3.26 The two examples above illustrate how government can adapt its procurement approach to ensure that SMEs have opportunities to compete for work directly. However, most SMEs working on government contracts do so as subcontractors and this is unlikely to change significantly in the future.
3.27 SMEs we spoke to raised concerns about the sustainability of working within a public sector supply chain. The main concerns raised were:
• difficulties identifying subcontractor opportunities;
• prompt payments not passed on;
• onerous commercial terms reflecting unfair distribution of risk;
• volume of work far lower than expected, so income reduced; and
• limited independent contact with the contracting authority so dependent on the success of the prime contractor.
3.28 In most cases, departments appoint a single prime contractor, who they rely on to appoint subcontractors. This means government rarely knows who makes up its supply chain or the terms and conditions of their contracts. With this lack of oversight, it is difficult for commissioners to ensure that SMEs are able to thrive and deliver benefits for the public sector. Departments also told us they were concerned about the dependency it created between government and prime contractors. For example, a department usually has no way to remove a prime contractor without losing the attached subcontractors as well. This has a detrimental effect on service continuity as the department must identify and appoint a new supply chain.
3.29 Some departments are introducing initiatives to help SMEs thrive within the supply chain and to influence how prime contractors treat their subcontractors:
• The Department for Culture, Media & Sport (DCMS) told us that it is developing a new approach where it identifies and appoints subcontractors, before transferring the contracts to a prime provider to manage. DCMS told us this is to ensure it has a better understanding of the subcontractors involved in the work and control over their terms and conditions. This approach is only used where the project is of sufficient size to require a prime contractor to manage the works or services. DCMS told us it also recently changed its procedure to require prime providers to list any subcontractors they intend to use when they bid for work.
• The Department for Work & Pensions (DWP) has developed the Merlin Standard, a code of conduct for prime providers of the Work Programme. In a recent review, 48% of subcontractors felt Merlin had improved supply chain management, suggesting it is having some impact although the review also noted that subcontractors did not generally agree that Merlin ensured subcontractors were protected and treated fairly. Despite this, 74% of subcontractors felt Merlin should be used more widely by other commissioners.28
• Highways England has introduced Project Bank Accounts for many of its large contracts to ensure that subcontractors are paid on time (see paragraph 2.22).
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28 Centre for Economic & Social Inclusion, Review of the Merlin Standard, October 2015, available at: www.gov.uk/government/uploads/system/uploads/attachment_data/file/468202/rr907-review-of-merlin-standard-full-report.pdf