Our Forecasts

OUR FORECASTS

Prospects for future growth remains strong, but the UK construction sector closes 2025 in a finely balanced position. Delivery remains broadly steady, but confidence has softened as decision-making slows. Current workloads are being underpinned by legacy projects, while many new starts and investment decisions remain on pause pending clarity from the Autumn Budget. The market feels active but hesitant, with schemes stalled at the conversion stage as clients await clarity on capital allocations, taxation and planning reform.

Financing conditions remain restrictive, and public-sector decision-making slow, reinforcing a defensive posture across much of the industry. Contractors are prioritising pipeline protection over expansion, maintaining selective bidding strategies and tightening commercial discipline while awaiting firmer policy and demand signals.

Input costs are stable, with materials prices broadly flat and supply chains functioning efficiently. The main inflationary pressure now lies in labour and compliance, particularly across MEP and regulated sectors, where skills shortages and new safety requirements continue to raise delivery costs. Wage growth has moderated from recent peaks but remains structurally high, keeping labour a key driver of cost tension even in a subdued market.

Tender price inflation is expected to rise modestly as embedded cost pressures outweigh weak demand. The 2025 UK average forecast has been lifted to 2.5%, reflecting firmer labour settlements, rising compliance-related preliminaries and limited competitive headroom as contractors seek to protect margins. Beyond 2026, a gradual strengthening in workload and greater fiscal clarity are likely to tighten specialist labour markets and absorb spare capacity, prompting a further increase to 2.75% in 2027. These revisions indicate a return to moderate, cost-led inflation rather than a renewed escalation cycle, but the risk of a spike in pent up demand is bigger than any time in the last two years.

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

After a stronger start to the year, UK economic momentum softened over the summer. GDP grew by 0.7% in Q1 before easing to 0.3% in Q2 as early-year stockpiling and front-loaded investment faded, with monthly indicators for July and August pointing to a similar modest pace in Q3. If confirmed, this would keep annual growth below 1.5% — above recessionary risk but below historical trend.

Inflation progress has stalled in recent months. Headline CPI remains at 3.8%, with services inflation still elevated due to lingering wage pressures, regulated price increases and higher transport costs. Goods inflation has eased significantly but this relief has yet to fully transmit into broader economic sentiment. 

The Bank of England held the Bank Rate at 4.0% in November but hinted at a possible cut in December if upcoming data confirm that inflation is easing. While policymakers agree that inflation has peaked, the MPC remains wary of cutting too quickly, emphasising that further reductions will depend on sustained disinflation.

Financing conditions have stabilised but remain restrictive enough to weigh on investment confidence, especially for capital-intensive sectors like construction.

Labour-market conditions are gradually loosening. Wage growth is easing and unemployment has edged higher, suggesting the labour market is rebalancing rather than weakening. However, this shift is also contributing to more cautious household spending behaviour, with big-ticket consumption muted and retail sales subdued. Consumer confidence has improved from its 2023 lows but remains fragile in the face of elevated living costs and future tax uncertainty.

Business confidence is similarly constrained. Firms are adopting a more defensive posture on labour budgets and capital expenditure while awaiting clarity on the Autumn Budget — particularly around taxation, planning reform and the scale of public investment. Many boardrooms remain concerned about the cumulative cost burden from regulation, higher-for-longer wage inflation and insurance premiums. This sentiment is feeding directly into delayed decision-making on development projects and a slower transition from feasibility into contract award.

Funding cost still shapes programme strategy. Although the Bank Rate’s reduction to 4% has eased the cost-of-capital shock of 2023–24, most development finance remains priced mid-to-high single-digit percent range (c. 6–9%) keeping long cash cycles expensive to service. Feasibility models now actively penalise extended programmes, prompting clients to prioritise phasing, tighter value engineering and accelerated delivery to manage financing exposure.

External risks are adding another layer of caution. Currency volatility has increased imported component price uncertainty. The outlook for the Eurozone remains subdued, dampening demand in key export-linked manufacturing sectors, while the trajectory of Chinese stimulus remains a swing factor for global commodities and metal prices relevant to UK infrastructure and industrial development. Meanwhile, ongoing geopolitical tensions continue to present upside risks to energy costs, insurance premiums and international supply chain reliability. These risks are not at crisis levels, but they are sufficiently elevated to reinforce risk aversion at investment committee level.

Overall, the UK economy remains constrained. The fundamentals of demand remain intact and growth is likely to stay in positive territory through 2026. However, decisions around new capital commitments are being delayed, with fiscal clarity and financing affordability increasingly setting the cadence of recovery. 

CONSTRUCTION OUT & NEW ORDERS

UK construction output rose 1.2% in Q2 2025 (driven by repair & maintenance), but the early read on Q3 points to a sideways/softer profile. Output was broadly flat in July (essentially unchanged vs June) and then eased in August (-0.3% m/m), leaving total activity close to the five-year monthly average. The compositional mix shifted: new work edged up across July-August, while repair & maintenance slipped back, reversing some of Q2’s R&M-led strength. In short, the market is ticking over rather than accelerating, with conversion delays still the main brake on momentum pending post-Budget clarity on programmes and approvals.

Official Q3 ONS new orders data were not available at the time of writing, but leading indicators point to subdued forward demand. The latest UK Construction PMI signalled a renewed downturn in October, with new orders falling for the tenth consecutive month as project starts were delayed and client confidence weakened. After signs of stabilisation earlier in the year, the rate of contraction has deepened again.

Performance continues to diverge by sector. Infrastructure and energy-transition work are supporting order books, while new commercial development remains constrained by viability pressures and tenant caution. Housing demand is still weak, but the slide has moderated in recent months, pointing to tentative stabilisation from a low base.

Across the industry, the friction lies in conversion rather than enquiry: projects are progressing more slowly through approvals as finance costs, governance scrutiny and risk transfer negotiations extend decision timelines. Pre-Budget uncertainty is further reinforcing caution, leaving fewer schemes moving to contract award.

With site activity still cushioned by previously secured work, a stronger revival in new orders will be needed through 2026 to prevent pipeline thinning from translating into weaker delivery.