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Pressure mounts for larger construction companies to use SME suppliers

Pressure mounts for larger construction companies to use SME suppliers

25 Sep 2014

Large construction firms are under growing pressure to increase the number of SMEs they work with, as the EU and UK Government deliver three separate campaigns to encourage the use of smaller businesses.

Yet, despite a raft of new regulations and guidelines, recent research suggests larger companies still have reservations about working with smaller suppliers.

More than 80% of larger construction companies are not planning to increase the number of SMEs they work with, according to a study conducted by independent research consultancy IFF and Achilles – a global supply risk management company. Just 19% of large construction firms actually planned to increase the number of smaller firms they worked with.

The results come despite the EU recently unveiling a number of new procurement rules designed to create a level playing field for small and medium-sized enterprises. These regulations include requiring companies to explain why a contract has not been split into smaller lots and only being able to specify suppliers have a minimum turnover of up to two times the contract value.

Meanwhile, the use of SMEs has also been encouraged in the UK with the introduction of the Social Value Act which requires public sector entities to consider social value – including use of smaller businesses and apprenticeship schemes – ahead of procurement.

Finally, the government’s CSR adviser and Carillion CEO Philip Green has taken the campaign a step further by writing to 50 of the UK’s largest companies asking them to reveal how their suppliers helped deliver social value.

So with such a big push to encourage the use of SMEs, why are construction companies planning to keep numbers static?

The research found one in four construction bosses (26%) were concerned about the financial stability of SME suppliers, while others were worried SMEs might not adhere to standards and regulations, or be able to adapt to changes in projects or contracts.

Achilles Building Confidence account manager Stephen Marshall said: “A number of larger construction companies are actively looking for smaller entities to work with but, quite rightly, they insist that SMEs must meet the same world-class standards in terms or safety and regulatory requirements before they can even be considered for work.

“Yet many SMEs don’t even get off the starting blocks by refusing to apply for tenders (pre-empting that they won’t win) or avoiding the completion of necessary paperwork.”

That is a relatively common situation experienced by Achilles – which manages supplier information on behalf of 900 businesses globally. In recent months, a power generation company was seeking to contract directly to SMEs, for a lucrative package of works cutting trees.

To be considered SMEs had to undertake an audit with Achilles, which was mandated by the client and dozens of other buyers due to the high risk nature of working at height using tools.

Around one in five SMEs contacted refused to tender for the works because they were not prepared to carry out the necessary checks and paperwork.

Clearly using SMEs presents potential risks for both the buyer – who must be 100 per cent sure of the credential of a supplier in business critical areas; and the supplier, who need to be reassured they will not be expected to fill in pre-qualification forms with no clear guidance.

“In a pre-qualification scheme such as BuildingConfidence, multiple buying organisations design a single pre-qualification questionnaire and all companies – irrespective of size – are assessed on the same criteria,” said Mr Marshall. “For buyers in BuildingConfidence, this means they can make fair and consistent decisions about all 1,900 suppliers – 78% of which are SMEs.”

The good news for suppliers is that the construction industry does still recognise the advantages smaller companies can bring.

The survey found SMEs were thought to be more in-touch with the customer’s needs, had more flexibility and the ability to deliver a reliable service – all factors which were seen as a major advantages when comparing smaller businesses to their larger counterparts.

Mr Marshall said it is commonly known that SMEs can add a large amount of value to any business however; the smaller companies must take steps to overcome the barriers to partnering and supplying large companies.

The Achilles’ research found there were a number of factors smaller businesses needed to address if they wanted work with larger companies.

“For many suppliers it may feel like a David and Goliath sized battle, but SMEs need to be proactive in taking steps to help ensure their business is attractive and meets the needs of larger buyers,” he said.

“With each doing their part, big buyers and smaller suppliers can ensure both of their interests are looked after.”

Steps smaller businesses can take to get a foot in the door with bigger companies:

1. Prove financial security:

Smaller enterprises need to be transparent when engaging with larger companies and prove they have the financial backing to see a project through.

2. Show demand flexibility:

Small businesses should ensure they have a plan which proves they can deliver under any circumstances to help allay the fear smaller operator’s may not be able to cope with changing demand.

3. Demonstrate ability to comply with standards and regulations:

SMEs must commit to achieving and publicising the same standards, accreditations and certification as the big players and this is most efficiently done through a community model.

4. Promote your talent:

Smaller businesses need to drop any shyness about promoting their talent, employee qualifications and successes.

5. Plan, plan and then plan some more:

Smaller enterprises need to pay close attention to their processes to ensure there are no gaps which could lead to delays.

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