Article  /  September 2026

Best Practice in Procuring SMEs

John Lohan MSc MCIPS MRICS MCIArb MAPM · Effectus Construction Services

Disclosure. The author runs a small consultancy, so he is one of the suppliers this piece is about. Every figure is referenced so it can be checked.

Construction is a small-business industry. Of the 885,485 construction businesses in the UK at the start of 2025, only 300 had 250 or more staff. Small and medium-sized firms employed about 86% of the sector's workforce and earned about three-quarters of its turnover 1. Any client that builds anything is buying from them, whether it knows it or not.

Mostly it does not know. The Department for Transport group, which includes HS2 Ltd, National Highways and Network Rail, spent about 5% of its procurement directly with SMEs in 2024/25, and forecast about 28% reaching them indirectly through its main contractors 2. That pattern is normal for a large construction client: the prime contracts go to large firms, and the specialists who do most of the work sit two or three tiers below, out of sight.

That matters for two reasons. Much of the innovation, capacity and local economic value in a project sits in those tiers. And so does much of the risk: when Carillion collapsed in January 2018, the National Audit Office reported that its subcontractors would not be paid for some of the work they had already done, and that government had not measured how many were in difficulty 3.

This piece sets out what good practice looks like: what the law now requires, what clients and main contractors should do, and how to manage the risks honestly rather than by excluding small firms.

What the law now requires

The Procurement Act 2023, in force since 24 February 2025, turned several long-standing policy aims into duties for public bodies 4.

  • Think about the barriers. Contracting authorities must have regard to the particular barriers SMEs face and consider whether they can be removed or reduced (s.12(4)), including below the procurement thresholds (s.86). An SME is a supplier with fewer than 250 staff and turnover of no more than £44m or a balance sheet of no more than £38m (s.123).
  • Consider lots, and explain if you do not use them. Before advertising a contract, the authority must consider whether it could be split into lots, and must either do so or give its reasons (s.18).
  • Keep the entry tests proportionate. Conditions of participation must be a proportionate means of checking legal, financial and technical capacity, having regard to the nature, complexity and cost of the contract (s.22(1), (5)). Authorities may not demand audited accounts from firms that are not required to have them, or require contract insurance to be in place before award (s.22(3)). Bidders may rely on the capacity of an associate, such as a joint bidder, subcontractor or guarantor (s.22(8)-(9)).
  • Pay in 30 days, all the way down. Public contracts carry an implied term that invoices are paid within 30 days (s.68), and that term is implied into every subcontract performed for a public contract (s.73). Authorities must publish their own compliance every six months (s.69).
  • Below the thresholds, do not pre-qualify. For smaller contracts, an authority may not restrict who can bid by assessing suitability (s.85), except for works contracts above £135,018 in central government or £207,720 elsewhere 5. Risk has to be managed through the contract, not by keeping small firms out.

Policy has moved in the same direction. The National Procurement Policy Statement makes increasing spend with SMEs a national priority 6. Central government departments now set three-year targets for direct SME spend and publish their results each September 7. Main contractors bidding for central government contracts worth over £5m a year can be excluded if they cannot show that they pay 95% of invoices within 60 days and pay on average within 45 days 8, and the payment terms in their subcontracts can be spot-checked 9.

Best practice for clients

1. Know where your SME spend actually goes. Direct spend is only part of the picture, and for most construction clients the smaller part. Ask your main contractors to report, by package, how much of the contract value reaches SMEs and how fast they are paid. You cannot manage what you only estimate.

2. Engage the market before you design the procurement. Preliminary market engagement is where packaging, lotting and risk allocation are still cheap to change (s.16). The Construction Playbook says early engagement is the time to test the approach to SMEs, and that SMEs can bring insight into modern methods of construction and innovation 10. Make it easy for small firms to take part: short sessions, clear questions, no presentation to prepare.

3. Lot for the market you have, not the one you would like. Very large single lots and bundled packages decide the outcome before a bid is written. The Gold Standard review found SMEs "can be locked out of frameworks where bidding costs and procedures are prohibitive" and recommended lotting, pre-procurement support and separate specialist frameworks for tier 2 and 3 suppliers 11. Where you do not lot, the Act now requires you to say why.

4. Size the financial test to the contract, not to the bidder you expect. The old rule that turnover requirements should not exceed twice the contract value has gone with the 2015 Regulations 12, but the principle has not. Cabinet Office guidance on financial standing uses a turnover ratio as a risk indicator and says authorities should normally not exclude a bidder on that ratio alone. Bidders who are not rated low risk should be allowed to explain themselves or propose mitigation 13.

