Q1 2026: Construction remains among the most pessimistic sectors as business challenges mount.
The latest national Business Confidence Monitor (BCM) shows that business sentiment was on course to move into positive territory in Q1 2026, but the outbreak of the Iran war had a dramatic impact in the final weeks of the survey period, with confidence deteriorating sharply. While businesses reported improved annual domestic sales and exports growth and easing input price inflation compared with Q4 2025, the war introduced significant downside risks to the outlook for the coming year.
The survey results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions and company sizes, ensuring a representative picture of the UK economy. The latest quarterly findings are based on the period 12 January to 16 March 2026.
- The Business Confidence Index for Construction rose to -8.6 in Q1 2026, remaining below the UK average (-1.1), with only Transport & Storage (-9.7) and Retail & Wholesale (-11.0) more pessimistic.
- Concerns about major challenges are more widespread than in other sectors, particularly about the tax burden, regulations and customer demand.
- Domestic sales growth slowed and businesses are relatively pessimistic about the outlook.
- Input price inflation edged down but the Iran war could impact predictions that it will drop below the historical norm in the coming 12 months.
- Labour demand rose sharply, though businesses plan little further growth in headcount with labour costs identified as the most prominent growing challenge.
- The investment outlook is downbeat as businesses plan to scale back capital investment growth and cut R&D budgets.
Business confidence in the Construction sector
Confidence improved in the Construction sector in Q1 2026, rising from -16.2 last quarter to -8.6. However, the score remains well below the UK average (-1.1), its historical norm (+3.4) and is ranked among the least confident sectors alongside Transport & Storage (-9.7) and Retail & Wholesale (-11.0).
The relative optimism of the Construction sector recorded through much of 2025 faded further in Q1 2026 as profits growth dwindled and the largest proportion of businesses of any sector cited tax, regulations and customer demand as growing challenges, while reports of late payments spiked. ONS data also reported that construction output declined by 2.0% in the three months to January 2026 – the fourth consecutive fall in the three-month series, mainly driven by a drop in new private housing activity. Meanwhile, the Bank of England Agents’ summary of business conditions for March 2026 noted that companies have become more downbeat about the outlook, with recovery expectations delayed until early 2027. The report also identifies a range of barriers including uncertain or slow government funding, access to finance and ongoing planning delays, alongside weak demand and high build costs. The Iran war will increase uncertainty for the sector, as mortgage rates were driven higher, placing downward pressure on house prices. Materials costs could also rise as a result of higher oil prices.
Domestic sales growth and customer demand
Customer demand at 51% was more widely reported as a growing challenge in Construction than elsewhere and notably ahead of the historical average (42%) as domestic sales growth cooled to 2.8% in the year to Q1 2026. While this was broadly consistent with the historical sector norm (2.7%) it lagged behind the national average (3.5%). Although Construction businesses anticipate an improvement next year to 4.2%, this is the weakest projection of any sector and notably lower than the UK average forecast of 5.4%. However, these predictions were largely set before the Iran war and expectations may have since moderated.
Input prices, selling prices and profits growth
Input price inflation edged down marginally to 3.7% in Construction in Q1 2026, comparable to the economy-wide average (3.6%) but markedly above the historical norm (3.1%). Companies predict a drop to 2.8% in the coming 12 months, a view which is softer than the national average (3.0%). However, the Construction industry is likely to be more exposed than average to higher inflationary pressure from volatile oil prices, particularly if these filter through to higher construction materials prices.
Annual selling prices in Construction eased to 1.8% in Q1 2026, below the national average (2.3%), and plans to ease growth to just 1.4% next year match the sector norm. However, higher input cost inflation may put upward pressure on selling prices.
Profits growth slowed to just 2.0% in Q1 2026 and remained below the historical sector norm (2.3%). Companies are relatively pessimistic about the outlook for profits growth in the year ahead and, despite expectations of profits rising to 4.4%, this prediction is well below the national outlook (5.2%).
Employment and labour market challenges
Labour demand rebounded in Q1 2026, with annual employment growth reported at 2.6%, the highest rate of any sector. However, Construction businesses plan minimal headcount growth of just 0.1% over the coming year, the lowest forecast of any sector and significantly below the sector historical average (1.2%).
The expected slowdown in recruitment comes as over two-thirds (67%) of businesses in the sector reported labour costs as the main growing challenge in Q1 2026. This was the first time companies were asked about the issue in the survey and Construction companies were more likely than average (56%) to cite the issue, second only to Retail & Wholesale (69%).
Wage pressures continued to rise for businesses in Q1 2026 as companies reported annual salary growth of 3.7% in the year, compared to 3.4% last quarter. This was again the fastest rate reported across UK sectors and above the 3.2% national average. Companies anticipate salary growth to cool to 2.6% over the coming year, below the national projection (2.9%) but significantly higher than the sectoral norm (2.1%).
As labour demand has cooled, Construction companies are less concerned about skills availability and labour turnover challenges, but the issues remain more widespread than in most other sectors.
Business challenges
While labour costs are now the most widespread growing challenge facing the Construction sector (67%) in Q1 2026, the tax burden is a close second at 66%, the highest proportion of any sector. The issue is less widespread than the survey high of 73% reached in Q3 2025 but is over three-times the historical average (20%).
Concerns about regulatory requirements are also more prevalent than in any other sector, rising to 58%, and significantly higher than the sector norm (36%) as companies continue to point to planning and regulatory delays impacting activity in the sector.
There are also signs that businesses in the sector could be facing increased financial stress, as reports of late payments as a growing challenge spiked to 29%, the highest of any sector and above the historical norm (26%).
Investment growth
The investment picture remains volatile for the Construction sector as businesses reported a return to growth of annual capital investment growth in Q1 2026 at 1.5%, which was close to the historical sector average (1.6%). However, this followed a decline in the previous quarter, with companies planning to cut growth to just 0.1% in the year ahead, the weakest expectation of all sectors.
Prospects for R&D budgets also remain downbeat, with companies planning to scale back spending by 0.8% next year, contrary to the growth plans of other sectors and national growth expected at 1.4%. The cuts follow annual growth of just 0.5% in Q1 2026, the lowest of all sectors and less than half the historical norm (1.1%).