UK Construction Q1 2026: Four Quarters Down, Iran Risk Rising, and 85% of Contractors Turning Down Work

Four consecutive quarters of falling construction output. A residential sector in sharp retreat. Contractors selective enough to turn down work at a rate not seen in recent memory. That’s the opening picture from Gleeds’ Q1 2026 UK Construction Market Report, published on 15 April, and it’s not the recovery narrative some had hoped to be writing by now.

The report is grounded in Gleeds’ own primary survey data – collected directly from clients, contractors, and consultants across the industry – paired with ONS figures, Glenigan Index data, BCIS forecasts, and input from the Construction Products Association and CITB. It’s one of the more forensic quarterly reads available, less inclined to soften bad news than most. And Q1 2026 has given it plenty of material: the escalation of conflict in Iran and the Strait of Hormuz arrived just as the market was already navigating thin margins, a hollowed-out housing pipeline, and a public sector order book that can’t single-handedly carry output.

This article works through the full report – inflation and material costs, tendering conditions, contractor behaviour, insolvencies, labour dynamics, and what the data actually means for cost planning, bid strategy, and workforce decisions over the rest of 2026.

The Biggest Threats: What the Industry Is Actually Worried About

Global conflict tops the list for the first time – and the Iran effect is only getting started

Gleeds asked survey respondents to rank the biggest threats facing the construction industry in Q1 2026. Global conflicts came out on top, cited by 50% of respondents as the number one concern. Interest rate pressures and delayed inflation reductions ranked second. Skills shortages, insolvency risk, and weak private sector demand followed. That ranking matters because it tells you what’s driving the defensive posture across the industry right now – and it’s not the usual suspects.

Sixty-five percent of respondents specifically flagged the war in Iran as a live concern for commodity shortages and price volatility. The mechanism is direct: the UK is now more dependent on LNG than it was during the post-Ukraine period, energy-intensive manufacturing is immediately exposed to fuel price movements, and steel – already sensitive to policy and tariff conditions – is being quoted by some suppliers on 24-hour fixed price windows. That’s not a market operating with any real confidence on forward pricing.

The Construction Products Association put it plainly in their supporting commentary: the rapid rise in energy prices is hitting material costs hardest for products with energy-intensive manufacturing processes or oil-based raw material inputs. Gleeds is careful to note this isn’t a rerun of post-Ukraine inflation – the concern is that it could move faster and with less capacity in the market to absorb it, particularly given how close contractor margins already are.

At the time of writing, the Gleeds report notes that Iran-related impacts were only just beginning to filter through to tendering activity. Remediation projects won earlier in the year on competitive terms are seeing contractors seek price uplifts before signing contracts, with white diesel and fuel costs cited as the primary driver. This is an early signal, not a settled market condition – which is exactly why Gleeds flagged it may reissue a cost update mid-quarter. That’s an unusual step worth noting.

Output and New Orders: Where the Market Actually Stands

Four quarters of decline mask a sharp public/private split in order flow

ONS figures for the three months to January 2026 confirm construction output fell 2.0%, the fourth consecutive quarterly decline. The headline figure is driven primarily by a 6.3% fall in private new housing. Repair and maintenance held up, rising 3.3% in January supported by smaller builders working through more modest residential workloads. Non-residential starts rose 6%, supported by utilities and civil engineering activity. But these offsetting positives aren’t enough to turn the aggregate number positive.

The Glenigan Index adds more granular texture. Total construction starts fell 9% in Q1. Residential starts are down 24% quarter-on-quarter and 32% lower than a year ago. That’s not a gentle correction – it’s a meaningful structural pull-back from private housebuilders responding to affordability pressures, delayed investment decisions, and a financing environment that hasn’t freed up.

New orders data tells a more complicated story. Q4 2025 ended strongly, with year-on-year new orders growth of 28.6% – one of the strongest periods since 2021. Public housing new orders grew 99.8% year-on-year in Q4. Infrastructure orders grew 70.0% over the same period. But new orders dipped 3.8% quarter-on-quarter, suggesting momentum is cooling even in the stronger sectors. And the higher-frequency indicators – PMI readings – have stayed in contractionary territory through early 2026, with respondents citing delayed decision-making, financing constraints, and weak private demand as the principal reasons.

The divergence between the year-on-year order book growth and the actual output decline reflects timing: orders placed now translate to output months or years later. The public sector pipeline is building. The present output reality is still being shaped by a private sector that pulled back sharply through 2024 and into 2025.

