Construction will see growth over next year but recovery "uneven" - new McBains report

While the sector as a whole is emerging from a prolonged period of instability, private sector confidence remains subdued, particularly within housebuilding and commercial development. High financing costs, planning delays, labour shortages and sustained cost pressures continue to constrain activity in these areas.

By contrast, infrastructure is expected to lead the recovery, with defence, energy and transport projects driving growth. Data centres are also highlighted as a sub-sector to watch.

Key Findings

• The UK construction overall is predicted to grow from 3.5% to 4.5% in 2026 compared to 2025 mainly driven by infrastructure sectors including defence, transport and energy. Demand for new housing remains suppressed, undermining the government’s longer-term housing targets.
• Tender price inflation – the increase in prices for construction projects between the time a cost estimate is made and the time a tender is submitted because of fluctuations in material and equipment costs – is forecast to increase from 2.75% in 2026 to 4% by 2029.
• Meanwhile the Building Cost Index is expected to climb by approximately 18% by 2031, as a result of increases in labour and materials costs.
• The industry is increasingly shifting toward two-stage hybrid procurement to manage risks associated with Building Safety Act gateways, and these are expected to continue.
• The industry is expected to continue struggling with persistent workforce shortages meaning hundreds of thousands of additional workers will be required over the next decade to meet projected workloads. Rising employment costs, coupled with a construction workforce at historic lows, may deter employers from hiring apprentices, despite available free training for SMEs.
• Although the increasing adoption of AI may partially offset resourcing pressures, 17% of employers anticipate staff reductions within the next 12 months, with these most likely to affect clerical, junior managerial, professional, and administrative roles. As a result, AI is unlikely to materially alleviate shortages in core site-based and skilled trade roles, where demand is expected to remain acute.
• With AI tools gaining traction, the industry should put an increased focus on drafting robust construction contracts so the allocation and management of risks are clearly defined.

Colin McCaffrey, director at McBains and leader of the team which produced the report, said: “The construction industry has been suffering through a prolonged period of instability and is continuing to recover from a phase of consistently and undeniably difficult market conditions. Although the industry is forecasting growth over the coming months, recovery will be uneven, with sectors like housebuilding and commercial projects struggling for momentum. On the plus side, the infrastructure sector is looking considerably rosy.

"Tender price inflation over the next year shows a moderate drawback compared to the forecasts of the last report, which are expected to be shaped by a combination of a weak outlook and persistent cost pressures. Upward pressure on tender prices is likely to persist due to rising labour costs and an intensifying labour shortage, which are expected to offset the current weaker market conditions and underpin modest inflation over this period.

“Meanwhile, the Building Safety Act continues to fundamentally reshape how projects are procured and delivered, with single-stage tendering struggling to accommodate the complexity of BSA gateways, pushing the industry toward two-stage hybrid models. Contractors are being increasingly selective, weighing client reputation and project complexity before committing to tenders, and the number of suitable opportunities continues to decline.

The report also forecasts the potential legislative ban on retention clauses could necessitate a widespread transition in client surety arrangements across the industry.

And the report says the industry is increasingly concerned about the potential lowering of the High Risk Building height threshold to 11m capturing those medium-level residential buildings – essentially 7-storeys down to 4-storeys.

Colin McCaffrey added "The potential lowering of the high risk building height threshold will mean pulling another 30,000+ buildings into the HRB-category in England, of which over 60% would be in London. There are obviously serious questions over whether the industry would be ready for such a change and it would mean thousands of projects, such as much needed new housing, at risk of stalling."

About the Report

The report draws on analysis from a wide range of sources, including McBains’ own research, alongside data from the Construction Products Association, the Construction Industry Training Board and the Building Cost Information Service.

The report was finalised before the recent Middle East crisis emerged as a material market factor. The potential implications were therefore unknown at the time of forecasting and have not been incorporated.

Colin McCaffrey said: “Clearly, the current Middle East crisis adds an unknown quantity to industry forecasts, with the potential for it to significantly impact construction by driving up material costs and disrupting global supply chains. The conflict has already led to sharp increases in global oil and gas prices, which could directly affect the production and transportation of construction materials, particularly energy-intensive products such as concrete and steel, as well as oil-derived materials. How long the conflict lasts will be critical.”

For further information or to request a copy of the full report, please contact the McBains team via email: [email protected].

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