5. Manage risk through the contract. Where a small firm carries real financial risk, there are better answers than exclusion: a parent company or financial guarantee, a bond, milestone payments, a project bank account, or a smaller first package 1310. The Playbook says project bank accounts should be used unless there are compelling reasons not to 10. Insurance can be required from contract start rather than at bid stage 14.

6. Keep the bid cost proportionate. The Playbook identifies the cost of bidding as a barrier to entry for SMEs and asks for procedures of proportionate duration and effort 10. Ask only for what you will evaluate. Reuse information already held. Keep page limits honest, and give feedback a bidder can act on.

7. Ask for Cyber Essentials only where it matters. Certification is required for higher-risk contracts, such as those handling personal data. But the policy note is explicit that it should be asked for only where relevant, proportionate and necessary, so as not to deter small suppliers 15.

8. Pay on time, and check your supply chain does. Thirty days is now the legal default on public contracts and their subcontracts 4. Publish your own performance, build the spot-check clause into major contracts 9, and treat a main contractor's payment record as part of its quality, not its paperwork.

9. Use collaborative frameworks to bring specialists in early. Supply chain collaboration under framework alliance contracts lets tier 2 and 3 specialists shape a design before it is fixed. The Gold Standard review gives examples, including a housing alliance that appointed its SME specialists early 11. See our worked example, Configuring an alliance.

10. Measure what happens after award. Targets for spend with SMEs are easy to meet on paper and hard to meet in delivery. Track the share of contract value that actually reaches small firms, how fast they are paid and how many drop out, and review it at the same meetings as cost and programme.

Best practice for main contractors

  • Flow down the terms you were given. If you are paid in 30 days, your subcontractors should be too. On public work this is now the law, not a courtesy 4.
  • Report retentions honestly. Large companies with construction contracts must now report whether they use retention clauses, their standard rate and release process, and whether the terms are no more onerous than those they accept themselves 16.
  • Bring specialists in early and pay them for it. Early contractor involvement that stops at tier 1 misses most of the specialist knowledge on the job.
  • Share the forward pipeline. A small firm can invest in people and equipment only if it can see the work coming.

What is coming

The direction of travel is clear, even where the detail is not settled.

  • Retentions. The Government has said it will legislate to prohibit the deduction and withholding of retention payments under construction contracts, and will consult further before a final decision on implementation 17. The Commercial Payments Bill, whose long title includes banning retention clauses in construction, completed Report stage in the House of Lords on 15 September 2026; it is not yet law 18.
  • Payment terms. The same response proposes a maximum of 60 days for business-to-business payment terms, no earlier than 2027, and stronger powers for the Small Business Commissioner 17.
  • Social value. From 1 January 2027, central government procurements of £1m or more must give social value a minimum weighting of 10%, rising to 20% at £5m or more 19. Below £1m the rules do not apply, which keeps them off much of the work smaller firms bid for.
  • Local reservation. Since February 2026, English councils may restrict below-threshold contracts to UK-based or local contractors 20, and government guidance allows them to reserve such competitions for SMEs 21.

The test

Good practice in procuring SMEs is not a quota or a charity. It is the recognition that in construction the work is done by small firms, and that a client's commercial model either lets them compete, deliver and get paid, or quietly shuts them out.

The question for every client is simple. On your largest contract, how much of the value reaches small firms, how fast are they paid, and would you know if either got worse?

