Government contracting with small and medium-sized enterprises

In the early days of the Coalition, when the warm glow of the rose garden press conference could still be felt, the government announced an aspiration that 25% of central government procurement spending should go to small and medium-sized enterprises (SMEs).

By February 2015, the government was able to announce that it had met its goal a year early and the latest figures for 2014/15 show 27%, just over £12bn, went to SMEs. The new government has extended this target to 33%, which it hopes to achieve by 2020.

Today, the National Audit Office (NAO) has published a report analysing the government’s record with SMEs. Whilst it rightly highlights a number of government initiatives to increase spend with SMEs, it also identifies some serious flaws in the data. So serious in fact that we can’t be sure how much government funding goes to SMEs or even whether the amount has increased.

What has this got to do with the voluntary sector?

An SME is an organisation that employs fewer than 250 people and has annual turnover of less than £39m (50m euros) or a balance sheet of less than £33m (43m euros).

On that basis, we calculate that over 99% of charities are SMEs. And, crucially, whether in the private or voluntary sector, smaller organisations face very similar problems when seeking to win government contracts.

The list of issues identified by the NAO will be very familiar to anyone involved in public service commissioning. Contracting opportunities can be difficult to find, bidding processes are unnecessarily onerous and commissioners are risk averse, lacking the expertise to try innovative approaches or take social value into account. Successful bidders are then subject to significant delays in payments.

The report goes even further, setting out some specific barriers faced by voluntary sector SMEs, including poor alignment between government aims and charitable mission, being used as ‘bid candy’ by prime contractors, disproportionate loss of funding and a perception that the government does not respect voluntary sector intellectual property.

Removing barriers

Since 2010 government has launched a number of initiatives aimed at improving the contracting experience for SMEs. The NAO found that these have generally been small scale or ineffectual, with some potentially making the situation worse.

Efforts to improve prompt payment have boosted the working capital of prime contractors but SMEs in supply chains have seen little benefit. Funding for commissioner and provider skills development, through the Commissioning Academy and masterclasses, has been cut completely, while the SME and VCSE Crown Representative posts are both currently vacant, the latter since October 2014.

As NCVO warned in 2013, scrapping pre-qualification questionnaires (PQQs) has in many cases been counter-productive. Commissioners have simply incorporated the old PQQ requirements into invitations to tender, meaning that SMEs proceed further through the procurement process before discovering they do not meet bidding requirements.

Any good work that has been done by such initiatives is likely, unfortunately, to be undermined by wider trends in commissioning, all driven by the public sector austerity. Reductions in commissioner capacity, moves to harness government’s collective buying power and pressure to make savings are already resulting in increased use of large contracts, delivered through prime contractors and funded on a payment by results basis.

Accurately counting elephants

Tracking the impact of these changes on procurement spend with SMEs would be easy were it not for the rather large elephant in the room: we have no idea whether the government’s figures are accurate.

Government spend with SMEs is broken down into direct spending, which accounts for around 40% of the total, and indirect spending, which makes up the remaining 60%. While the direct spending data is relatively accurate, the indirect spending data is problematic as it relies on ‘the goodwill of large suppliers to report spending accurately to the [Crown Commercial Service] as departments usually have no way to verify the accuracy of the figures’.

What’s more, as the methodology has changed almost annually, the yearly figures are not comparable, meaning that we don’t know whether spending with SMEs has increased or not.

If you’re thinking to yourself that it’s a bit ridiculous that the government doesn’t know where its money goes, then you’d be right. It also has serious consequences. If government doesn’t understand the market it is buying from then it is unlikely to make the best commissioning decisions or spot market failure before it’s too late. The lack of transparency also drastically reduces the ability of members of the public to hold government to account for spending decisions.

To overcome these issues the NAO has suggested some incremental improvements to Contracts Finder, where all central government contracts worth over £10,000 and local government contracts over £25,000 should be advertised. While improving governance and accountability will help, we would go further, requiring contractors to be given a unique identifier (such as company or charity number) so that aggregate statistics can be easily compiled.

Recording accurate figures for indirect spending with sub-contractors will require the introduction of a transparency clause into all government contracts which requires primes to pass this information onto commissioners. Similar steps should be taken to ensure that government grant funding is equally transparent.


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Nick was NCVO's public services manager until March 2017. He is also a trustee of the South London Relief in Sickness Fund.

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