elevated level of inflation, while well below early-2023 peaks, remains above the Bank of England’s 2% target and is higher than most Eurozone peers.

Against this inflation backdrop, monetary policy has tilted more decisively towards easing, even as the Bank of England maintains a data-dependent stance. The Bank Rate was held at 3.75% in February following a knife-edge 5–4 MPC vote, with four members favouring an immediate reduction — a notably more dovish split than markets had anticipated. While the majority cited residual uncertainty around services inflation and wage dynamics, the Bank’s accompanying guidance acknowledged that further easing is likely, supported by a softer growth outlook and a weakening labour market. Market pricing has shifted accordingly, with expectations pointing to multiple cuts over 2026, rather than a single, delayed adjustment. For construction clients, easing monetary policy may start to improve the viability backdrop.

The labour market is loosening, albeit gradually and unevenly. Survey data indicates the unemployment rate has risen into the low-5% range, up from the historically tight sub-4% pandemic trough, with vacancies moderating and hiring intentions softening. Payroll employment metrics and jobless claims point to weakening labour demand, while wage growth remains positive but slowing — a combination that is easing, though not collapsing, domestic cost pressures.

On the demand side, consumer and business sentiment remains fragile. Household real incomes are constrained by elevated CPI and service inflation as the ongoing cost-of-living squeeze dampens discretionary spending. Some pockets of stronger activity (eg recent improvements in UK manufacturing export orders) show resilience, but these are not yet broad enough to drive a sustained upswing in investment.

CONSTRUCTION OUTPUT & NEW ORDERS

UK construction output has shifted from “ticking over” to a clearer late-year soft patch. Official ONS data shows that total output fell by 2.1% in Q4 2025 versus Q3, with both new work (-2.6%) and repair & maintenance (-1.5%) contributing to the decline. At sector level, the downturn was broad-based (seven out of nine sectors falling), with particularly sharp quarterly falls in public new housing and private commercial work.

Monthly data underlines the same story: output fell by 0.5% in December 2025, following revised declines in November (-0.8%) and October (-1.6%). The December fall was driven entirely by a sharp drop in repair & maintenance (-2.5%), while new work rose by 1.0% — suggesting activity did not collapse, but remained fragile and uneven across work types.

On the forward pipeline, total construction new orders fell by 3.8% in Q4 2025 (around £469m) versus Q3, with the quarterly decline mainly driven by private commercial and private industrial work. This points to continued caution in capex-led development where viability, pre-let certainty and investment committee risk appetite dominate — and it aligns with the wider macro backdrop of weak growth and delayed decision-making.

That said, survey evidence offers a slightly less downbeat read on forward demand at the start of 2026. The January PMI signals that new orders are still contracting, but with a slower rate of decline than in late 2025, alongside reports of firmer enquiry levels and fewer outright cancellations. The improvement appears most evident in commercial-related activity, while housing demand remains the weakest and most hesitant part of the pipeline. Overall, the message is not that order books are rebuilding yet — but that forward demand has shifted from sharp contraction to a more measured, sideways profile.

Across the industry, the principal friction continues to lie in conversion rather than headline enquiry: projects are progressing more slowly through approvals and governance gates as financing constraints, risk transfer negotiations and heightened client scrutiny extend decision timelines. In this environment, any sustained improvement in new work is more likely to stem from firmer commitment mechanisms — such as funding approvals, pre-lets, phased procurement strategies and clearer risk allocation — than from an improvement in sentiment alone.