Why Is construction still so bad at making money?

Construction is one of Britain's biggest industries, but size has never guaranteed financial strength. The sector generates hundreds of billions of pounds in activity each year, yet many businesses continue to operate with little room for error. Rising material and labour costs, aggressive tendering, contractual risk, slow payment and insolvencies throughout the supply chain are combining to make profitability increasingly difficult to protect, writes John Ridgeway.

The latest figures from ICAEW make the problem particularly clear. In Q2 2026, construction businesses reported 5.1% annual input-price inflation, up from 3.7% in the previous quarter. Selling prices, by comparison, rose by only 2.1%. Annual profits fell by 0.1%, making construction the only sector in the survey to record a decline. (

That is the central problem. Construction companies are paying more to deliver projects, but in many cases, they cannot increase what they charge by anything like the same amount. The difference comes straight out of the margin.

The scale of construction is difficult to ignore. UK construction turnover was approximately £368.3bn in 2024, while total construction output reached £225.5bn in 2025, comprising £132.9bn of new work and £92.5bn of repair and maintenance, but turnover is not profit.

A company can be turning over tens or hundreds of millions of pounds while retaining only a small proportion once labour, materials, plant, finance, insurance, overheads and the cost of delivering individual projects have been accounted for.

That creates a particular vulnerability in construction because projects are frequently priced months before they are completed. A contractor may commit to a fixed price today and discover six months later that the assumptions behind that price no longer reflect the cost of delivering the work. The project still has to be completed and the margin has to absorb the difference.

When costs rise faster than prices

The latest numbers illustrate the squeeze. As mentioned earlier, ICAEW's Q2 2026 survey found that construction input costs were rising at 5.1% annually, compared with selling-price growth of 2.1%. Businesses expected input costs to increase by another 4.6% over the following year.

RICS reported similar concerns in its Q1 2026 Construction Monitor. Survey respondents expected construction costs to increase by 6.6% over the next 12 months, while materials costs were expected to rise by 7.5% and tender prices by 5.6%. At the same time, the RICS profit-margin expectations balance fell to -27%.

The difficulty is obvious. A contractor cannot automatically pass every increase to the client. The client has a budget, competing tenders and a project viability calculation of its own. So, the contractor absorbs some of the increase, but do that repeatedly and a healthy-looking project can become a marginal one.

There is another side to the profitability problem and that is the construction industry's approach to winning work.Competitive tendering is an essential part of the market, but it can create intense pressure on contractors to sharpen prices.

A business needs projects to keep its workforce productive, maintain turnover and generate cash. That can make walking away from work difficult, even when the available margin is less attractive than it should be. The problem is that a low tender price does not remove risk.

If the programme takes longer than expected, a material becomes more expensive, labour is unavailable or coordination problems create additional work, the financial consequences still have to be absorbed somewhere. This creates a dangerous situation in which contractors can end up taking on substantial risk in return for relatively little margin.

RICS' finding that 66% of respondents identified financial constraints as a factor limiting activity illustrates just how significant the wider financial environment has become.

Labour costs are eating into margins too

However, materials are only part of the equation. The CIOB and Federation of Master Builders' State of Trade Survey for July to December 2025 found that 57% of construction SMEs reported rising wages, while 75% were concerned about higher material costs. Almost half, 47%, expected changes to National Insurance to have a negative impact on their businesses.

At the same time, around 72% of firms reported being affected by a shortage of skilled tradespeople. That shortage has a direct commercial consequence. Among firms affected by skills shortages, 49% reported project delays, 30% said expansion plans had been affected and 22% reported job cancellations.

A shortage of skilled labour therefore creates more than a recruitment headache. If a project cannot progress because the right people are unavailable, productivity falls, programmes extend and overheads continue accumulating. Once again, the pressure eventually reaches the margin.

There is another distinction that is crucial to understanding construction's financial problems - profit is not the same thing as cash flow. A contractor may have a profitable project on its books while simultaneously waiting for money that it has already earned.

Construction operates through long contractual chains. A client pays a main contractor, which pays subcontractors and suppliers, which in turn have their own payroll, suppliers and overheads to meet. If payment slows at one point in that chain, the pressure travels downwards.

ICAEW reported that concern about late payment reached a five-year high in Q2 2026. The CIOB/FMB survey found that only 57% of construction SMEs said invoices were being paid within agreed terms. A further 29% reported variable payment times, while 13% experienced frequent late payment.

For a small specialist contractor, that can create a particularly difficult equation because wages and suppliers have to be paid now, while money owed by a customer may arrive weeks or months later.

Retentions make the cash-flow problem worse

Retentions have been a longstanding feature of construction contracts, but they can leave significant amounts of money tied up within the supply chain. Research cited by CIOB found that more than 70% of contractors had experienced delayed or withheld retention payments, while 44% had lost retention payments because of insolvency elsewhere in the supply chain. That creates an uncomfortable situation.

A contractor can complete its work correctly, meet the required standard and still wait for money that is contractually being held back. For companies operating with limited working capital, the difference between a healthy cash position and a financial crisis can be surprisingly small. And when a company higher up the chain fails, money can disappear altogether.

