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12 June 2019

Armed forces losing out as small business spend stalls

The Ministry of Defence (MoD) is underusing small firms in its supply chains and urgent action is needed or it will fail to meet its required SME spend target, according to the Federation of Small Businesses (FSB).

FSB’s latest report shows that in the last financial year, the MoD only spent 16.5% of its £20.2bn procurement budget with small firms. If the MoD is to hit its target of 25% of total procurement spend by 2022 at the current budget level, they will need to up its spending by £2bn each year. The MoD has the highest procurement budget of all central government departments but the lowest proportion of direct spend with SMEs.

Currently, the majority of MoD procurement spend goes through five large suppliers including BAE Systems, Babcock, Airbus, Rolls-Royce and Lockheed Martin.

The report, ‘Taking off: Opening up defence procurement for small firms’, highlights a number of key challenges faced by small businesses when bidding for defence contracts. These challenges include getting the correct accreditations, being locked out of purchasing systems and being paid late by suppliers within MoD supply chains.

To overcome these challenges and to open up the huge defence procurement market to more small firms, FSB is calling on the Government to put in place a fund to help SMEs meet the security requirements and accreditations. They are also calling for greater transparency and accessibility of Engineering and Delivery Partnerships (EDPs) and the introduction of Dynamic Purchasing Systems (DPS).

FSB’s National Chairman, Mike Cherry, said: “When it comes to spending money with small businesses, the MoD is firing blanks with far too many of our small businesses missing out on defence contracts.

“The armed forces are the real losers here, as they are not benefiting from the innovation and value for money offered by many smaller firms. Smaller businesses are often leading the way in developing new technologies that could play a vital role in maintaining the UK armed forces as one of the best in the world. That is why we must see an increase in the percentage of small businesses procuring directly with the SMEs

“Small firms need more support in overcoming the challenges they face when trying to enter the public defence procurement sector. Making it easier for small businesses to get accreditation and increasing transparency around MoD purchasing systems are a good place to start.

“When small businesses win so does the armed forces.”

FSB needs to see the MoD SME Action plan adopt the following proposals:

  1. FSB would like Central Government to create a small access fund to help SMEs meet extra security and accreditation requirements that are required. This can be introduced as a grant for those smaller businesses likely to be bidding for MoD contracts. The fund should be supported by access to expertise from the MoD.
  2. MOD must take steps to open up accessibility and transparency of EDPs. Including publishing a formal process to join the EDP, feedback on all failed applications, and publishing the bidding structure within the EDP.
  3. As a longer term solution, MoD should explore the introduction of Dynamic Purchasing Systems where appropriate to do so, and continue using Framework Agreements for Technical Support (FATs) where not.
  4. For those businesses working directly with MoD though, the vast majority of payments are received within 5 working days. However, our research suggests that payment to SMEs further down MoD supply chains still needs significant improvement. That is why, where businesses are found to be in serious breach of the prompt payment code but still of strategic importance, any future awards to that businesses should have to involve the use of project bank accounts for all awards above £5m (in line with the construction sector).