Middle East Update - Construction Market Intelligence

The geopolitical developments in the Middle East introduce renewed uncertainty into the economic outlook, with potential second-order effects on consumer price inflation, interest rates and confidence.

However, current conditions differ materially from previous shocks. At the time of writing, crude oil prices are lower than at the time of the start of the Ukraine conflict and have not been on a sustained upward trajectory in the past year (as was the case in 2022).

As a result, while fuel and energy costs may fluctuate in response to unfolding events, impacts are expected to be uneven and, in some instances, will diffuse gradually through the supply chain rather than translate into an immediate, broad-based cost shock.

As seen in prior crises, market behaviour is likely to be shaped as much by sentiment and risk perception as by underlying input costs, with volatility rather than sustained inflation the defining feature.

For our base tender price forecasts, our expectation assumes a short, contained conflict, under which current forecasts remain appropriate but with heightened volatility. Contractors are likely to continue pricing selectively, with risk allowances varying by sector and project type rather than moving uniformly across the market.

If disruption proves more prolonged, tender prices may spike but then firm in some areas as risk pricing increases, but then confidence weakens and demand softens. In a more severe escalation scenario, volatility would intensify further, with sharper sectoral divergence and greater emphasis on contingency and risk transfer.

Across all scenarios, clients should expect increased dispersion in tender outcomes and a stronger need for early market engagement and risk-informed procurement strategies.

In any of these scenarios, some sectors are likely to be more insulated from any softening in demand, and as a result, input cost pressures and risk pricing are likely to have a more measured impact on tender prices in those sectors.

	Short, contained conflict	Prolonged disruption and regional risk	Escalation and infrastructure loss
Unfolding events	The conflict is contained and resolved in weeks, with a view to more stable regional geopolitical risk. There is some short-term disruption to oil, LNG and shipping through the Strait of Hormuz.	Wider disruption of shipping and greater impact on fuel prices that persist.	Wider escalation of the conflict and for a prolonged period of time. Some infrastructure loss, causing increased disruption to shipping, international travel and energy production.
UK economic impact	Inflation is moderately impacted by fuel prices (which temporarily rise) and this delays further interest rate cuts which return later in 2026.	Inflation grows again through the remainder of 2026, with interest rates higher for longer. Cost of living impacts discretionary spending and economic growth.	Spike in CPI is relatively rapid and persistent. Business confidence is impacted and cost of living pressures affect consumer spending.
Impact on UK construction pipeline	Slightly prolonged viability challenges and some continuing delays in investments and project starts, but only in the short term.	Viability remains challenged by both tender prices and underlying economic conditions. Some targeted government stimuli benefit the sector.	Relatively quick impact on private sector pipelines with new starts deferred. Public finances prevent significant stimuli.
Impact on tender prices	Input cost pressures rise in the short term, but pipeline concern keeps a lid on tender prices. Contractors under increasing pressure as a result.	Immediate tender prices increase more quickly than forecast, softening quickly through late 2026 in response to weaking demand. In 2027 and 2028, tender prices rebound post-conflict to stabilise contractors’ balance sheets.	Despite sharper and more persistent cost pressures, tender price inflation is uneven and volatile, with weak pipelines forcing aggressive bidding in some sectors while supply chain stress drives selective price spikes. A slower rebound in 2027 and accelerating into 2028.