The Middle East crisis adds a fresh unknown to construction’s uneven recovery

We all know the construction industry has been suffering through a prolonged period of instability, so it’s encouraging that our latest analysis of industry trends suggests the industry could see modest growth from late 2026 into 2027.

However, our Construction Market Report finds that recovery is expected to be uneven and constrained by structural issues, including workforce shortages, regulatory complexity and limited balance sheet resilience among contractors.

And that’s before the latest escalation of conflict in the Middle East dealt a fresh blow to confidence. Heightened geopolitical instability introduces yet another layer of uncertainty for investors and project timelines.

First, the good news. The industry is forecast to grow by 3.5-4.5% in 2026, driven by infrastructure and public sector projects. The defence, energy and transport sectors will bolster growth and new work in data centre projects will be a sub-sector to watch.

But other areas, including public and private housebuilding and commercial construction, are expected to lag, as weak housing demand undermines long-term government ambitions and broader sector recovery.

Cost pressures will remain a persistent challenge. We forecast that tender price inflation will rise from 2.75% in 2026 to around 4% by 2029, driven by labour shortages, rising wages, supply chain constraints and broader economic uncertainty.

The ongoing Middle East conflict could push costs even higher. Rising oil and gas prices drive up material costs and disrupt global supply chains, with energy-intensive products such as concrete and steel, and oil-derived materials, being particularly vulnerable. Yet even before this latest development, the sector was grappling with stubbornly high costs. Material prices remain elevated, labour shortages persist, and contractors continue to face significant financial pressure. As a result, the Building Cost Index is forecast to rise by around 18% by 2031, adding further strain to already stretched project budgets.

At the same time, regulatory change is reshaping how projects move forward. The Building Safety Regulator is reshaping compliance across the sector, but is facing challenges along the way. Delays to Gateway 2 and Gateway 3 approvals are increasing, External Wall Assessments are taking up to eight months, and there is a shortage of qualified fire engineers and building control specialists.

This means construction project procurement is evolving, with the industry moving away from traditional single-stage tendering towards two-stage and hybrid procurement models, as firms attempt to manage the risks associated with the Building Safety Act’s gateway approval process. As a result, we’re seeing that contractors are becoming selective about which projects they pursue, evaluating factors such as project complexity and regulatory risk before committing to tenders.

Our report also finds industry concerns are growing over proposals to lower the High Risk Building (HRB) threshold from 18m to 11m. Expanding the definition from roughly seven-storey buildings to around four storeys could pull more than 30,000 additional buildings into the HRB category in England, risking delays to development.

Our report also finds AI tools are gaining traction and are being implemented throughout the lifecycle of construction projects. This can vary from AI-assisted design to site management and quality checks – although this raises concern as to which party is responsible. As a result, we recommend that greater focus should be implemented in drafting robust construction contracts, and the allocation and management of risks should be clearly defined. AI is also unlikely to alleviate shortages in site-based and skilled trade roles. The sector will therefore need significant investment in training and skills development to address workforce gaps and help workers adapt to new technologies.

The sector’s recovery will depend on restoring market confidence and stability. Achieving this will require predictable regulation, consistent policy support, and sustained investment in skills to address labour shortages – particularly during a period of economic uncertainty and geopolitical disruption.