The latest Federation of Master Builders trade survey for the first quarter of 2013 makes bleak reading.

And things could get even grimmer for contractors with a Construction Products Association prediction of a £2bn drop in workloads this year.

Brian Berry, Chief Executive of the FMB, said: “Last year was a tough one for our members, but there were some encouraging signs in the final quarter of 2012 that the industry may be turning a corner.

“These latest survey results however paint a bleak picture, and our members are telling us that they are faced with the unenviable choice of putting up their prices or laying off staff.”

Small builders are being squeezed as workloads continue to fall, costs keep rising and credit conditions remain extremely tough.

The first three months of this year have seen 30% of firms shed staff.

Key indications from the survey include:

Overall SME workloads decreased at a substantially faster rate in Q1 2013 than in Q4 2012. The number of respondents reporting a fall in workloads climbed (39% vs 31%), while those indicating higher levels of workloads declined (18% vs 22%);

Output prices, wages and salaries and material costs are all predicted to go up in the coming six months: Although in the case of material costs, the rate of increase is expected to slow marginally, as fewer firms anticipate increasing their prices (74% vs 77%).

SME employment continues to slide: Current employment levels are decreasing, with 30% saying they have shed staff in the first part of this year, up from 27% in the previous quarter;

Berry said: “Our members have for years eaten into their own profit margins in a bid to maintain capacity – but that cannot continue.”

Latest forecasts from the Construction Products Association predict output is set to fall by more than 2% this year following an 8% contraction in 2012.

A recovery is anticipated in the medium-term with growth of 1.9% in 2014 and 3.8% in 2015.

Noble Francis, Economics Director of the association, said: “The industry lost £9 billion of activity last year and these latest forecasts anticipate a further £2 billion loss in 2013.

“This fall is primarily due to the lack of private sector investment and the continuing bite of public sector spending cuts. Conditions were exacerbated by poor weather during the first quarter.

“Of most concern is the fall in output in private commercial, the largest construction sector, which fell 10% last year and is estimated to fall a further 7% in 2013.

“Despite this, we are already encouraged by signs of improved market activity, primarily driven by private housing and infrastructure.

“We anticipate that government policies such as Help to Buy will boost private housing, which is expected to rise 19% in just two years.

“Infrastructure activity is set for 7% growth in 2013, boosted primarily by rail construction such as Crossrail, Europe’s largest project, and station refurbishments around the country.

“Overall, 2013 is anticipated to be extremely challenging. From 2014 prospects are brighter for the industry, but the key risk is the extent to which government announcements feed through to activity on the ground.”