A study by credit insurer Euler Trade Indemnity found that the sector's profitability has gradually declined between the start of 2001 and the first quarter of 2002. The index fell from 52.4 in the first quarter of 2001 to 43.8 in early 2002 – a rating of 50 denotes no change compared with the previous quarter.
The report, conducted last month, also found steadily declining business activity – the index for construction fell from 60.9 in early 2001 to 50.5 in early 2002 – and smaller order books in the sector.
Euler chief economist William Simpson said the profit downturn was a big concern for the sector. He said: "The combination of falling margins, later payment and slower activity is evident and potentially damaging to the industry."
Simpson added that the general economic climate was impacting on the sector. He said: "It seems likely that 2001's consistent downward pressure on company profits is causing firms to reduce investment in new building, and the slower environment is causing more aggressive bidding for contracts."
One major contractor backed up Euler's report, saying the market had slackened in the last month. The contractor said: "We are now seeing the downturn after September filter through to contractors, especially in the commercial sector."
The gloomy Euler report compares with better workload figures announced by trade body the Federation of Master Builders for the first quarter of 2002.
The survey of small and medium-sized builders found that 44% of respondents' workloads had risen since the last quarter of 2001.
It reported that almost half of the UK's builders expected increases in their workload in the second quarter of 2002, with expectations in Yorkshire, the South-west and the East Midlands particularly high.
FMB director general Ian Davis welcomed the survey. He said: "It is heartening to see that the building sector remains positive and FMB member are enjoying a period of sustained growth."
The survey also noted a slight increase in the total workforce employed by firms, after a fall in late 2001.