UK Construction Market View H1 2025

The first quarter of 2025 has seen a continuation of the economic stabilisation that began in 2024. Following the peak of the cost-of-living crisis in 2023, inflationary pressures have eased, aided by the new Labour government's economic policies and the Bank of England’s interest rate cuts to 4.5%. While the Ukraine conflict's impact has diminished, tensions in the Middle East continue to influence global energy prices and supply chains.

In the construction sector, tender price inflation has stabilised at around 3%, a trend carried over from late 2024. This stability is expected to persist through 2025, with potential for slight increases. Key factors shaping the sector include ongoing supply chain adjustments, labour market dynamics, and government infrastructure spending.

Despite the relative calm, the construction industry remains vulnerable to global economic shifts, geopolitical events, and domestic policy changes, necessitating continued vigilance from clients, consultants, funders and stakeholders.

The construction sector has begun to adapt to the post-HS2 landscape, with a gradual reallocation of resources and focus towards other infrastructure projects and sectors.

The government's renewed commitment to regional development and green infrastructure has partially offset the impact of the HS2 cancellation. This shift has created new opportunities for contractors, particularly in sustainable construction and urban regeneration projects.

Inflation has moderated, with the Bank of England's interest rate sitting at 4.5% from 6 Feb 2025 helping to ease financing costs. This has improved the viability of some construction projects, leading to a modest increase in new project starts compared to late 2024.

Output in the construction sector has shown slight growth, estimated at 1-2% for H1 2025. While competition remains intense, there's been a marginal improvement in tender prices and profit margins for contractors. The industry outlook is cautiously optimistic, with a focus on efficiency and innovation driving recovery.

Overall, the UK construction market for H1 2025 shows signs of resilience and adaptation. While challenges persist, the industry's focus on efficiency, sustainability, and risk management is driving a cautious but steady recovery. Inflationary pressures have stabilised, with material costs now relatively steady following the resolution of supply chain disruptions. However, labour costs remain a significant factor in tender price inflation, as skilled worker demand continues to outpace supply in certain sectors, particularly those aligned with sustainable construction and regional development initiatives.

The bond market has improved slightly, with insurers cautiously regaining confidence, though premiums remain higher than pre-2023 levels. Construction insolvencies have decreased from their 2023-2024 peak but continue to influence risk assessment practices. This has led to more robust financial vetting processes in contractor selection and a trend towards collaborative contracting models.

Financing costs are stabilising following the Bank of England's interest rate cut on 6 February, providing some relief to contractors. However, lenders maintain a cautious approach, particularly for larger projects, spurring innovation in project financing and growing interest in alternative funding models. Overall, the UK construction market in H1 2025 demonstrates cautious optimism, with a focus on efficiency, sustainability, and risk management driving a steady recovery.

• Skilled labour shortages persist in key sectors

• Modest growth in construction output

• Green and regional initiatives driving projects

• Stable inflation and predictable cost increases

• Reduced but ongoing insolvency concerns

• Diversified infrastructure focus post-HS2

• Tender Price Inflation steady at 3-3.5%