A key index for the sector – from the S&P Global/CIPS purchasing managers – came in at 49.2 in August, up slightly from 48.9 in July.
A score below 50 indicates contraction, while a score above points to growth.
S&P said civil engineering posted the sharpest decline in activity, followed by commercial, ending an 18-month run of growth. Housing was fractionally up.
Andrew Harker, economics director at S&P, said new orders increased marginally last month – its the slowest rate since June – due to mounting costs forcing firms to put projects on hold.
He said: “The construction sector looks set for a challenging period.”
Martin Beck, chief economic adviser for leading forecasting group EY ITEM Club, agreed. He said sky-rocketing inflation – which has hit demand – higher staff pay and raw materials costs would squeeze construction businesses.
Mr Beck added: “Near-term outlook for construction appears challenging. The cost-of-living crisis is likely to weigh on housing market activity and reduce demand for home improvements.”
“Although August’s survey pointed to easing in inflationary pressures, costs and prices continued to rise at historically strong rates, reflecting higher prices for cement, steel and other raw materials and rapid growth in pay.”
Gareth Belsham, director of property consultancy and surveyors Naismiths, said: “As the recessionary vice begins to close on the UK economy as a whole, the construction industry’s brakes are being squeezed harder and faster than most.”
Elsewhere, house builder Berkeley says it is confident of hitting its full-year targets despite its soaring costs, which are growing at 5 to 10 percent.
It said it believes it will make a pre-tax profit of £600million for the year to the end of April 2023 and £625million for the following year.
At its trading update, it said that it still sees “a good level of demand” in the market, despite the inflationary pressure on incomes and the growing economic uncertainty.