A UK subarmine. © Press Association Images
A UK subarmine. © Press Association Images

MoD announces measures to boost SME spend

15 March 2016

The UK Ministry of Defence (MoD) has announced a series of measures that will reduce the bureaucratic burden for SMEs and enable them to work more easily with the government.

The policy is designed to meet the MoD’s target of at least 25% of both direct and indirect procurement spending being with SME firms by 2020.

According to defence sources this is lower than the wider central government target of 33% by 2020 because the ministry signs single source contracts – where they are the only buyer and there is only one bidder – with bigger businesses on larger defence equipment such as submarines. The MoD therefore does not consider a 33% target achievable by 2020 given that such single source contracts cannot be conducted with SMEs.

A statement by the MoD indicated that in the period of 2014-15 19.2% of procurement spending was with SMEs, with a total spend of £3.8bn.

The ministry will have to increase spending to £4.9bn, or by 29%, in order to achieve its 2020 target, the statement predicted.

“We spend £4bn a year with small firms, and this new policy is a signal of our intent to do more to tap into the innovation of SMEs in our supply chain,” said Philip Dunne, minister of state for defence procurement.

The policy aims to provide “single points of contacts for suppliers”. The statement also said the policy aims to reduce “red tape” or excessive bureaucracy in the defence sector within the first six months of 2016.

“We are exploring ways of simplifying our procurement processes, for example by investigating the use of purchase order templates for the simplest low value and low volume contracts,” the statement said.

Another aspect of the changes is to introduce a new tool for suppliers that will guide them on how to obtain target funding for certain opportunities with the government.

The announcement relates to the MoD’s wider goals of encouraging firms to innovate more easily in the defence supply chain. The changes further stem from the MoD’s commitment to boost competition in the defence supply chain and ensure that all procurement within the sector is obtained at cost-effective prices.

The policy change follows a call by the the National Audit Office (NAO) last week for the UK government to do more to procure with small businesses. 

The government set up an £800m Innovation Fund at the end of last year which was set up to encourage entrepreneurial innovation from UK firms, which would also include SME firms.

Meanwhile, on Monday the MoD clamped down the amount of profit that defence companies can make on single source contracts signed with the government during 2015. Baseline profits on single source contracts have been slashed by 15 percent down to 8.95 percent from 10.6 percent. 

The move is designed to assure better value for taxpayers and generate significant savings, said the MoD.

Defence secretary Michael Fallon said: "Taxpayers can be confident that we are getting better value for money for single source defence contracts as we deliver our £178bn equipment programme. This profit rate provides a fair return to industry while delivering savings that will be reinvested in defence.”

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