London Construction Market Faces Challenges Amid Inflation and Labour Shortages, AECOM Survey Finds
Short-term confidence among contractors in London’s construction market remains subdued, according to the latest findings from AECOM’s annual London Main Contractor Survey 2026. The report highlights that inflationary pressures, labour shortages, and rising competition are shaping the market, even as long-term outlooks for contractors show cautious optimism.
Survey Overview
AECOM’s 2026 survey gathered insights from contractors with a combined turnover of £6 billion, offering a detailed snapshot of London’s construction sector at the start of the year. The survey measured tender activity, inflation expectations, labour availability, and emerging trends such as artificial intelligence (AI) adoption in the construction process.
Brian Smith, Head of Cost Management and Commercial at AECOM, noted, “Contractors are balancing the need to secure work with managing risk exposure. The London market is competitive, but not necessarily cheaper, as most contractors maintain margins while passing on increased labour and material costs.”
Inflation and Cost Pressures
The report reveals that contractors expect sector-specific inflation to reach 3% in 2026, higher than the UK Treasury’s broader forecast of 2.2%. Rising costs affect both skilled and unskilled labour, adding pressure on contractors’ margins.
These inflationary trends are particularly pronounced in areas such as mechanical, electrical, and public health (MEP) works, where labour shortages are acute. The survey suggests that increased demand for data centres is further straining the already limited pool of MEP sub-contractors, driving up prices and competition. To mitigate these risks, some contractors are investing in in-house MEP capabilities, aiming to reduce dependency on external subcontractors and maintain project timelines.
Tender Activity at Pre-Pandemic Levels
Tender activity among London’s main contractors surged in 2025. Tier 1 contractors reported activity at rates not seen since the pandemic, with just over 70% of tenders being actively bid for, indicating strong competition for available work. When combined with Tier 2 contractors, tender activity reached 64%, up from 59% in 2024.
Tender activity measures the number of tenders invited versus the number of tenders submitted per contractor and serves as a strong indicator of market competition and workload availability. Despite higher competition, contractors are cautious in their approach, carefully balancing the need to secure new projects with managing risk exposure.
Diversification of Projects
The survey highlights a shift away from residential projects, with London’s construction market increasingly focusing on commercial, refurbishment, public sector, life sciences, and infrastructure projects. While residential activity declined over 2025, growth in other sectors helped maintain overall order levels above the long-term average.
Tier 1 contractors report healthy order books for 2026, composed of a diverse mix of sectors, rather than dependence on a single market segment. This diversification provides a buffer against volatility in any one sector, supporting more stable long-term planning.
Labour Shortages and Market Challenges
Labour availability continues to be a significant challenge for contractors, affecting timelines, cost management, and tender competitiveness. Shortages are most acute in MEP trades, prompting firms to rethink their workforce strategies.
“Some contractors are prepared to take on greater risk, such as committing to longer programme durations, to win work,” said Brian Smith. “Others are prioritising lower-risk opportunities with trusted partners. Maintaining labour capacity and industry resilience will be critical to navigating the dynamic market expected in 2027.”
Technological Adoption and AI Trends
AECOM’s survey also identified AI adoption as a growing trend in the London construction market. Contractors reported increased use of AI tools for tendering, estimating, and project planning, which can enhance efficiency and reduce costs over time.
The integration of AI is still in its early stages, but contractors experimenting with these technologies are seeing potential for accelerated benefits. As AI becomes more embedded in operational workflows, its adoption could fundamentally reshape bidding strategies, cost estimation, and project delivery efficiency.
Short-Term Market Sentiment
Despite high tender activity and competitive pressures, short-term confidence among contractors remains low. Inflation, rising labour costs, and intense competition are key factors behind cautious sentiment.
Contractors are employing a range of strategies to navigate these challenges, including:
- Strengthening in-house capabilities, particularly for MEP works
- Carefully selecting tenders based on risk assessment
- Embracing AI to improve efficiency and reduce reliance on manual processes
Long-Term Outlook
While immediate confidence is subdued, the longer-term outlook is more positive. Tier 1 contractors, in particular, report healthy order books and a diverse range of projects, providing resilience against sector-specific downturns.
The report suggests that 2026 will be a year of balancing risk and opportunity, as contractors focus on sustaining stability while positioning themselves for growth in 2027. Diversification, innovation, and strategic labour planning are expected to be key drivers of success.
Key Takeaways from the AECOM Survey
- Sector inflation expected at 3%, higher than general economic forecasts
- Tender activity at its highest level since the pandemic, indicating a competitive market
- Labour shortages, particularly in MEP trades, continue to challenge contractors
- Project diversification away from residential towards commercial, public sector, and infrastructure
- AI adoption is emerging as a tool for efficiency and risk management
- Long-term optimism among Tier 1 contractors due to strong, diverse order books
AECOM’s London Main Contractor Survey 2026 provides a comprehensive view of the capital’s construction market, revealing a complex environment shaped by inflation, labour constraints, and competition. While short-term confidence is tempered, strategic adaptations, technological innovation, and diversification offer pathways for contractors to sustain growth and stability.
“The challenge for 2026 will be maintaining stability by strengthening the industry’s resilience and labour capacity,” said Brian Smith. “Contractors who embrace innovation and diversify their projects will be best placed to navigate a dynamic market and capitalize on long-term opportunities.”
About AECOM
AECOM is the global infrastructure leader, committed to delivering a better world. As a trusted professional services firm powered by deep technical abilities, we solve our clients’ complex challenges in water, environment, energy, transportation and buildings. Our teams partner with pubaecom.com/press-releaseslic- and private-sector clients to create innovative, sustainable and resilient solutions throughout the project lifecycle – from advisory, planning, design and engineering to program and construction management. AECOM is a Fortune 500 firm that had revenue of $16.1 billion in fiscal year 2024. Learn more at aecom.com.
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