UK construction outlook steady but fragile

The UK construction sector enters the latter half of 2025 in a precarious yet stable state, according to the latest Q3 Tender Price Indicator (TPI) from Gardiner & Theobald. While core input costs have stabilised and materials availability has improved, persistent labour shortages and a thinning project pipeline continue to restrain momentum.

Labour remains a critical pressure point, particularly for specialist roles and complex packages, keeping wage-driven inflation elevated at around 5% year-on-year. Despite a broader easing of material price volatility, cost pressures persist due to increasing preliminaries driven by staff costs, compliance requirements, and National Insurance hikes. Overheads and profit margins remain flat, constrained by client resistance and competitive tendering.

Overall, tender price inflation is forecast to remain moderate, with Gardiner & Theobald projecting a UK average of 2.25% for 2025 and 2.5% for 2026. These figures reflect a cautious near-term outlook influenced more by structural cost pressures than by volatile input pricing.

Activity levels vary significantly across sectors. Infrastructure, healthcare, and regulated utilities continue to perform steadily, buoyed by legacy projects. Conversely, residential new-build remains the weakest segment, hampered by slow planning, funding uncertainties, and persistent viability challenges. Fit-out, refurbishment, and life sciences are holding up comparatively well amid these headwinds.

Contractors are increasingly selective in bidding strategies, reflecting both a tighter risk appetite and ongoing procedural friction. Public sector delays, slower project conversion rates, and protracted regulatory processes, particularly linked to the Building Safety Act—are further dampening momentum.

The macroeconomic backdrop adds further complexity. UK GDP growth for 2025 has been revised down to between 1.0% and 1.1%, while inflation remains stubborn. Consumer price inflation (CPI) rose to 3.6% in June, with core and services inflation even higher, limiting the Bank of England's ability to ease monetary policy rapidly. Although the Bank cut interest rates to 4.00% in August, it has signalled limited room for further reductions in the short term.

Business confidence continues to decline, driven by concerns over rising costs, weak demand, and policy uncertainty. Investment decisions are being deferred, and firms are scaling back on hiring and discretionary spending.

Despite a 1.2% increase in construction output during Q2 2025, driven mainly by repair and maintenance—the forward outlook remains uncertain. Total new orders dropped 8.3% to £10.8 billion, with infrastructure, private industrial, and commercial segments all posting steep declines. This reflects a sector increasingly reliant on existing contracts, with a shrinking pipeline and fewer new tender opportunities.

The latest S&P Global UK Construction PMI for July underscores the trend, falling to 44.3, its lowest level since May 2020. The figure signals a deepening downturn in sentiment and suggests increasing competition for a dwindling volume of work.

Looking ahead, the upcoming Autumn Budget is expected to play a pivotal role. While public sector programmes continue to provide a base level of activity, a more robust recovery will depend on improved investor sentiment, clearer policy signals, and acceleration in procurement and project delivery.

Gardiner & Theobald's TPI concludes that while the UK construction market is not in crisis, it remains delicately balanced. The interplay of macroeconomic fragility, labour constraints, and policy-driven uncertainty will determine whether the sector can transition from stability to sustained growth in the coming quarters.