Construction sector under pressure
Rising costs and weaker demand continue to challenge the industry
UK construction firms are facing some of the sharpest cost increases seen in almost 30 years, as the conflict involving Iran pushes up fuel, energy and raw material prices.
A closely watched survey of UK construction businesses found that input cost inflation rose significantly in April, reaching its highest level since June 2022, when commodity prices surged following Russia's invasion of Ukraine. In fact, April's increase in purchasing costs was among the steepest recorded since the survey began in 1997.
At the same time, activity across the sector continues to weaken.
The Construction Purchasing Managers' Index (PMI), one of the key indicators of activity in the industry, fell to 39.7 in April, down from 45.6 in March. Any reading below 50 indicates contraction, suggesting that many firms are seeing workloads and activity levels decline.
A difficult backdrop for the industry
These pressures come at a challenging time for a sector that contributes around 7% of UK GDP and employs more than two million people.
Construction businesses have already been dealing with a combination of:
- Weaker demand
- Ongoing skills shortages
- Higher operating costs
- Increased financing costs
The latest rise in input prices only adds to those challenges.
Around two-thirds of firms surveyed reported higher costs during April. Many businesses pointed to suppliers passing on increased fuel and transport costs linked to the conflict in the Middle East, disruption in the Strait of Hormuz, and rising prices for imported materials.
Supply chain issues continue
Alongside higher costs, supply chains are once again showing signs of strain.
Vendor delivery times lengthened at the fastest pace since December 2022, with firms reporting delays to international shipping and difficulties sourcing materials from parts of the Gulf region.
For many construction businesses, delays can be almost as damaging as price increases. Longer lead times make project planning more difficult, affect cashflow and can create challenges when managing customer expectations.
New work remains subdued
Perhaps the bigger concern is that new work is not always replacing completed projects quickly enough.
The survey found that sales decisions are taking longer, reflecting ongoing caution among customers and investors. In some cases, businesses are responding by reducing recruitment activity or choosing not to replace employees who leave voluntarily.
While that approach may help control costs in the short term, it also highlights the level of uncertainty many firms are currently experiencing.
Final thoughts
Construction remains an important part of the UK economy, but the sector is facing pressure from several directions at once.
Rising input costs, supply chain disruption, slower decision-making and weaker demand are creating a challenging environment for many businesses. While external events may be outside a company's control, understanding margins, monitoring cashflow and planning ahead become even more important during periods like this.
If you're running a construction business and would like to discuss cashflow, profitability or managing rising costs, I'm always happy to have a conversation.
