UK Construction Market Trends
Market Recovery Underway
Construction output increased by 1.8% in 2025, marking the fifth consecutive year of annual growth. While Q4 2025 saw a decline of 2.1%, this reflects seasonal adjustments and pre-Budget uncertainty rather than underlying weakness. The industry is positioned for recovery in 2026.
Cost Pressures Persist
Building costs are forecast to increase by 15% over the next five years, with tender prices rising by 17%. Labour remains the primary cost driver, with skills shortages prevalent across both blue-collar and white-collar roles. The BCIS All-in Tender Price Index grew 2.5% in Q4 2025.
Sector Divergence
Market conditions are increasingly two-speed. Private building sectors face competitive tension and margin pressure, while public and regulated infrastructure markets provide firmer workload visibility. Infrastructure and private housing lead growth forecasts for 2026-2027.
Policy Backdrop Improving
The Bank of England is signalling further rate cuts through 2026, which should improve investor confidence. The Autumn Budget provided clarity on capital programmes, with increased funding for health, education, and infrastructure projects from mid-2026 onwards.
"The industry ended 2025 facing familiar challenges. Demand remains weak and confidence subdued, and while the pace of decline may have eased slightly, there was little in the Autumn Budget to deliver an immediate uplift in workloads. We expect growth to strengthen from 2026 as delayed schemes progress and housing and infrastructure activity begin to recover."
— Dr David Crosthwaite, Chief Economist, BCIS
Key Takeaways for Developers and Funders
For those planning residential and mixed-use projects in 2026-2027, the market signals are cautiously positive. Cost planning should account for continued labour-driven inflation of 3-4% per annum. The easing of interest rates should improve scheme viability, particularly for private housing starts. Fund monitoring should remain vigilant on contractor pricing strategies, as competitive tension may drive aggressive tendering followed by claims activity post-contract.
NorthEight provides cost management, project management, and project monitoring services to developers, landowners, and funders. Contact us at info@northeight.co.uk for project-specific advice.