Firms said they were holding off hiring because of ongoing political uncertainty and rising wage and material costs.
According to a survey from the Federation of Master Builders, the number of small to medium-sized reducing workforces has risen from 21% to 23% in the third quarter, while the number of members saying they were expanding dropped from 19% to just 15%.
This was despite construction workloads improving with over a third of firms reporting rises, up from just over a quarter in the previous quarter.
Brian Berry, chief executive of the FMB, said: “The fact that SME firms are having to lay people off and are holding off taking new people on is worrying.
“Skilled workers are scarce in the construction industry, and it is critical we keep people employed in the sector.”
He said that builders were tired of the continued political uncertainty blighting the UK economy.
Berry added: “Stagnating staffing levels is a concerning sign, and if this trend continues, we could see the capacity of the industry shrink at a time when builders are needed more than ever.”
He also warned that fast-rising input costs were hitting firms.
Berry said that 86% of his members anticipated a rise in material prices, up from 77% in the previous quarter.
More firms are also predicting salaries and wages to increase than previously.
Berry said: “Small building companies are also having to contend with eye-watering material prices, and these are set to continue to rise.
“This coupled with continued wage inflation, driven by skill shortages, is leaving many firms to have unsustainable profit margins.
“Ultimately this could see some firms having to close. The Government needs to carefully consider the impact of new regulations that will impose extra costs and cash flow restrictions on the sector such as reverse charge VAT.”