One step forward, two steps back: 2025 was bitterly disappointing but the future will surely be brighter

We recently published our Spring Market Forecast at Arcadis. It paints a disappointing and contradictory picture. Even as national contractors like Galliford Try report spectacular growth in orders for 2027 and 2028, the wider industry has entered recession.

What’s going on? The data suggests that, with the exception of public sector building work, all other new-build sectors have recently either flatlined or contracted. Given the atrocious recent weather and the current. turmoil in the Middle East, 2026 is unlikely to be off to a better start.

Confusingly, there is also plenty of evidence of a growing order book, boasting year-on-year, double-digit growth. It seems as if there are parallel universes, the present and future of construction.

What evidence is the industry to believe? They are both credible data points. Framework appointments and early engagement show that there is demand backed by substantial capital. But cashflow is king and, when growth does not materialise as quickly as expected, confidence takes a knock. This is highlighted by the latest PMI data, which fell back to 44.5 in February.

In the past year, the rate of growth of nearly all sectors has slowed – hence our gloomy prognosis – one step forward, two steps back

We all understand that the UK has a multi-speed construction sector. Sectors sensitive to the cost of finance and consumer demand – particularly housing and commercial – have had the worst of it since covid, with logistics, infrastructure and public buildings all benefiting from policy and market tailwinds.

Viability ultimately trumps need. But, in the past year, the rate of growth of nearly all sectors has slowed – hence our gloomy prognosis – one step forward, two steps back.

Headwinds affecting sectors including multi-family residential development are well known. There are process problems including the gateways and sales are slow in the private sector, meaning there is too much inventory. Worse still, sales price growth has lagged behind cost.

Construction costs are a problem, although the Arcadis assessment is that construction price inflation has barely kept up with CPI since 2021. The root cause is not the industry cost base, but the cost of what we are building.

A recent analysis of Arcadis data by the Financial Times highlights that costs have increased by much more than the rate of inflation. 60% of the increase in costs of multi-family housing since 2016 can be attributed changes in design and process driven by regulation.

Elsewhere – in the US, Spain, and Germany – cost growth over and above inflation has been much lower for comparable housing. But here in the UK, the balance between the regulator and the market has been lost: buildings and infrastructure need to be safe and low carbon, but they need to be deliverable too.

Few markets can absorb this level of cost growth, and as a result the landing zone for viable commercial and residential development is getting smaller. Higher grant rates for social and affordable homes help bring mixed-tenure schemes forward, but at the price of delivering fewer homes overall. Similarly, if the only office buildings under development are prime and super-prime, then the rest of the market will be served by older, second-hand stock.

Paradoxically, even as these sectors recover, the scale of their bounce-back may be shrinking – after all, the cure to high prices has often been high prices – squeezing the viability of marginal schemes.

We need to ask whether these programmes are actually deliverable in their current form, or whether the UK construction sector is being asked to deliver too much in future, even as it has too little work in the present.

The situation in the public and regulated sectors should be very different, with funded programmes ready to go. The Spending Review period is about to start in April, but other programmes including AMP8, CP8 and ASTI should now be in full swing. With all of this opportunity, construction should not be in recession.

In fairness, programmes do take time to establish. Furthermore, one of the lessons from HS2 is that a “start slow” approach to scope, design and planning helps to ensure more efficient delivery downstream. But, with ambitious plans for housing, hospitals, and networks all being delivered in parallel on delayed timelines, we need to ask whether these programmes are actually deliverable in their current form, or whether the UK construction sector is being asked to deliver too much in future, even as it has too little work in the present.

NISTA issued its updated infrastructure pipeline this week, highlighting that the value of the 10-year pipeline has increased to over £700bn. However, against the background of an industry in recession, I am beginning to wonder whether the pipeline is asking and answering the right questions.

The aim of the pipeline has always been to give the construction industry the confidence to invest in its future through visibility of long-term, certain workload. Of course, workload must be converted from pipeline into cash. Constraints affecting clients as well as the supply chain have been slowing this conversion. As a result, the pipeline overall is being held up by pinch-points, even as it grows.

Increasingly I am thinking about whether NISTA and its stakeholders need to focus more on these pinch-points. The new skills assessment is a welcome development, but the pipeline should also assess actual capacity to manage multiple national programmes and megaprojects.

Sizing and shaping the pipeline to smooth some of the peaks will help to make the industry more efficient and will make better use of capacity. At the moment, as programmes “shift to the right”, I expect that we will see more constraint, rather than less. Plans and programmes should be recalibrated to account for this delay, otherwise, high prices could again cure high prices by delaying projects further.

2025 was a bitterly disappointing year for the construction industry. It was a year when progress on essential programmes fell back and when confidence dropped badly.

New work and recovery are tantalisingly close. Balancing workload and capacity cycle will help to determine whether we break out of the one step forward, two steps back cycle.

Simon Rawlinson is a partner at Arcadis