The Ulster Bank purchasing managers index for the sector showed a reading of 43.1 in March, down from 45.3 in February.
The index examines the civil, housebuilding and commercial sectors, which all saw declines in output during the month.
Ulster Bank said that the biggest decline was seen in the civil engineering sector, where the rate of contraction quickened to the fastest in three months.
Employment in construction also fell for the 71st month in a row and the pace of layoffs was the fastest this year so far, the bank noted.
Business sentiment dipped in line with sharper falls in new orders and activity - and was the lowest in three months. But companies still predicted that activity would increase over the next 12 months, reflecting both the weakness of current activity levels and new business development.
Ulster Bank's chief economist Simon Barry said that previously encouraging signs on the trend in the new orders index have given way to renewed weakness last month as respondents cited a lack of available projects and strong competition for tenders as key headwinds.
''In turn, diminished new business opportunities continue to exert downward pressure on staffing levels as the employment index fell in March following three months in a row over which the pace of decline eased,'' he added.