Tendering Conditions: Selective, Cautious, and Getting Longer

Which sectors are generating work – and why 85% of contractors are saying no

For a fourth successive quarter, education tops Gleeds’ ranking of sectors generating the most tender invitations. Supporting survey comments point to a strong increase in SEND projects led by local authorities, alongside DfE-funded schools and colleges activity. Government policy commitments around the ageing school estate mean this pipeline should remain active. Data centres and energy round out the top three, with infrastructure and defence-related programmes also featuring prominently. These are all public or regulated sectors – they’re providing the stability that private commercial and residential work is failing to deliver right now.

Against that, 85% of contractor respondents said they or their supply chain had declined a tender in Q1. The reasons vary but cluster around three themes: inability to staff the work, reluctance to take on supply chain exposure in a market where insolvencies remain high, and a deliberate strategy of only pursuing jobs where delivery is genuinely achievable at a price that makes sense. Gleeds describes this as a shift from risk-averse to “risk-selective” – and that framing is accurate. These aren’t firms paralysed by uncertainty; they’re firms with enough market choice to filter out jobs they can’t win profitably.

The risk appetite data reinforces this. Fifty-seven percent of respondents noted a reduced appetite for risk from contractors in Q1 2026, slightly down from 67% in Q4 2025. The practical evidence: risk premiums added to tenders, extended programme durations quoted, and a demand for clearer scopes before committing. This is making negotiation periods longer and procurement timelines harder to predict – a real operational challenge for clients trying to mobilise quickly on approved programmes.

The Chancellor’s Spring Forecast did little to shift sentiment. Fifty-seven percent of respondents said it failed to instil confidence in the sector. For a government with stated housebuilding and infrastructure ambitions, that’s a notable disconnect between policy intent and industry reception.

Insolvencies and Margins: Survival Mode Is Not a Strategy

Construction is still the most insolvency-hit sector in the UK – and margins aren’t wide enough to fix that

Construction accounted for 17% of all UK company insolvencies in 2025, with 3,931 firms going under. That’s the fourth consecutive year the sector has been the worst-affected in the country. The pace of failures has eased from the extreme levels seen in 2023-2024, but rolling data shows insolvency levels remain materially above pre-pandemic norms, particularly among SMEs and smaller specialist contractors. M&E and modular construction are the subsectors featuring most prominently in the failure data.

The pattern is consistent. Firms most at risk share the same profile: volatile workloads, tight margins, and working capital pressure. For clients, the implication from Gleeds is unchanged and worth stating plainly – pre-contract financial due diligence on the supply chain, supply chain visibility through the contract, and proportionate risk allocation are not optional extras in this environment. They’re the baseline.

Overhead and profit margins on £10-30m projects have been hovering above 6% for three consecutive quarters. That figure sounds reasonable until you consider what it can’t fund. Gleeds flags the risk directly: margins thin enough to keep firms out of losses but not wide enough to invest in expansion, new technology, or talent development. A firm operating in that zone is functional but brittle. Add a programme delay, a supply chain failure, or a sudden cost spike on an energy-intensive package – all currently more likely than usual – and the position changes fast.

The government’s proposed late payment reform and the ban on retentions could, if implemented, improve cash flow dynamics across the supply chain. Gleeds notes these positively but carefully, given the distance between policy proposal and practical impact. We’ve covered the compounding pressure on UK construction SMEs in depth before – this report confirms that pressure hasn’t eased in Q1.

Labour: The Gap Between the Data and the Market

Headline figures say cooling. Nearly 80% of contractors say they’re seeing rate uplifts right now.

The labour market data presents a surface-level picture of moderation. ONS pay figures show construction wages growing around 3% year-on-year into early 2026, well below the post-pandemic and energy-shock period and broadly flat compared to late 2025. Construction vacancies are tracking below 2024 peaks. Hudson Contract data shows flatter year-on-year growth in self-employed pay, with regional variation but no clear evidence of renewed upward pressure at a national level. BCIS commentary attributes this easing to softer demand, not to any genuine improvement in labour supply.

The more telling number sits in Gleeds’ own survey data: nearly 80% of contractor respondents are currently experiencing labour rate uplifts. That gap between the headline data and the live market experience matters. BCIS is right that headline pressure has eased – but it’s eased because private housing demand contracted, not because the structural workforce problem has improved. CITB’s Construction Workforce Outlook projects a continued labour shortfall driven by demographics, replacement demand from retirement, and the scale of infrastructure programmes in the pipeline.

