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Why the government prices smaller FM companies out of the market

Author : Martin Reed is chief executive officer at Incentive FM Group

25 April 2018

Despite a promise by the government that small businesses in the UK will get over £33bn worth of government contracts by 2022, little seems to be changing.

In the past five years, direct spending on SMEs has only grown by one percentage point from 10% to 11%. So why is it so difficult for SMEs to get their foot on the ladder and win government projects?

Since the collapse of Carillion at the start of the year, there has been talk of a big shake-up in the facilities management world especially around public sector contracts.

But do the actions really match the words when it comes to a fresh look at how the government procures its FM contracts?

The procurement process for smaller FM contracts currently being undertaken by the Crown Commercial Service (CCS) once again talks about engagement of SMEs but when you read in to the detail the guidelines, terms and commercial framework, these seem to favour larger companies.

In particular the risk associated with blind bidding for work can be very dangerous for smaller companies as they may not be awarded enough ‘good’ contracts to offset the ‘bad’ ones.

As such the need to win large amounts and spread risk favours larger businesses and, in particular, the very largest. If we focus on the risk to small businesses, the requirement to commit to a ‘call off’ price for work by a specific measurable unit that can be taken up directly by any organisation using the framework is also fraught with danger.

Simply impossible

How do you price for air conditioning maintenance per m2 when you haven’t seen the building, don’t know the number of assets in scope, their age or condition, their workload and their prior maintenance history? It is simply impossible.

The same applies to cleaning, as how can you price to clean a m2 of office space when you don’t know the floor covering, the amount of staff using the space, if it’s open plan or modular, etc?

In my experience bidding for government work can be a lengthy and costly process and many smaller businesses don’t have the same resources as larger companies to put together winning bids.

I welcome the intent of the CCS to make the procurement process simpler, however they have just swapped some challenges for others.

For example, smaller FM companies often have a regional focus, whereas government projects tend to be on a national scale. It is therefore extremely difficult for a smaller business to find the resources to fulfil large scale contracts.

In addition, the penalty clauses for not delivering are huge and this has the potential to break the company - more risk!

As a result, a lot of small businesses will continue to shy away from competing for public sector contracts. This is a real shame as there is no doubt that these organisations are often more specialised and can provide a better solution.

However, the contracts which are suitable for these companies are often contained within a larger tender and given to one primary contractor as it is cheaper than tendering multiple parts of one project.

The end result for smaller businesses is often lower margins and higher risk. Despite these challenges, the government is starting to introduce measures that have been designed to help smaller businesses contribute to large projects.

Delayed payments

Another big risk for many small companies is delayed payments. As FM relies on its people, a delay in payment may result in staff not being paid on time and businesses eventually folding due to exceptionally tight margins.

However, in a bid to crack down on this, as of April 2017, large companies have to publically report twice a year on their payment practices and performance.

The government has also started to exclude businesses from projects if they cannot demonstrate fair payment practices. Whilst this seems like a good place to start, in my opinion, much more needs to be done to address the issue.

If there is one thing that we can learn from the collapse of Carillion, it is that there is great risk in concentrating all public business in the hands of a small number of big companies.

A fair framework

So what is the answer? I think the CCS should have a process which selects smaller businesses on local and national capability.

Once they have selected a long list of companies that meet the required standards of service and compliance, the end user can then select from this list to specifically quote for their contract based on a fair commercial and contractual framework.

This will allow the bidding companies to price the work correctly and get the client the best value price, not the cheapest.

More importantly it will ensure the providers do not play Russian roulette with blind pricing and any contracts awarded are sustainable for both the client and the contractor.

In conclusion, the government procurement process has developed a polarised market with a limited and stretched supply chain that ultimately cannot deliver what it promises over an extended period.

I believe that FM outsourcing in the public sector can be improved by not allowing poor procurement to deliver low standards of service and sustainability.

This article was kindly supplied by Mr Reed following comment from the PFM Editorial Advisory Board after the collapse of the Carillion and further industry demand for better FM procurement practices and improved treatment of SMEs.

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