Reduced capacity and a risk-averse environment within London’s construction market represents a significant challenge to the capital, according to a new report from AECOM.

In its annual London Main Contractor Survey, it said London faces difficulties if it is to progress major developments and meet its new housing targets.

The report, which surveys firms with a combined turnover of £6bn, found that large tier one contractors have already filled their order books for 2025 amid a reduction in tendering and a lower-risk approach to new contracts.

Contractors reported a fall in tendering activity to 60% in 2024, a noticeable decline on the 72% rate seen in 2023.

AECOM sets 60-70% as a benchmark for when the market isn’t experiencing major shocks.

The company says the low-risk approach to tendering is in response to the economic stability of recent years and reflects a period in which contractors are continuing to adjust to the new regulations implemented under the Building Safety Act (BSA).

London's housing target is just shy of 88,000 homes a year. On average, around 38,000 are being delivered.

Contractors also highlighted future bottlenecks in the residential market as labour shortages in the sector remain acute – both in skilled and unskilled roles.

At present, the slow progress of many housebuilding schemes is obscuring the scale of the issue.

Once the new gateway process for Higher-Risk Buildings is mastered, and projects receive the green light, contractors believe the UK will not have enough skilled labour in the country to carry out the works.

Despite capacity pressures and planning delays, AECOM’s research suggests contractors are recognising a more stable market than in recent years.

The outlook for the construction sector is strong as the pipeline of work remains healthy, and the government commits to delivering infrastructure schemes to drive growth.

London firms are expecting inflation to run at an average of 2.9% in 2025, down from 2024 and in-line with AECOM’s expectation of 2.94%.

Brian Smith, head of cost management at AECOM, said: “The feeling among the capital’s largest contractors is that there are sufficient opportunities available to them.

“However, a range of market factors – from regulation to labour availability – mean they’re filling their order books with caution.

“ISG’s collapse in September was a wake-up call for the industry and, understandably, contractors aren’t wishing to overreach themselves.

“As a result of this low-risk environment, we’re seeing a broader capacity crunch developing, with sub-contractors facing a more competitive market to secure work.

“The government is committed to delivering new homes and investing in vital infrastructure, which will increase contractors’ confidence and appetite for risk longer-term.

“But this needs to be matched by greater support for the industry which will help firms to increase their capacity to meet the growing project pipeline.

“This means bolstering training schemes to bring new people to the sector and addressing the UK’s loss of European labour post-Brexit.”