As we began 2026, the outlook for the construction sector was trending upwards. The ONS recorded 2% growth for the sector in January this year. However, the ongoing war in the Middle East makes the outlook for Spring 2026 and beyond look much more uncertain.
With the Strait of Hormuz effectively closed to ships transporting oil, the war in the Middle East is impacting global oil supplies – with knock on economic effects being felt around the world.
The UK is facing the biggest hit to growth from the Iran war out of the G20 major economies, according to a BBC report on the Organisation of Economic Co-operation and Development (OECD) forecast. The OECD revised down its forecast for overall UK economic growth from its previous forecast of 1.2% to just 0.7%.
Inflation is also predicted to be higher than expected. Experts fear a prolonged period of high energy prices will dampen growth, fuel inflation and make interest rate cuts less likely.
The construction sector relies heavily on oil
The construction industry is heavily reliant on oil. This includes day-to-day deliveries, moving raw materials, waste disposal, operating heavy machinery as well as the use of plastic and other oil-based goods. Further, most construction materials are highly energy intensive to manufacture.
The impact was immediately felt at the petrol pumps. The Guardian reported that Brent crude is now on track for its largest ever monthly gain. It is up by 54% since the start of March – beating the previous record of 46% in September 1990 after Saddam Hussein invaded Kuwait.
While rising fuel costs immediately eat into construction firms’ profits, industry experts are warning that there may be more financial bad news to come. Historically, oil prices have triggered significant material price inflation for construction.
The sector experienced sharp increases in material prices and delays in shipments during the last energy crisis as a result of Russia’s invasion of Ukraine. Overall, UK inflation is now forecast to hit 4% this year, up from the previous estimate of 2.5%.
A worsening outlook will impact borrowing costs
In response to the worsening outlook, UK mortgage lenders have raised rates and axed hundreds of deals. Their reaction is indicative of lenders across the board in anticipation of action by central banks, especially the Bank of England.
Rates had been coming down, but the Bank of England kept interest rates on hold in March. At the time, it signalled that it could be forced to increase borrowing costs in the coming months as the US-Israel war on Iran threatens to drive inflation in the UK above 3%.
This increased cost of borrowing will directly impact construction contractors that are operating with large loans and finance – making good project cost control and cashflow even more crucial than usual.
What next for the UK Construction sector?
The International Monetary Fund said “all roads lead to higher prices and slower growth worldwide” should the conflict in the Middle East continue to throttle flows of oil through the Gulf.
The best outcome would be for the war to end quickly and oil exports through the Gulf to return to normal. However, with Israel in bullish mood and the White House increasingly unpredictable, construction firms must prepare for the worst.
Writing in the CIOB’s Construction Management magazine, Anjali Shrivastava at Michael Gerard Solicitors warned that “with sharp increases in material prices, delays in shipments and rising borrowing costs, contractors and employers are likely to try shifting the risk burden to one another. This could crystallise into disputes over variations, price escalation, extensions of time and liability for delays.”
She recommends that contractors review their existing contracts immediately. This includes:
- Review the relevant events clause to understand whether delays linked to disrupted supply chains could entitle them to an extension of time.
- Review the fluctuations provision; if it is a fixed price contract, the only avenue of relief is the variation clause and arguing it is a relevant event.
- Ensure robust record-keeping – including issuing notices on time – with a view to evidence mitigation and early warnings.
For new contracts, she stresses that “real-world volatility must be reflected in the contract terms”.
How can you respond?
Maintaining tight, real-time control over project costs and cashflow is the best way to protect yourself in an uncertain financial environment.
Prevail Accountancy has two decades of experience helping construction firms to “get closer to the money” and tighten their control over their cashflow, project costs and financial management and planning.
Get in touch if you would value our support in these uncertain times.
Call us: 01706 550 825
Message us: https://prevailaccountancy.co.uk/contact-us/
