A significant proportion of strategic government contracts - and therefore suppliers - will be at risk of losing out on government business unless they get their payment practices in order, according to a new report by research firm Tussell.
In fact, only six out of the government’s 36 strategic suppliers - suppliers that are deemed so critical to the delivery of essential public services that the government’s relationship with them is managed centrally - would have been found to be compliant under the new rules.
The findings in the report follow guidance from the Cabinet Office released in November last year, which aims to clamp down on the amount of time government suppliers take to pay their own suppliers - making it a requirement that they get paid within 60 days.
The aim of the new ‘red line’ is to help make it easier for SMEs to do business with government, as they often end up working via one of the larger suppliers, rather than directly. And cash flow can be a huge problem for SMEs.
The new prompt payment initiative is set to come into force in Autumn this year. At the time of the announcement, Cabinet Office Minister, Olive Dowden, said:
Companies providing crucial services to the public sector, like supporting prisons and delivering road infrastructure projects, must be paid on time.
Paying invoices promptly is vital in providing healthy cash flow, particularly for smaller businesses who are the backbone of the UK economy, to help them survive and thrive.
From next year, if government contractors are late with supplier payments, they could stop winning public contracts altogether - until they clean up their act.
A target has been in place for a number of years to get 33% of all Whitehall spend to SMEs by 2022. It is thought that one of the primary blockers for SMEs working with government - specifically via a larger contractor as part of their supply chain - is prompt payment, as cash flow is vital to their survival.
Whilst the Cabinet Office recently claimed that half of government digital spend now goes to SMEs, the overall central government spend figure fell for the first time in years last July.
For the year 2016/17 direct spend fell from 11% to 10.5% and indirect spend fell from 13% to 12%, compared to the previous year. Departments including the DWP, the Department of Health, the Cabinet Office and the Ministry of Defence all saw a drop in total spend with SMEs.
Tussell, a research firm that is planning to publish regular reports on supplier payment compliance, found that a total of £90 billion of in-scope contracts (ones that are worth more than £5m per annum each) have been awarded to suppliers with poor payment practices since 2015. Only 10% of contracts have been awarded to compliant suppliers.
The number of in-scope contracts awarded since 2015 in central government stands at 562; local government has awarded 354; and the NHS has awarded 81.
It also found that under the new standard, four-fifths of the government’s strategic suppliers would be excluded from bidding on government contracts.
Of the departments responsible for issuing the most contracts that fall under this remit, it’s unsurprising that the Ministry of Defence comes out on top with 59 contract awards. This is followed by Highways England (28), Department for Work and Pensions (25), Transport for London (23) and the Home office (20).
Tussell notes in its report that the government needs to tread carefully in implementing these changes. If it comes down too hard too soon, it could have detrimental consequences. The report states:
The government deserves real credit for mandating the transparency that makes analysis such as this possible. The UK government is undeniably one of the most open and transparent in the world.
However, our initial analysis does not paint a pretty picture: the current state of compliance with the new standard is undeniably poor. Based on the past four years of public procurement data, only 10% of the 1,000+ in scope contracts were awarded to compliant suppliers. If, come September 2019, this policy were to be enforced to the letter, four-fifths of the government’s Strategic Suppliers would be frozen out of bidding for public sector contracts.
This would be counterproductive. However, there are strategies the government could pursue to ensure the policy has the greatest immediate impact. Given the number of contracts the Ministry of Defence has awarded to non-compliant firms since 2015, focusing on improving payment practices in its supply chain could be an effective way of focusing limited resources. The same is true of Strategic Suppliers in the Outsourcing / Construction sector, who have collectively been awarded 66 in-scope contracts, but report paying on average more than a quarter of their invoices in over 60 days.
While our findings demonstrate that implementing this policy will be no easy task, they also show the scale of positive transformation that this policy could bring about.