The government claims its latest procurement reforms will provide better value for money and more competitive prices. But, a new paper from the Adam Smith Institute (ASI) warns they will do the opposite. Excessive regulation risks locking out innovative smaller firms, making public services more expensive and less effective.

Our procurement system is already broken. Over the last 30 years, procurement failures have cost the taxpayer £141.7bn with only 9% of major ongoing projects running on time and on budget. Whilst successive governments have committed to increasing SME involvement in procurement, central government procurement spending on SMEs has fallen from 10% in 2011 to just 7% in 2023. 

This is because government reforms have hindered, not helped SMEs, leading to worse value for money in the process. One of the most problematic changes was The Social Value Act (2012) which legally mandated the government to consider social value when awarding contracts. This means companies compete on Tackling Economic Inequality, Fighting Climate Change, Equal Opportunity and Well-being rather than simply value for money. SMEs simply don't have the time and resources to dedicate to meeting these arbitrary requirements.

Winning contracts also requires compliance with other complex specifications. For instance, businesses working in sectors from services to food-processing are expected to undertake a rigorous vetting process to demonstrate that modern slavery is not occuring in their supply chains - a costly and time-consuming expectation, especially for smaller firms with limited administrative capacity.

Plans to centralise all consultancy procurement through the Crown Commercial Service (CCS) threaten to make the situation even worse. These changes will crush departmental flexibility and add an even greater administrative burden to companies trying to win contracts. New provisions for carbon reduction plans, for example, bar the vast majority of SMEs from participation, with only 3% having such a plan in place. Additionally, the vague definition of consultancy services could compel government departments to channel even more industries through the CCS. By restricting access to alternative frameworks, these reforms could shift an additional £1.6bn to the big six consultancy procurement suppliers, sidelining smaller firms. Using Cabinet Office modelling, this hit to competitiveness could also increase bid costs by over £129 million annually.

For many SMEs, these reforms are deeply troubling. With only 3 out of 16 departments meeting the government’s five-day payment target, further obstacles could drive SMEs out of public sector contracting altogether. Already burdened by rising Employer National Insurance contributions, soaring energy costs and increasing taxes, many would even face the risk of insolvency.

SMEs play a vital role in procurement, bringing sector-specific expertise and lower overhead costs that often allow them to deliver better value than larger firms. Reducing their involvement will not only stifle competition but also weaken public services - leading to higher costs and worse outcomes for taxpayers.

The paper outlines several recommendations to fix procurement:

• Block proposals to route all consultancy procurement through the CCS, preserving departmental autonomy and maintaining competitive, diverse tender processes.
• Abolish The Social Value Act or ease requirements for SMEs to avoid imposing prohibitive compliance costs. 
• Enforce prompt payment targets, ensuring that SMEs receive undisputed payments from the Government within five days. 
• Tailor supply chain transparency and modern slavery regulations so they are proportionate to the size and risk profile of SMEs.

Alex Burghart MP, Shadow Chancellor of the Duchy of Lancaster, said:

“The Adam Smith Institute is right to point to a need for a much better approach to risk and innovation. We need to create greater opportunities for younger and smaller businesses to compete with the standard incumbents.”

John O'Connell, Chief Executive of the TaxPayers' Alliance, said:

"For many years procurement policy has been a case of government by press release, with proclaimed aims not aligning with actions on the ground.

"This has led to a mess of contradictions, where an aversion to risk has actually ended up delivering poor value for taxpayers. Combined with absurdly prescriptive rules around social value targets this means our procurement system is defined by a lack of competition and innovation.

"Ministers would do well to heed the recommendations of this new report to ensure that they don't repeat the mistakes of their predecessors."

Sam Bidwell, Director of Research and Education at the Adam Smith Institute said:

"Rachel Reeves stood up in the Commons this week, calling for more British SMEs to win contracts - but the government’s new procurement plans will have the opposite effect.

Forcing businesses to compete on virtue rather than value is already shutting SMEs out, creating an oligopoly where only big firms can navigate the layers of red tape needed to secure contracts. Now, centralising consultancy procurement will make things even worse, funnelling an extra £1.6bn to the ‘big six’ consultancies and driving up bid costs by £129m a year.

This means a more expensive, less innovative procurement system, at a time when the UK needs to be working with SMEs to seize the opportunities that they present.

If the government is serious about boosting SME involvement and fixing its broken procurement system, it must reverse course, scrapping plans to centralise consultancy procurement and slashing the web of regulations that serve the interests of just a few large companies”

Notes to editors:  

For further comments or to arrange an interview, contact press@adamsmith.org | 0758 477 8207

Sam Bidwell is Director of Research and Education at the Adam Smith Institute.

Sam Bailey is a Research Associate at the Adam Smith Institute.

The Adam Smith Institute is one of the world’s leading think tanks. It is ranked first in the world among independent think tanks and as the best domestic and international economic policy think tank in the UK by the University of Pennsylvania. Independent, non-profit and non-partisan, the Institute is at the forefront of making the case for free markets and a free society, through education, research, publishing, and media outreach.

The paper is available here.