Sources

  1. Department for Business and Trade, Business population estimates for the UK and regions 2025, 2 October 2025, detailed tables, Table 5 (construction, SIC section F; shares are the author's arithmetic from the published rows). https://www.gov.uk/government/statistics/business-population-estimates-2025
  2. Department for Transport, SME Action Plan 2025 to 2028 (2024/25 baseline: direct 5.0%, about £1.2bn; indirect forecast 28.0%, about £6.8bn). https://www.gov.uk/government/publications/dft-small-and-medium-sized-enterprise-sme-action-plan-2025-to-2028/department-for-transports-small-and-medium-sized-enterprise-sme-action-plan
  3. National Audit Office, Investigation into the government's handling of the collapse of Carillion, HC 1002, 7 June 2018, para 5.13. https://www.nao.org.uk/wp-content/uploads/2018/06/Investigation-into-the-governments-handling-of-the-collapse-of-Carillion.pdf
  4. Procurement Act 2023, ss.12(4), 16, 18, 22, 68, 69, 73, 85, 86 and 123 (in force 24 February 2025). https://www.legislation.gov.uk/ukpga/2023/54/contents
  5. Cabinet Office, PPN 023: Threshold amounts, 14 November 2025 (amounts from 1 January 2026), and Procurement Act 2023 s.85(3) as amended by S.I. 2025/1200. https://assets.publishing.service.gov.uk/media/6929c25eb3b9afff34e96238/2025-11-14_PPN_023_2026_Threshold_amounts.pdf
  6. Cabinet Office, National Procurement Policy Statement, February 2025, p.6. https://assets.publishing.service.gov.uk/media/67ab332fd41dfb0b59cec46a/E03274856_National_Procurement_Policy_Statement_Accessible.pdf
  7. Cabinet Office, PPN 001: SME and VCSE procurement spend targets, February 2025, paras 8 and 11. https://assets.publishing.service.gov.uk/media/67ae095f2c594609b38acd89/2025-02-12_PPN_001_SME_and_VCSE_procurement_spend_targets.pdf
  8. Cabinet Office, PPN 018: Taking account of a bidder's approach to payment in the procurement of major contracts (procurements advertised from 1 October 2025), paras 9-10. https://assets.publishing.service.gov.uk/media/6749a8b06f60e77679723a6c/2024-10-23_PPN_018_Taking_account_of_a_bidders_approach_to_payment_in_the_procurement_of_major_contracts.docx.pdf
  9. Cabinet Office, PPN 021: Payment spot checks in public sub-contracts, updated 8 October 2025, paras 9-12. https://assets.publishing.service.gov.uk/media/690dfce6896fad804b050f9a/2025-04-16_PPN_021_Payment_spot_checks_in_public_sub-contracts.docx.pdf
  10. Cabinet Office, The Construction Playbook, v1.1, September 2022, pp.18-19, 28, 48, 51, 58-60 and 67. https://assets.publishing.service.gov.uk/media/6312222de90e075880923330/14.116_CO_Construction_Playbook_Web.pdf
  11. D. Mosey, Constructing the Gold Standard: An Independent Review of Public Sector Construction Frameworks, December 2021, section 7, pp.36-37. https://assets.publishing.service.gov.uk/media/61b9cb41e90e07043e8ff5cc/Constructing_The_Gold_Standard_Final.pdf
  12. Public Contracts Regulations 2015, reg 58(9) (revoked from 24 February 2025). https://www.legislation.gov.uk/uksi/2015/102/regulation/58
  13. Cabinet Office, Assessing and Monitoring the Economic and Financial Standing of Bidders and Suppliers, 2026 edition (dated 31 December 2025), para 2.2.2 and pp.16, 32 and 61. https://assets.publishing.service.gov.uk/media/698c4873701ea1f716d712d9/2025-12-31-_EFS_-2025_Final_v4.pdf
  14. Cabinet Office, Guidance: Conditions of Participation (Procurement Act 2023), paras 7, 10 and 19. https://www.gov.uk/government/publications/procurement-act-2023-guidance-documents-procure-phase/guidance-conditions-of-participation-html
  15. Cabinet Office, PPN 014: Cyber Essentials scheme, 17 February 2025, paras 12 and 21. https://assets.publishing.service.gov.uk/media/67af78c8a75f02dffca29bd8/PPN_014_Cyber_essentials_scheme.pdf
  16. Department for Business and Trade, Duty to report on payment practices and performance: guidance (retention reporting for financial years beginning on or after 1 April 2025). https://www.gov.uk/government/publications/business-payment-practices-and-performance-reporting-requirements/duty-to-report-guidance-to-reporting-on-payment-practices-and-performance
  17. Department for Business and Trade, Late payment consultation, "Time to Pay Up": government response, 24 March 2026. https://www.gov.uk/government/consultations/late-payments-tackling-poor-payment-practices/outcome/late-payment-consultation-time-to-pay-up-government-response-web-version
  18. UK Parliament, Commercial Payments Bill [HL], bill stages (Lords Report stage 15 September 2026; third reading scheduled 20 October 2026). https://bills.parliament.uk/bills/4128
  19. Cabinet Office, PPN 026: The Social Value Model, August 2026, para 13. https://assets.publishing.service.gov.uk/media/6a727128332792bd88ece51b/PPN_026_The_Social_Value_Model.pdf
  20. The Local Government (Exclusion of Non-commercial Considerations) (England) Order 2026, S.I. 2026/94 (in force 4 February 2026). https://www.legislation.gov.uk/uksi/2026/94/made
  21. Ministry of Housing, Communities and Local Government, Reserving competitions for below-threshold contracts, updated 16 February 2026. https://www.gov.uk/government/publications/reserving-competitions-for-below-threshold-contracts