The United Kingdom’s construction sector is grappling with sustained challenges that continue to test the financial resilience of firms across the industry.
While recent data shows some signs of improvement, elevated insolvency rates and ongoing market uncertainty reveal deep structural vulnerabilities in a sector heavily reliant on stable cash flow and predictable project pipelines.
Mixed Signals: The PMI Picture
The construction sector’s performance has shown significant volatility throughout 2024 and into late 2025.
In late 2024, the industry experienced a period of growth, with the November 2024 PMI reading hitting 55.2, indicating robust expansion driven primarily by commercial construction activity. However, this momentum proved short-lived.
By November 2025, the sector faced a dramatic reversal. The construction PMI plummeted to 39.4, down from 44.1 in October 2025, marking the steepest downturn since May 2020 and extending a contraction that has now persisted for eleven consecutive months.
All major segments weakened sharply in November 2025:
- Housing: 35.4
- Commercial: 43.8
- Civil engineering: 30.0
This eleven-month downturn represents not a temporary slowdown but a prolonged period of weak demand, with construction companies citing fragile market confidence, project delays, and uncertainty ahead of budget announcements as key factors.
Insolvencies: A Persistent Challenge
Construction remains one of the most insolvency-prone industries in the UK. According to the most recent official data:
- In the 12 months to November 2024, 4,102 construction companies became insolvent, representing approximately 17% of all insolvencies in England and Wales
- For the full year 2024, insolvencies actually declined to 4,032 companies, an 8.1% decrease from 4,388 in 2023
- Despite this improvement, 2024 figures remain significantly elevated compared to pre-pandemic levels of 3,217 in 2019
The sector continues to face disproportionate insolvency risk. While construction accounts for approximately 6-7% of UK gross value added, it represents nearly 17% of all company insolvencies.
Why Construction Firms Continue to Struggle
1. Tight Cash Flow and Slow Payments
Construction companies operate on razor-thin margins, typically 2-4%, often waiting months for payments.
Delayed or withheld payments from main contractors or clients can rapidly push small and mid-sized firms toward insolvency. Industry sources report that payment practices are deteriorating again after a brief period of improvement.
2. Rising Labour Costs
Persistent skilled labour shortages and wage inflation have increased project expenses throughout 2024 and into 2025.
The UK continues to face significant challenges building major infrastructure projects due to workforce shortages, exacerbated by factors including Brexit, the pandemic’s lingering effects, and an aging workforce with particular gaps in specialized trades.
3. Elevated Borrowing Costs
Despite some easing in interest rates, borrowing costs remain substantially higher than pre-2020 levels. Construction firms, which often rely on revolving credit facilities, have been particularly affected by the increased cost of financing day-to-day operations.
4. Sharp Decline in New Orders
The November 2025 survey data revealed alarming trends:
- 44% of firms reported falling new orders
- Only 17% saw any increase
Excluding the pandemic period, this represented the fastest downturn in new work since early 2009. For many firms, the absence of incoming work sits at the core of their financial distress.
5. Project Delays and Client Uncertainty
Economic uncertainty and policy changes have led many clients to pause or defer investment decisions.
Public sector projects have also experienced delays, creating additional gaps in contractor pipelines. Budget uncertainty in late 2024 and 2025 particularly impacted commercial construction activity.
Housing and Infrastructure Face Ongoing Strain
Housing construction has been especially hard-hit, suffering from elevated mortgage rates and reduced buyer confidence.
Despite government commitments to build 1.5 million homes, housing activity recorded some of the sharpest declines in the sector.
Civil engineering has similarly struggled despite long-term government infrastructure commitments.
The government has outlined £725 billion in infrastructure spending over the coming decade (not £775 billion as sometimes reported), including at least £9 billion per year for renewal of health, education and justice estates. However, many projects remain in planning phases or have been delayed by funding allocation decisions.
Some Positive Developments
There are areas of improvement worth noting:
- Material costs have stabilized: Supply chain pressures have eased significantly, with supplier performance reaching its best levels since mid-2024
- Input cost inflation: Remains below long-run averages, providing some relief on the cost side
- 2024 insolvency decline: The 8.1% decrease in construction insolvencies in 2024 compared to 2023 suggests some firms have successfully navigated the challenging environment
However, these improvements have offered limited relief to firms already under strain from weak demand and rising operational costs.
Business Confidence Remains Fragile
Industry optimism has deteriorated significantly. As of November 2025, confidence fell to its lowest point since December 2022. While 31% of firms expect some improvement, 25% forecast further declines—an unusually pessimistic outlook for a sector that typically anticipates recovery cycles.
Employment in the sector has declined for eleven consecutive months, with November 2025 marking the steepest job losses since August 2020.
What Could Stabilize the Sector?
1. Continued Interest Rate Reductions
Further easing of interest rates could revive housing demand and reduce financing costs for construction projects, though the Bank of England is proceeding cautiously given persistent inflation concerns.
2. Accelerated Public Sector Project Delivery
Faster decision-making on infrastructure projects and clearer procurement timelines would provide immediate work opportunities for contractors.
The government’s 10-Year Infrastructure Strategy and new National Infrastructure and Service Transformation Authority (NISTA) aim to address these issues, but implementation will be critical.
3. Improved Payment Practices
Stronger enforcement of prompt payment requirements within construction supply chains would ease cash-flow pressures that drive many insolvencies.
4. Policy Stability and Planning Reform
The government’s Planning and Infrastructure Bill, intended to streamline decisions on major projects, represents a step forward. However, predictability around housing policy, tax structures, and planning processes remains essential for investor confidence.
Outlook: Cautious Optimism Amid Ongoing Challenges
The sector’s challenges are both deep and structural. While 2024 saw a decline in overall insolvencies and some subsectors showed resilience, the dramatic downturn in late 2025 demonstrates the sector’s continued vulnerability to economic uncertainty and policy shifts.
The potential for recovery exists—particularly if public-sector spending accelerates as planned under the 10-Year Infrastructure Strategy and if financial conditions continue to ease. However, the immediate outlook remains challenging.
With order books under pressure, confidence weak, and market conditions fragile, many construction firms are preparing for continued turbulence.
The key question is whether the government’s infrastructure commitments and planning reforms can translate into tangible project starts quickly enough to reverse the downward trend and provide the pipeline certainty that the sector desperately needs.
For now, the industry awaits clearer signals that 2026 will bring the stability and project flow necessary to support sustained recovery.
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