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Fourth quarter figures for 2001 showed that labour and materials costs were rising faster than tender prices, squeezing profit margins. It was the second successive quarterly fall in profit margins for building contractors and the third for civil engineers.

Construction Confederation president John Gains said it was unclear how long the trend would continue.

He said: "It is too early to assess the full significance of the squeeze on margins – this may be just a pause or it could indicate a more long-term trend. Although further cost increases are expected in the first quarter of 2002, the rate of increase appears to be slowing."

Gains added that the survey suggested that skills shortages were easing in the industry. Average earnings rose about 6.5% on the same period in 2000.

The number of workers in construction has increased by 192,000 since April 1996, according to the DTI, but remains 300,000 below its 1989 peak. Bricklayers, plasterers and carpenters and joiners are the job sectors with the greatest shortages. However, employment expectations for the first quarter of 2002 are high.

It is too early to assess the full significance of the squeeze on margins – it may just be a pause

John Gains, president, Construction Confederation

The effects of the 11 September terrorists attack also appear to have eased. The Construction Confederation noted that the initial caution in the wake of the attacks has been replaced by short-term optimism. On balance, contractors overwhelmingly believe that output will rise over the next 12 months.

The survey also concluded that new housing output had weakened, new public housing remains depressed and, although housing repair and maintenance work is expanding, enquiries and work in hand are weak.

Private commercial construction output and enquiries dipped slightly in the fourth quarter and private industrial output and enquiries are falling. Non-housing repair and maintenance work showed modest growth.