Short-term confidence among contractors in London’s construction market is low, according to a new report launched by AECOM.

Research from its latest annual London Main Contractor Survey, which surveyed contractors with a combined turnover of £6bn, highlights that despite the market becoming more competitive, it has not become cheaper, with most contractors maintaining margins and passing on labour and material price increases in their tender pricing.

Last year, Tier 1 contractors bid for new work at rates not seen since the pandemic in 2022, as tender activity rose to just over 70%, which is above the typical range for a market not experiencing major shocks.

Tier 1 and Tier 2 combined tender activity was 64% in 2025, an increase on 2024’s 59% figure. Tender activity is the number of tenders invited to, versus the number of tender bids submitted per contractor. It is a strong indicator of the levels of competition and work available in the market.

The report finds higher-than-average inflation of 3% (compared with the Treasury’s 2.2% forecast) and increasing costs for both skilled and unskilled labour as key factors driving the dip in confidence.

The research also suggests that the rising demand for data centres is straining the already deeply limited availability of mechanical, electrical and public health (MEP) sub-contractors.

This is driving up prices and competition and is leading some contractors to develop in-house MEP capacity to support projects. Another key trend for 2025 was the adoption of artificial intelligence (AI), with contractors reporting increased use of the technology for tendering and estimating.

“Inflation and labour shortages continue to hamper an increasingly competitive London construction market” said Brian Smith, head of cost management and commercial, AECOM.

“This year’s survey shows contractors are balancing the need to secure work with managing risk exposure. As competition intensifies, some are prepared to take on greater risk, such as committing to long programme durations, to win work, while others are prioritising lower-risk opportunities with trusted partners.

“The challenge for 2026 will be maintaining stability by strengthening the industry’s resilience and labour capacity ahead of what is expected to be a dynamic 2027.

“One growing trend we’ve identified this year is the trialling of AI by contractors. If AI becomes more deeply integrated in their operations, the potential benefits are likely to accelerate rapidly as contractors look for new ways to drive efficiencies.”

Looking ahead, the survey respondents have a more confident outlook for the longer term. Tier 1 contractors report healthy order books for 2026, built up of a diverse mix of sectors, rather than a reliance on any single market. Orders in London were above the long-term average in the final quarter of 2025, with growth across all sectors offsetting the year’s overall decline in residential activity.

Evidence points to the London construction market diversifying away from residential projects, shifting focus to commercial, refurbishment, public sector, life sciences and infrastructure projects instead.