Industry Expert Calls for Greater Govt Support for Supply Chain SMEs

The latest ONS construction output figures highlight continued pressure across the sector, reinforcing calls for greater government support for SMEs and businesses at the bottom of the supply chain, easing energy and VAT costs.

Businesses say support could improve affordability, encourage investment in renovation and building projects, and encourage healthy growth in the construction industry.

Paul McFadyen, industry expert and chairman of metals4U (pictured above), commented on the latest ONS construction output figures, calling for greater government support for businesses at the lower end of the supply chain as rising energy costs drive up material prices and place further pressure on the construction industry.

“Today’s construction output figures showcase a continuing downward trend that we’ve been seeing across the industry for some time, with output falling by 1.0% in the three months to August 2026; this worryingly marks the second consecutive decrease in the three-monthly series,” said Paul.

“Although five out of the nine sectors experienced a decline over this period, the main contribution came from private new housing, which fell by 3.2%.

Pressure Across Sector

“This is part of a wider problem we’re seeing across the construction industry, for both private and public sector projects. With material prices, labour costs and energy bills all putting pressure on budgets, projects are becoming more expensive to deliver, and some businesses are finding that work they originally planned to undertake is no longer financially viable. As a result, people are instead choosing to fix up and improve their existing buildings rather than commit to new projects, with repair and maintenance proving slightly more resilient.

“Unfortunately, the construction industry is particularly sensitive to fluctuations in the economy, with the Bank of England’s expectation that inflation could rise to 4.0% in the first four months of 2027, largely due to increasing energy prices.

“Obviously, stabilising the economy would be the best course of action, but that’s neither an easy nor a quick process. In the meantime, businesses still have to deal with rising costs and find ways to keep projects moving, in a landscape where homeowners and businesses are cautious about taking on large-scale projects.

Energy and VAT Burdens

“Energy prices are one of the biggest burdens on material costs, particularly in industries such as metal manufacturing and fabrication, where producing and transporting materials can account for a significant proportion of costs. When energy prices rise due to events such as the recent conflict in the Gulf, the impact is felt throughout the supply chain, eventually feeding through into the price of construction projects. One possible way to ease this pressure would be to reduce VAT on energy for eligible businesses to 5%, helping to reduce some of these operating costs, but this is just a temporary solution to the problem.

“Because of this, there is a knock-on effect in the supply chain as material and labour costs increase significantly, making it much harder for businesses to accurately forecast how much a project will cost from start to finish. In fact, construction costs have risen much faster than general inflation in recent years. While general inflation peaked at around 10% in autumn, construction material price increases reached 26% in the summer of the same year.

“This is also making bigger-scale renovation projects such as extensions and home offices much less viable, and not guaranteed to deliver on investment, as according to the RedBook Index, the cost of redecoration, refurbishment and building work increased by 44% between 2019 and 2025.

“For businesses, this means that projects which were financially viable when they were first priced can become much more difficult to deliver by the time the work is completed. Many construction projects run over several months or even years, and businesses cannot always predict how much the cost of materials, energy and labour will increase during that time.

“If these additional costs cannot be passed on to the client, they have to be absorbed by the businesses carrying out the work, putting their profit margins and financial stability at risk. In fact, construction has recorded 3,800 insolvencies over the past 12 months, more than any other sector of the economy. Even among smaller builders, 20% said their business viability was under threat. These figures highlight that the problem goes beyond falling output. Businesses are not only struggling to secure new work; they’re also finding it increasingly difficult to stay financially stable while delivering the projects they already have.

Knock-On Effects for SMEs

“Additionally, for materials SMEs such as ours, the knock-on effects of bankruptcies can be potentially devastating. When a larger company becomes insolvent, smaller businesses working for them can be left waiting for payments or may never recover the money they’re owed for work they’ve already completed.

“Unlike larger organisations, SMEs often don’t have the cash reserves to absorb substantial losses, and a single unpaid invoice can have a serious impact on the ability to cover operating costs.

Caution Among Homeowners

“We’re seeing this caution for building and renovation projects among homeowners as well. For people who haven’t undertaken renovation work for ten years or more, the cost of starting a new project can come as quite a shock, considering how much everything has increased. What might once have been a relatively affordable improvement can now require a much larger investment, and people have to think carefully about whether they can afford the work and whether they’ll get that money back when they eventually sell their property.

“In London especially, uncertainty around house prices and future resale values can make this decision even harder. If people aren’t confident that they’ll recover the cost of major renovations when they sell, they’re less likely to commit to expensive improvements. Instead, they’re choosing to focus on essential repairs and maintenance, dealing with what needs fixing now rather than taking on larger projects that could leave them financially stretched.

“This helps explain why repair and maintenance has been more resilient than other areas of construction, although obviously it cannot make up for the decline in new housing and larger renovation projects, and more needs to be done to encourage larger-scale projects to keep the industry afloat.

“Ultimately, the construction industry cannot deliver the homes and infrastructure the country needs if businesses are placed under increasing financial pressure. Rising costs and declining order levels increase the risk of insolvency, with consequences extending throughout the construction supply chain. Supporting the industry therefore requires not only encouraging new projects to commence, but also ensuring that businesses of all sizes have the financial capacity to complete projects and remain operational in the longer term.”

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