The report notes a similar fall in new orders that was the strongest for over two-and-a-half years.
It adds sentiment among firms towards the year ahead dipped into negative territory for only the sixth time on record, “reflecting fears around the near-term economic outlook”.
Overall, construction activity posted 48.8 in December, down from 50.4 in November, below the 50.0 growth mark to signal the first contraction in output since August.
The growth of commercial work eased to 50.3, housebuilding fell marginally for the first time since July to 48.0, while civil engineering recorded its sixth monthly fall in a row to 46.8.
The survey says the fall in new industry orders “was driven by weak client demand, linked in turn to higher prices”.
It adds: “Challenging business conditions were reflected in confidence among constructors towards the year-ahead outlook for activity, which dropped into negative territory for the first time since the initial Covid-19 wave [in May 2020] and for only the sixth time on record.
“Downbeat sentiment was attributed to expectations of a recession and poor demand conditions, as well as inflationary pressures. That said, the degree of pessimism was marginal.”
Chartered Institute of Procurement & Supply Chief Economist Dr John Glen says: “Housebuilding saw a notable change of direction, with a mix of higher inflation for raw materials and transportation and the squeeze on affordability rates for mortgages resulting in fewer house sales.”
Beard finance director Fraser Johns adds: “While many within the industry would have been encouraged by the past few months of marginal growth in activity, news of a poor December and end to the year will come as no surprise given the deluge of challenges the sector is facing.
“The higher cost to borrow, tighter access to credit and wider inflationary pressures have had a major impact on client confidence.
“Contractors, who have seen higher material costs erode margins are now seeing the market for new work tighten, making tenders more competitive. While those with strong balance sheets may be able to stomach that, those already at risk face a difficult 12 months ahead.
Alliance Fund chief executive Iain Crawford says: “Although the construction sector has continued to produce a fairly robust level of activity in recent months, the economic complications that we faced for much of 2022 have finally taken their toll with a notable reduction in output recorded in December.
“Of course, it’s important to note that there is almost certainly a seasonal influence at play here too and with many having already implemented contingency plans in anticipation, we should see a more stable outlook emerge in the coming months.”