Our Forecasts

OUR FORECASTS

The UK construction sector enters late 2025 in a finely balanced position. Input costs have largely stabilised and material availability is broadly steady, but labour remains a persistent pressure point—particularly for specialist roles and complex packages. While headline inflationary risk has receded, forward pipelines are under strain, with slower project conversion, delayed public sector decisions and protracted regulatory processes—most notably around the Building Safety Act—limiting momentum.

Contractors are adapting strategies to navigate procedural friction, selective demand and tighter risk appetites. Activity is steady in parts—particularly infrastructure, healthcare and regulated utilities—but confidence remains brittle, underpinned more by legacy workload than by new project starts. Residential new-build is the weakest segment, with viability gaps, slow planning and funding uncertainty weighing heavily, while fit-out, refurbishment and life sciences are holding up comparatively well.

The wider UK economic backdrop remains challenging. GDP growth forecasts for 2025 have been revised down to around 1.0–1.1%, with business confidence slipping further into negative territory amid concerns over rising costs, policy uncertainty and sluggish demand. Inflation is proving stickier than expected, limiting the scope for rapid monetary easing despite the Bank of England’s recent rate cut to 4.00%. With consumer sentiment fragile and investment decisions being delayed, near-term economic conditions are likely to remain subdued, adding to the sector’s cautious tone.

Tender price pressures are now driven more by structural factors than by materials volatility. Labour cost inflation remains elevated—running at around 5% year-on-year—despite softer demand, as shortages persist in key trades. Preliminaries are edging higher due to staff costs, National Insurance increases and compliance requirements, while OH&P levels remain broadly flat, sustained by competitive tendering and client resistance.

Materials costs are steady for most categories, with improved availability and shorter lead-in times. Pricing is becoming more competitive outside the busiest sectors, though specialist imports remain exposed to currency and geopolitical risks. The supply chain is financially fragile in places, with insolvency risk and tighter payment terms influencing pricing behaviour.

Our UK average Tender Price Inflation forecasts remain at 2.25% for 2025 and 2.5% for 2026, reflecting a stable but cautious near-term outlook. Public sector programmes will continue to provide a floor for activity, but sustained recovery will depend on improved investor sentiment and a faster pace of procurement and delivery.

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

Despite a solid 0.7% expansion in Q1, the UK economy’s pace slowed to 0.3% in Q2, according to the latest ONS estimates. The strong first-quarter performance was fuelled by one-off factors—such as early-year stockpiling and investment front-loading ahead of US tariff shifts—which pulled some activity forward. As these one-offs faded, Q2 growth settled into a more modest rhythm, with gains in services and construction output offset by weaker production output.

The Office for Budget Responsibility expects the economy to expand by just 1.0% in 2025, with the July consensus from independent economic forecasters only marginally higher at 1.1%, both signalling a risk of near-term stagnation. This muted outlook is compounded by weaker business investment, subdued consumer spending and flat productivity growth, pointing to a recovery that remains hesitant and uneven.

Inflation remains stubbornly high. Headline CPI rose to 3.6% in June—exceeding both the Bank of England’s 3.4% projection and its 2% target—while core inflation ticked up to 3.7% and services inflation held at 4.7%. The persistence of elevated services inflation points to entrenched domestic cost pressures, driven in large part by wage dynamics. At its August meeting, the Bank raised its near-term inflation profile, now expecting CPI to remain above 3.5% through the remainder of 2025 and warning of increased risks from “second-round” effects, with elevated inflation expectations potentially feeding into pay growth

While wage growth has begun to ease, the Bank of England cut the Bank Rate by 25bps to 4.00% in August in a closely split decision—highlighting the MPC’s divided view on the balance of risks. Policymakers now face a delicate trade-off - reining in inflation that remains stubbornly above target while preventing an overly aggressive stance from stalling already fragile growth.

Economic activity is likely to remain subdued through the second half of 2025, following the Q2 slowdown and the fading of early-year one-offs. Business confidence has slipped further into negative territory, according to the ICAEW’s latest national Business Confidence Monitor, with rising costs, weak demand and the prospect of higher taxes in this autumn’s Budget weighing on sentiment. Many firms are responding by tightening labour budgets—cutting back on hiring and bonus awards—and deferring investment decisions until there is greater policy and market clarity. Consumer sentiment remains fragile, with households focusing on essentials and deferring big-ticket purchases, leaving little scope for a meaningful near-term uplift in domestic demand.

CONSTRUCTION OUTPUT & NEW ORDERS

UK construction output rose 1.2 % in Q2 2025, with new work up 1.1 % and repair & maintenance expanding 1.4 % on the previous quarter. June’s monthly figures reveal a 0.3 % rise, propelled entirely by repair & maintenance—which rose 1.2 %—while new work declined 0.4 %. The sectors lifting the monthly gains were largely led by private housing and non‑housing repair & maintenance, growing 3.7 % and 0.8 % respectively.

While Q2’s construction output growth offers some respite, underlying conditions remain challenging. Total new orders fell 8.3% to £10.8 billion, led by steep declines in infrastructure, private industrial and private commercial awards. This divergence underscores a growing fragility - activity on site this quarter was sustained by the delivery of existing contracts, yet the forward pipeline is visibly thinning. The sector now faces the prospect of a bumpy autumn, with the upcoming Budget likely to prove pivotal in either stabilising demand or deepening the slowdown.

July’s S&P Global UK Construction PMI reading of 44.3—the lowest since May 2020—underscores how sentiment has deteriorated despite Q2’s modest output gains. The downturn reflects a sustained easing in new enquiries and tender opportunities. If this trend persists, project pipelines could begin to thin materially heading into 2026, intensifying competition for work. However, a combination of targeted fiscal measures in the Autumn Budget, easing financing costs, and the delivery of delayed schemes could help stabilise demand and lay the groundwork for a gradual recovery.