A report from the Chartered Institute of Building (CIOB) and the Federation of Master Builders (FMB) has found that despite market growth overall, construction SMEs risk buckling under increasing cost pressures
The latest State of Trade Survey, covering July to December 2025, found that the construction sector- and SMEs in particular- under strain from high numbers of insolvencies, increasing wage bills, in part linked to National Insurance changes and persistent materials price inflation.
More than two in five (42%) firms reported changing contractors during the period, with nearly a quarter (24%) of those changes driven by insolvencies or firms going bust.
Meanwhile, over half (57%) of construction SMEs reported rising wages and three-quarters (75%) raised concerns about higher material costs.
Overall growth was on the increase
Despite these challenges, key activity indicators remained in positive territory. Workloads (+22%), employment (+17%) and enquiries (+18%) all increased in the second half of 2025, although growth slowed compared to the first half of 2025.
Dr Victoria Hills, CEO at CIOB, said: “While it is encouraging to see key indicators continuing to grow, this survey shows many construction SMEs are still operating under intense pressure.
“Rising wages – worsened by increases in National Insurance – alongside persistent materials inflation are significantly impacting profit margins, growth potential and recruitment plans.
“At the same time, ongoing insolvencies within the supply chain are creating further instability, while chronic skills shortages are delaying projects and preventing firms from growing their businesses.
“If we are to sustain this recovery, it is vital that industry and government work together to address the skills gap, improve payment practices, and support firms facing rising costs from all directions.”
Brian Berry, chief executive of the Federation of Master Builders, said: “Small building companies continue to face a perfect storm of rising material and labour costs, ongoing shortages of skilled trades, and continued uncertainty in the wider economy. When you can’t recruit a qualified carpenter or bricklayer, projects grind to a halt. And for the skilled tradespeople who are available, wage pressures and inflation mean labour costs have risen sharply over the past year. The construction skills shortage continues to put serious pressure on SME builders, making it harder to plan workloads and keep projects moving.
“The underlying demand for building work remains strong, which is encouraging, but until we address the skills shortage by bringing more people into the industry and create greater stability around costs and planning, small builders and homeowners alike, will continue to suffer.”
Cost pressures are already having a significant impact on businesses
The report highlights how changes to National Insurance contributions are expected to further increase labour cost pressures, with nearly half (47%) of firms anticipating a negative impact from these changes.
Half (51%) of firms reported lower-than-expected profits or losses, while one in five (20%) said they fear their business viability was under threat. As a result, 61% of firms increased the prices they charge clients.
There are some signs of improvement in payment practices, with 57% of firms reporting invoices paid within agreed terms. However, 29% still experience variable payment timelines and 13% report frequent late payments, highlighting ongoing cashflow challenges for SMEs.
Skills shortages remain a major barrier preventing companies from growing
Around 72% of firms reported being affected by a lack of skilled tradespeople, with 49% experiencing project delays, 30% forced to halt expansion plans, and 22% reporting job cancellations as a result.
Companies reported the most difficult skills to recruit include carpenters (30%), bricklayers (29%) and plumbers (23%), alongside ongoing shortages in specialist areas such as building safety, sustainability and new technologies.
You can read the full report here.
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