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Public sector must act to improve SME payment terms and avoid a future Carillion style fallout

There will be a lot written about the Carillion collapse over the coming weeks and months. None of this will be any comfort for those staff, pensioners, suppliers and customers who may lose out significantly from Carillion’s compulsory liquidation, but the government, and public-sector buyers do need to learn lessons and act to try to prevent this happening again.

There are calls for the public sector to end its approach of awarding contracts to the same large companies because they are a perceived ‘safe pair of hands’. The Carillion issue proves this logic can be unfounded, but how can more public sector spend be directed to small and medium-sized enterprises (SMEs), or what obligations can be put on the prime contractors to ensure fair terms for their smaller suppliers?

The National Audit Office (NAO) reported that 27% of government’s procurement spending, or £12.1 billion, reached SMEs in 2014-15, beating the government target of 25%. Based on this apparent success the government has increased its spending with SMEs to 33% by 2020. However, the NAO figures show that only 11% of spend actually went direct to SMEs, with the balance being through prime contractors.

The 2015 Public Contracts Regulations include statutory guidance for public sector buyers to pay invoices within 30 days for prime contractors, and in turn these primes must ensure that their sub-contracts include equivalent 30-day payment terms, but what about private sector contracts? In April 2017, the government introduced an obligation on all large UK companies to report publicly on their payment policies, practices and performance. The average time to pay for the 279 large companies who have filed reports upto 15th January 2018 is 50 days, with on average 29% of invoices not paid within the agreed terms. This list includes public sector suppliers such as TNT UK Ltd and City Electrical Factors Ltd (53 and 54 days average payment respectively). These are hardly stellar performances!

Whilst it would be impractical, and too much state intervention, to expect government to legislate on payment terms between companies; surely, they can put pressure on public sector suppliers to improve their payments on all contracts? For example, making it an obligation to have average payments terms of 30 days or less, including private sector contracts, to be considered for a public-sector work? This would prevent schemes such as Carillion’s controversial reverse factoring early payment facility (EPF), which was even endorsed by the then Prime Minister David Cameron. Under the EPF suppliers could have to wait 120 days from invoice approval (which wasn’t always straightforward), although Carillion stated they would meet the 30-day obligation on their public sector contracts.

The Federation of Small Businesses (FSB) is continuing to lobby government to improve the deal for SMEs in public sector contracts. “Public procurement must be much more small-business friendly, in which it is easier for small firms to navigate the system and the Government should prioritise meeting its target of at least one third of taxpayer-funded contracts going to smaller firms.” FSB National Chairman Mike Cherry.

BIDCOMSERVICES wholly supports the FSB’s stance, and our free BIDALERT service is one way we try to help SMEs get more from public procurement, by providing a better way to find and bid for relevant tender opportunities. We would really like to see the government following through on its stated support for SMEs and using the billions of pounds spent on public sector outsourcing with large firms as a lever to do this.

Jon Kershaw

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