Roddy Cormack: Public procurement cake and SME benefits



Roddy Cormack

Public procurement policy and practice, when it comes to facilitating SME involvement, seems to be focused solely upon ensuring there are opportunities at a sub-contract level. But, asks Wright, Johnston & Mackenzie legal director Roddy Cormack, does this focus miss the sweet spot in terms of actual benefit to the SME economy?

There are certain things in life that we all accept as fact: the Earth is round; everyone likes cake; and increasing business opportunities for SMEs is a good thing. Well, ok, most of us accept these as “fact”.

On the issue of increasing business opportunities for SMEs, this is something pushed by government policy.  One of the stated objectives of our current procurement rules is the facilitation of greater access to public procurement by SMEs.

Scottish law (and the EU law from which our rules are derived) is not prescriptive as to how greater SME participation should be facilitated. All that matters is that that facilitation must be consistent with the procurement rules as a whole.

So, what about a rule that said where a contract is awarded to a particular party, that party must carry out at least 70 per cent of the work themselves – no more than 30 per cent of the work could be sub-contracted out to suppliers further down the contractual chain?

The Italian Government (which is subject to the same core procurement rules as we are in Scotland) introduced just such a rule.

That rule was then challenged by a contractor who had been excluded from bidding for a contract to widen the A8 Motorway near Milan because they proposed to sub-contract more than 30 per cent of the works.

That challenge made its way to the European Court of Justice which decided that the 30 per cent limit was in breach of the procurement rules. The thrust of the ECJ’s reasoning was that such an arbitrary limit would do the very opposite of facilitating access by SMEs to public contracts.

Essentially, if a contract must be performed (predominantly) by a single provider, it automatically follows that the cake can’t be shared with others further down the supply chain.  Consequently, the argument goes, SMEs would lose out.

Is being given the opportunity of an offer of a slither of cake by a main contractor what SMEs will really benefit from? Is it what SMEs really want?

Pushing the cake analogy further, allowing a large main contractor to take all the cake and then divide it up into smaller pieces means that the SMEs just get what they are given when the main contractor sees fit. The access to a public contract is something the SME effectively gets second hand – the main contractor has left their fingerprint in the icing and has eaten the cherry off the top.

Being towards the bottom of the contractual chain often means that:

  1. the control the SME has over the project is limited;
  2. payment for work done is generally slowed as it passes down the contractual chain; and
  3. the bulk (if not all) of reasonable profit has been syphoned off by businesses that haven’t done the work on the ground.

Being offered a small slice of a bigger cake is, maybe, better than nothing but it is often not as good as having a whole cake to yourself – an issue the ECJ doesn’t seem to have taken into consideration when coming their decision in the Italian case.

An approach that seeks to promote SME involvement in public contracts solely through the facilitation of sub-contracting opportunities is arguably, therefore, misconceived at the very least.

The Scottish Government does appear to be aware of the fact that there are definitely benefits to be derived from contracting directly with SMEs. It has issued statements to the effect that public sector organisations should consider the breaking up of their requirements into smaller lots – thereby making them more accessible to SMEs.

The Scottish Government’s policy actions of late have, however, predominantly focused on improving the Sub-Contracting environment. They are encouraging the use of Project Bank Accounts (to ensure that certain sub-contractors are paid at the same time as the main contractor). There is also a push to get sub-contract opportunities advertised through the Public Contract Scotland’s website.

Little, if anything, in terms of actual policy action is, however, being taken to really push the breaking down of large public sector requirements into smaller bite-sized chunks.

Sub-contracting opportunities for SMEs are, obviously, of some benefit and the more that we can do to protect sub-contractor SMEs the better. It is, however, perhaps time to think bigger (well, actually, smaller in this case) and ensure that there is more in the way of direct contracting with SMEs through the division of overall requirements into separate lots.

Why should SMEs settle for rationing from main contractors when, potentially, they could have their cake and eat it?

Roddy Cormack is legal director and head of construction at Wright, Johnston & Mackenzie LLP



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