Contractors struggle to fill order books as economic headwinds hammer construction sector

Two surveys published on Monday showed a tough outlook for construction in 2023, piling pressure on firms that are already grappling with difficulties such as labour shortages and high materials costs.

The closely-watched S&P Global/CIPS UK Construction Purchasing Managers’ Index brought good news about commercial construction - which grew at the fastest rate in nine months in February - but residential building declined for the third straight month.

Meanwhile a poll among London’s biggest building contractors found that 25% of their new work for 2023 is still to be secured. A year earlier, companies only had 15% left to fill in their order books to meet targets.

Global infrastructure consulting firm Aecom spoke to large builders and sub-contractors that have a combined turnover of £6 billion and are involved in working on £50 million or higher projects in London.

It emerged that around a third of their projects were affected by the economic and political upheaval last year, leading to schemes delayed, put on hold or cancelled.

Construction chief executives will be waiting to see what Chancellor Jeremy Hunt will announce in the Budget on March 15 that could boost business after a turbulent period.

The housebuilding sector has been under pressure since the fallout from the September mini-Budget, when higher interest rates added to mortgage costs. In the offices market, where hybrid working remains popular, some investors are waiting longer to see how much occupier interest there is before they start developments.

Jo Streeten, managing director of buildings and places for Europe and India at Aecom, said the survey “outlines a challenging outlook for London contractors in 2023”.

Aecom’s Brian Smith said: “If the output falls as expected contractors will likely suffer falls in revenue due to developers delaying office buildings and residential projects because of high financing costs and work in other sectors not making up the difference.”

Smith added: “The property sector and the construction sector which supports it needs stability and inflation to fall above all. Inflation has proved to be very difficult for the sector, with labour and materials costs soaring, contributing to the slowdown in new work.”

But there are some encouraging signs for the industry, with tier-two contractors  - smaller companies typically used by the main contractors - faring better. Their order book levels so far have improved, helped by a broader spread of work.

Looking ahead, companies expect to see work pick up in the refurbishments market, as office developers look to extend the life of their existing properties and to meet sustainability and net zero targets. Contractors are expecting inflation to tail off towards the end of the year.