Labour demand is also shifting in composition. Housebuilding roles are shrinking. Highly skilled civil engineering and utility roles are growing. For contractors whose workforce is weighted toward residential trades, that mismatch is a longer-term structural challenge. Firms that have invested in civil engineering and infrastructure capability are better positioned for where the public sector order book is heading – but retraining and recruiting to match that shift takes time and money that thin margins make difficult to find.

The Wylfa SMR project in north Wales is a specific example Gleeds flags. The UK’s first small modular reactor will require significant relocation of skilled labour from elsewhere in the country. Long-cycle major programmes competing for the same shallow labour pool push rates up, particularly in specialist trades. The moderation in the headline data may prove to be cyclical and short-lived as that public sector pipeline ramps up through 2026 and 2027.

Materials: Commodity by Commodity

Cement stable, bricks suppressed, steel exposed – and all three sensitive to an energy shock

The materials picture in Q1 2026 is shaped by two overlapping dynamics: subdued demand in private residential work keeping volumes and prices relatively contained, and the looming risk of an Iran-driven energy and commodity shock that could reset pricing quickly for energy-intensive products. Gleeds is explicit that this commentary focuses on observable conditions, not forecasts for outcomes that hadn’t resolved at the time of writing.

Cement pricing has held relatively firm despite weak demand. Energy-intensive production underpins cost sensitivity, and BCIS and Gleeds data show low single-digit annual price growth into early 2026. The risk identified is specific: cement prices historically don’t revert fully to prior baselines after a shock – they reset upward and stay there. Any tightening in energy markets changes the cost position quickly and semi-permanently.

Brick supply conditions are currently the most stable of the three, with muted housing demand suppressing volumes. Delivery data is well below pre-pandemic levels, confirming the constraint is demand-led. The warning Gleeds flags is worth noting for anyone with a housing scheme moving toward procurement: should residential activity recover – and the public housing order book suggests it will, eventually – lead times and pricing could react faster than headline production data implies, particularly if manufacturers have delayed reopening mothballed capacity.

Steel is the most exposed package right now. Producer price data continues to show elevated input costs across fabricated metal products. The Carbon Border Adjustment Mechanism will increasingly shape procurement strategies for steel-intensive work, reinforcing the importance of early supplier engagement, specification clarity, and appropriate risk-sharing in contracts. Some steel suppliers are already offering pricing on a 24-hour fixed basis – that’s not a normal market condition and it’s a direct signal to procurement teams about where the volatility sits.

Tender Price Inflation: The Revised Forecasts and What’s Not in Them

3.5% for 2026 – but this was written before Iran fully landed in tendering

Gleeds has revised its UK tender price inflation forecast upward. The 2026 figure moves from 3.25% to 3.50%. The 2027 forecast shifts from 3.50% to 3.75%. The 2028 figure holds at 3.75%. These are tender price inflation figures only – not general materials inflation, not CPI – and they’re explicitly grounded in market conditions at the time of the survey, before the full transmission of Iran-related commodity shocks had worked through to tendering activity.

The apparent stability in these numbers sits on a narrow base. Cost structures remain exposed to energy-linked inputs, logistics costs, and specialist supply chains. The risk Gleeds identifies isn’t sustained high inflation – it’s short, sharp spikes that reset the cost baseline for specific packages, particularly energy-intensive and steel-heavy ones, without necessarily reversing. Extended programme durations, currently being built into tender returns as standard, also add cost through extended preliminaries. That’s a real and often underestimated line in cost plans.

Gleeds’ guidance throughout the report is consistent: treat cost plans as time-sensitive documents requiring regular review, build in realistic programme allowances, and don’t assume current pricing stability translates into forward price certainty. Factors including project size, sector, specification, and procurement strategy all influence tender prices significantly – broad market forecasts need translating into project-specific assessments before they’re useful for decision-making.

We’ve tracked how the 2026 construction outlook has shifted considerably since the year’s opening predictions. The Gleeds report captures the mechanics of why: the structural softness in private residential, the public sector taking longer than hoped to compensate, and now a geopolitical variable arriving mid-cycle that the market hasn’t had time to absorb.

What This Means in Practice: Actions for Contractors and Clients

The report’s practical guidance, consolidated

Gleeds doesn’t just document conditions – it draws clear operational implications throughout the report. For contractors and clients trying to make sense of what this quarter’s data means for live decisions, the core guidance clusters around procurement approach, cost management, and supply chain strategy.

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