Our Forecasts

OUR FORECASTS

The UK construction market moves through Q2 2026 in a more risk-sensitive position than at the start of the year. Earlier signs of improving momentum have been disrupted by renewed energy and geopolitical volatility, most notably due to the Middle East conflict. Softer demand, delayed project conversion and increased competition for workload continue to restrain pricing, but fuel, energy, shipping, metals and risk premiums are reintroducing upward pressure across selected packages.

Our current forecast uplift is not being driven by stronger underlying demand, nor does it represent a repeat of the 2021–22 materials shock. Material availability is better, labour supply is more balanced and main contractor OH&P remains largely stable. However, contractors and suppliers are becoming more cautious around their fixed-price exposure, quote validity, long procurement durations and energy-sensitive packages. Pricing pressure is emerging less through margins and more through preliminaries, package rates, risk allowances and selective supplier notifications.

These inflationary pressures are being partly offset by demand-side relief, as project starts slow and more cautious design reviews push out procurement. Contractors are willing to fix pricing, absorb short-term volatility, or accept capped inflation mechanisms where pipelines are thin, teams are becoming available and projects offer credible forward workload.

Against this backdrop, we have increased our 2026 UK average tender price inflation forecast to 3.50%, up from 3.00% previously. Our 2027 forecast remains unchanged at 2.75%, recognising that some lagged pass-through into longer-duration procurement, preliminaries and risk allowances is likely to be offset by softer demand, competitive tendering and selective absorption of inflation exposure. Our longer-term forecasts also remain unchanged at 2.75% for both 2028 and 2029.

Overall, our view is for moderate, cost-led tender price inflation - upward pressure has increased in 2026, but weaker workload conversion, competitive pressure and improved general availability could prevent a more aggressive escalation.

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. Please contact your Gardiner & Theobald expert for project specific advice.
 

THE ECONOMY

The UK economy entered 2026 on a firmer footing than expected, with real GDP increasing by 0.6% in Q1, following revised growth of 0.2% in Q4 2025. The expansion was broad-based, led by services, while construction and production also contributed positively. However, the stronger outturn should be treated with caution. March provided a positive end to the quarter, but some activity appears to have been brought forward ahead of the expected energy price rises, and recent years have seen relatively strong first-quarter growth figures give way to softer momentum later in the year.

That initial growth now sits against a more uncertain forward outlook. The escalation of conflict in the Middle East has renewed volatility in global energy markets, raising the risk that higher oil and gas prices feed through into transport costs, inflation expectations and wider business confidence. This complicates what had previously looked like a gradual disinflationary path and reduces the likelihood of a smooth improvement in investment conditions through the rest of 2026.

Headline CPI inflation increased to 3.3% in March 2026, driven partly by higher fuel and transport costs, while services inflation remains elevated, reflecting persistent domestic pricing pressures. Although inflation is significantly below the peaks seen in 2022–23, it remains above the Bank of England’s 2% target and continue to constrain the pace of monetary easing.

Earlier expectations of a clearer rate-cut cycle through 2026 have faded as Bank of England policymakers weigh weak domestic growth against renewed inflationary risks linked to energy markets and geopolitical instability. As a result, the current base case is increasingly centred around rates remaining higher for longer, with the Bank prioritising inflation credibility while assessing whether recent energy-driven pressures prove temporary or more persistent.

The labour market presents a similarly mixed picture. The unemployment rate unexpectedly fell to 4.9% in the three months to February 2026, although this partly reflected rising economic inactivity rather than a broad-based strengthening in employment. Vacancies have continued to decline and payroll employment has softened, while wage growth has moderated to its lowest level in over five years. Overall, labour market conditions appear to be gradually cooling rather than deteriorating sharply, helping ease some domestic inflationary pressure.

For construction markets, softer economic growth, weaker investment confidence and elevated financing costs continue to weigh on project viability and procurement activity in parts of the market. At the same time, renewed energy and commodity volatility has increased the risk of selective cost pressures re-emerging across energy-intensive materials, logistics and imported components. The industry therefore remains caught between subdued demand conditions and a supply-side inflation shock – a combination likely to sustain cautious pricing behaviour and elevated commercial risk sensitivity.

CONSTRUCTION OUTPUT & NEW ORDERS

UK construction output stabilised in Q1 2026, but the recovery was narrow and uneven. Official ONS data shows that total construction output rose by 0.4% q-on-q, partially reversing the sharp 2.8% fall recorded in Q4 2025. However, output remained 1.3% below Q1 2025 levels, suggesting that the market found a floor, but not a firm recovery path. The headline improvement is therefore better read as a pause in deterioration rather than the start of a broad-based recovery.

The quarterly improvement was mainly supported by repair and maintenance, particularly private housing R&M and non-housing R&M, both of which grew strongly over the quarter. New work remained weaker overall, falling by around 1.9% q-on-q, with most major new-build sectors contracting. The notable exception was private commercial new work, which rose by 1.6%, suggesting some resilience in parts of the commercial market. However, this was outweighed by wider weakness across housing, infrastructure and industrial work. The general picture is therefore one of stabilisation supported by R&M and selective commercial activity, rather than a genuine new-build recovery.

Monthly data was more encouraging, with output rising by 1.5% in March, following revised increases of 0.5% in February and 0.7% in January. The March rise was supported by both new work (+2.0%) and repair and maintenance (+0.8%), providing a stronger end to the quarter. However, this should be treated with caution. The ONS noted anecdotal evidence that financial year-end effects may have lifted activity, while weaker new orders point to a thinner pipeline as existing schemes complete. With project conversion still slow and geopolitical uncertainty adding further pressure to cost and risk assumptions, March is better read as a temporary firming in activity than a decisive improvement in the growth outlook.

On the forward pipeline, the picture is more cautious. Total construction new orders fell by 10.5% in Q1 2026, from £11.8bn in Q4 2025 to £10.6bn, and were 11.9% lower than Q1 2025. The quarterly fall was mainly driven by weaker private commercial and infrastructure orders, suggesting that larger capital projects remain vulnerable to delayed approvals, viability pressure, funding constraints and investment committee caution. This is the more important forward-looking signal for TPI - current output may have stabilised, but the pipeline feeding future workload has weakened.

Overall, the latest data point to a market caught between steadier near-term site activity and weaker forward demand. Softer new orders and slower project conversion would normally temper pricing pressure, but this is being partly offset by renewed cost-side volatility. The key message for TPI is therefore that while output found some short-term support in Q1, the pipeline remains fragile – leaving tender pricing caught between softer workload visibility and renewed cost pressure.