In the latest of our series covering the wider building services sector, Rob Driscoll of B&ES welcomes the government’s efforts to improve procurement practices, but urges it to go further for small firms
The government is encouraging SMEs to use its confidential complaints Mystery Shopper scheme about poor procurement practices in public sector contracts.
Describing small firms as the “lifeblood of the economy”, the Cabinet Office said it wants 25 per cent of the £230bn annual public sector budget to be spent with SMEs by the end of next year.
However, it said that many small firms were reluctant to even bid for this work because of problems with late payment and unfair or overly bureaucratic procurement practice on the part of many public sector clients.
The Mystery Shopper service is “an informal, anonymous service allowing businesses to raise concerns and highlight the barriers they encounter when bidding for, or working on, public sector contracts”, the Cabinet Office said.
“We know that SMEs stand a higher chance of winning public sector business if the procurement processes are simpler and more accountable,” said a statement from the Crown Commercial Service, which manages public sector procurement on behalf of the Cabinet Office.
The effect on SMEs
The true scale of late payment in the public sector and its impact on SMEs has been highlighted by research conducted by the electronic banking provider BACS. It revealed that the amount of overdue money owed to SMEs had risen from £15bn in 2006 to £46.1bn today and that local authorities were among the worst offenders.
The average amount owed to SMEs up and down the country is now £38,000 and BACS reported that most small firms say they “struggle to survive” when amounts owed to them reach £50,000.
It is important that small firms feel they have some way of reporting problems. However, in practice most are fearful of asserting their legal rights because they do not want to lose the prospect of future work from the same client.
Government initiatives such as the Prompt Payment Code are helping to raise awareness of an issue that threatens to push thousands of perfectly good, well-run companies into insolvency, but the voluntary schemes lack teeth.
The Mystery Shopper scheme is an anonymous service that gets the government to investigate on behalf of hard-pressed contractors. It can be a real help and we are encouraging B&ES members to take advantage of it.
Problems can be reported by sending an email to email@example.com or by telephoning the Mystery Shopper Service Desk on 0345 010 3503. The Mystery Shopper team also carries out daily spot checks on procurement documentation.
Following an investigation, the team will then work with the contracting authority to reach a resolution. The results of cases are published on the government website (gov.uk) and are tweeted in real-time by the Mystery Shopper Twitter handle, @GovMysteryShop.
The Mystery Shopper service has actually already been in place for three years, but is now being supported by a social media campaign to increase its visibility.
To date, 86 per cent of complaints to the service have come from SMEs and four out of five cases have resulted in a positive outcome, the government said.
However, I believe the government should be backing up this welcome initiative by also introducing a system of electronic payment for all public sector contracts. Electronic banking is commonplace in most areas of commerce, but is conspicuously absent in public sector construction procurement.
It offers transparency so that small firms can be reassured the money is at least available, even if it hasn’t been released yet.
At the moment, many of them have no idea when they are likely to be paid if at all, but with electronic banking the funds are made available and a schedule for releasing payments is published. It is high time small contractors were no longer expected to act as charitable benefactors to large clients.
B&ES is in dialogue with Balfour Beatty to establish if this concept, which the main contractor has adopted for its supply chain, can be developed into everyday industry practice.
This is a particularly important issue at the moment because contractors tend to be vulnerable in the period immediately after a recession – to the extent that continuing late payment practices threaten to undermine the sector’s recovery.
As many as 34 per cent of small contractors are at risk of insolvency in the aftermath of the recession because of cashflow problems exacerbated by payments that are, often unfairly, withheld for six months – or longer.
A perhaps-surprising 83 per cent of the UK construction sector is made up of one-man bands, and a huge 99 per cent of the industry is SMEs. Micro-companies underpin the sector, but are particularly vulnerable when money is held back, both during and at the end of projects.
Poor cashflow through the supply chain, therefore, risks derailing the government’s infrastructure projects, which it regards as central to the wider economic recovery.
Trade credit trebled to £30bn during the recession, but lending to the industry declined because construction is seen as a big risk. Small companies are very exposed and, although the recovery is under way, it remains embryonic and needs to be nurtured.
Contractors are faced by rising material and labour costs – often on fixed-price contracts that have been in place for some time or were held up during the recession, which means it is hard for them to pass on rising overheads to clients. It is easy for a contractor to get squeezed if they take on too much work. It only takes one job to go bad to push them over the precipice.
Building better businesses
Managing the pace of growth is really important. At B&ES, we want to help people build better businesses for the long term, rather than have to help them constantly chase money. The government recognises that growth can be built on small businesses and that they can be the solution to skill shortages, which is why they have introduced measures to tackle late payment and to improve procurement practices in general.
Late payment is the biggest problem, but other procurement practices such as onerous and repetitive pre-qualification questionnaires (PQQ) are a huge administrative burden that many small firms simply cannot resource. This kind of behaviour, effectively, discriminates against some companies by making it impossible for them to compete for certain types of contract.
It is more vital than ever, in the wake of the longest and deepest recession of our lifetimes, that infrastructure procurement is backed by the best and brightest skills and that building engineering services firms, in particular, are given a chance to play their part.
Such high-profile backing for the Mystery Shopper scheme is clear evidence that the government realises it needs the skills of small contractors to achieve its own quality and sustainability targets. Encouraging SMEs to bid for public sector work ticks a number
of political boxes, including improving employment prospects throughout a vital supply chain and increasing the country’s skills base.
Now it needs to extend that sense of fair play to the thorny issue of late payment and ensure any ‘voluntary’ measures are enforced by, potentially, barring those who refuse to play fair from bidding for these contracts themselves. That really would, finally, tip the scales in favour of SMEs.
Rob Driscoll is head of commercial and legal affairs at the Building & Engineering Services Association (B&ES) – www.b-es.org
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