The construction industry's insolvency figures provide perhaps the clearest indication of the cumulative pressure. Government figures recorded 3,851 construction company insolvencies in the 12 months to February 2026, representing 17% of all insolvencies where an industry was captured. Construction recorded the highest number among the sectors measured. The figure was 5% lower than the preceding 12-month period, but remained substantial. Separate analysis of Insolvency Service data recorded 4,188 construction company insolvencies during 2025, with 4,038 in the 12 months to May 2026.

The figures use different reporting periods and methodologies, so they should not be treated as interchangeable. They do, however, point towards the same conclusion: construction remains heavily exposed to insolvency and the consequences extend well beyond the company that fails.

An insolvent contractor can leave unpaid subcontractors, suppliers and consultants behind. A project may need to be reprocured. Programmes can be disrupted. Retentions can be lost. One company's financial problem can therefore become another company's cash-flow problem.

A full order book can hide a problem

This is perhaps where construction's financial story becomes most counterintuitive. A busy contractor is not necessarily a profitable contractor.An impressive order book tells us how much work a company has secured. It does not tell us whether that work was priced correctly, whether the original margin is still achievable or how much cash is tied up while it is delivered.

The more useful questions are therefore different. What margin was originally priced into the project? How much of that margin has survived? How much money is currently outstanding? How much has been retained? How much contractual risk has been accepted? And how much additional cost can the business withstand before the project becomes loss-making? Those questions provide a much clearer picture of financial health than turnover alone.

However, the industry's real problem may be the distribution of risk. Construction does not have a shortage of economic activity. The sector produced £225.5bn of output in 2025, while continuing to underpin housing, infrastructure, commercial development and the maintenance of Britain's existing buildings. The problem is how the financial risk of delivering that work is distributed.

Costs can rise faster than prices. Labour shortages can reduce productivity. Competitive tendering can push margins down. Contractual arrangements can transfer significant risk to contractors and subcontractors. Payment delays can restrict cash flow, while retentions can keep earned money out of the business. None of those issues exists in isolation. They interact.

A contractor operating on a thin margin has less capacity to absorb a material price increase. A delayed project consumes additional labour and overhead. Slow payment creates a need for additional working capital. An insolvency further up the chain can turn an accounting profit into an immediate cash-flow problem. That is how a company can be extremely busy, have a substantial order book and still find itself under severe financial pressure.

So why is construction still so bad at making money? The answer is not that construction is inherently unprofitable. It is that the industry often operates within a model where the price is agreed before the final cost is known, the risks are difficult to predict, the margins can be aggressively competed away and payment can arrive long after the work has been completed.

The latest statistics show the consequences. Input prices in construction rose by 5.1% in Q2 2026 while selling prices increased by only 2.1%. Construction profits fell by 0.1%. RICS recorded a -27% balance for profit-margin expectations, while financial constraints were identified by 66% of respondents as limiting activity.

The industry's challenge, then, is not necessarily finding more work. It is finding a way to ensure that the work being undertaken properly accounts for cost, risk, productivity and payment.

Until those four elements are better aligned, construction can continue to generate enormous revenues while individual businesses struggle to convert that activity into sustainable profit.

FAQs: Why Is Construction Still So Bad at Making Money?

1. Why are construction profit margins so tight?

Construction companies often work with relatively narrow margins while carrying significant costs and project risk. Materials, labour, plant, finance, insurance and overheads can all increase during a project, while the contract price may have been agreed months earlier.

2. Are construction costs still rising?

Yes. ICAEW reported construction input-price inflation of 5.1% in Q2 2026, while selling prices increased by just 2.1%. That gap puts direct pressure on contractors' margins. (GOV.UK)

3. Why can't contractors just increase their prices?

Construction projects are often competitively tendered against fixed budgets. Once a contract has been agreed, a contractor may have limited ability to recover subsequent increases in labour, materials or other costs, depending on the contractual arrangements.

4. Does having a large order book mean a construction company is profitable?

No. Turnover and order-book value say little about the profitability of individual projects. A contractor can have substantial secured work while margins are being eroded by cost increases, delays, variations, financing costs or contractual risk.

5. How much does late payment affect construction companies?

Late payment can create serious cash-flow pressure, particularly for SMEs that have to pay employees and suppliers before receiving money from customers. ICAEW reported that concern about late payment reached a five-year high in Q2 2026. (GOV.UK)

6. Why are construction retentions such a problem?

Retentions delay payment of money that contractors have already earned. This can tie up working capital for long periods and create additional exposure if another company in the contractual chain becomes insolvent.

7. How serious is construction insolvency in the UK?

Construction continues to record the largest number of company insolvencies of any UK industry sector. In the 12 months to July 2026, 3,841 construction companies entered insolvency, accounting for 17% of cases where an industry was identified. (GOV.UK)

8. Are skills shortages affecting construction profitability?

Yes. Skills shortages can increase wage costs, delay projects and reduce productivity. When projects take longer to complete, contractors can face additional labour, plant and overhead costs without necessarily being able to recover them from the client.

9. Is competitive tendering making construction less profitable?

Competitive tendering puts pressure on contractors to offer attractive prices to win work. The commercial challenge comes when a low tender price leaves insufficient margin to absorb unforeseen costs, delays or changes during delivery.

10. What needs to change to make construction more profitable?

The issue goes beyond increasing prices. Better risk allocation, realistic tendering, improved productivity, faster payment, tighter cost control and greater certainty earlier in the project could all help businesses convert turnover into sustainable profit.