Why SMEs Struggle to Win Public Contracts

12 December 2025, Iain C. Steel

First, let’s think about why SMEs are dropping out, being excluded, or self-selecting not to participate. The root causes are often organisational (procurement design and buyer behaviour) rather than supplier capability. Consider taking a brief diagnostic to find the friction points, for example:

Quick organisational diagnostics (red flags)

• SME spend metric: % of total direct spend to SMEs (by value and by contract count). If this is below your organisation’s targets or national benchmarks, investigate further.
• Bid funnel attrition: number of registrants, number invited, number who submit, number awarded. High drop-off between invite and submit usually signals design issues, complexity or bid cost problems.
• Pre-qualification ask burden: number of mandatory documents, volume of questions and ease of response to questions asked at selection stage. High duplication is typically a barrier, but also consider what risks you are passing to the bidders. Do have onerous prior experience requirements that could not easily be responded to by new entrants? Do you require difficult to obtain references? Can your requirements only realistically be served by organisations who have direct experience of your industry? Are you asking bidders to take on an unreasonable level of risk for an SME?
• Turnover / insurance thresholds: contract-required minimum turnover and insurance levels compared with contract value. If these exceed what a sensible SME could hold, they’re exclusionary. Also, what risk are you really asking them to carry? Will they really have to fund or insure significant expenditure that requires a significant liquidity?  A short term contract without significant outlay is unlikely to require any specific turnover, but could be a lifeline to an SME without increasing your risk.
• Lot size: median contract value / lot size. Large, single-lot procurements push SMEs out. Guidance explicitly recommends lotting as a tool to open up markets. Have you considered what is the best supplier type for your needs, or have you restricted the marketplace by simply bundling services together for ease of administration, or to simply take a couple of tenders out of your workload?
• Payment profile: average time to pay invoices for suppliers and whether retention/bond practice creates cashflow risk (e.g., requirement to wait months for retention). The Procurement Act introduces statutory prompt-payment protections that support supply-chain liquidity. SMEs, and in particular micro-SMEs, are largely dependent on the liquidity of prompt payment, particularly in their early years following establishment.
• Tender complexity: word count of tender docs, number of evaluation criteria, number of clarifications during the process. Long, bespoke documents penalise SMEs with limited bid teams. Is your specification optimised, or are you relying on the supply chain to ‘fill in the blanks’ when you are running against a deadline?
• Past contract winners: proportion of awards going to the same tier-1 firms repeatedly. Concentration often indicates insufficient market creation or over-reliance on large frameworks.

Measure these, then prioritise the highest-impact gaps to address first.

Three Common Causes of SME Access Problems

When diagnosing why small and medium-sized enterprises struggle to win public contracts, three root causes consistently emerge: capacity, finance, and complexity. Each presents in predictable ways, and each can be addressed through practical, proportionate action by the buying organisation.

Capacity Constraints:
One of the most frequent challenges is capacity. Many SMEs have the expertise but not the scale, resources, or formal accreditations that larger competitors possess. This becomes evident when expression of interest or registration rates are high but the number of submitted bids remains low. SMEs may also rely heavily on subcontracting disclaimers, signalling that contract sizes or qualification criteria are simply beyond their reach.

To test whether this is an issue, buyers can engage SMEs early to discuss approaches to scaling-up during market engagement sessions. This helps assess whether smaller firms could realistically grow, partner, or subcontract to meet delivery requirements if the opportunity were structured differently. Similarly, buyers should review whether the certifications being requested (such as ISO standards or specialist accreditations) are genuinely proportionate to the stage and value of the contract.

The fixes are practical. Large, single-lot contracts can be split into smaller lots or phased stages, allowing SMEs to compete for manageable portions of the work and build capability over time. The new procurement regime explicitly highlights lotting as an effective way to increase competition. Buyers can also use staged contracts, starting with a pilot or early-works phase to de-risk delivery and give SMEs an opportunity to demonstrate capacity before full roll-out.

Another solution is to reward collaboration: include evaluation criteria that give weight to credible SME supply chains or require prime contractors to demonstrate how they will engage and integrate smaller partners. Finally, contracting authorities can include a limited onboarding support allowance within the contract to help new SME suppliers cover training, system access, or transition costs.

Financial constraints:
Even where SMEs have the skills and appetite to deliver, financial barriers often stand in the way. Tight cashflow, high insurance requirements, and long payment cycles are among the most persistent deterrents. When SMEs decline to bid or withdraw mid-process, it is often because they cannot sustain the high, and often unnecessary, working capital demands of the contract. In my own experience running an SME consultancy, I am often baffled by the high liquidity demands imposed by Authorities, where there is no need for any working capital requirement for the contract, but nevertheless there is a high bar to jump to be considered for a contract that we would otherwise be perfect for.

Procurement teams can test for this by calculating the working capital required under their existing payment terms, retentions, and bonding policies for a typical contract size. If this figure is unrealistic for smaller firms, the structure is likely excluding them. Surveying past bidders about whether cashflow or financing challenges were a deciding factor provides further insight (e.g., inability to fund payroll / sub-contracts until invoice paid).

To remedy these issues, buyers should make full use of the Procurement Act’s enhanced payment provisions, which demand 30-day payment terms throughout the supply chain. These terms should be clearly referenced in contract documentation and actively monitored in contract management. Requirements for bonds and insurance should also be reviewed and scaled to contract value, imposed only where demonstrably necessary, and replaced where possible with less burdensome alternatives that match the actual risk profile of the contract.

Where working capital demands are required, other practical measures include providing mobilisation payments or modest advance payments to ease early cashflow, and encouraging SMEs to form consortia or joint bids with clear rules on payment flows and subcontracting. Buyers can also help by considering supplier finance arrangements (invoice discounting / supply chain finance) or signpost suppliers to finance support schemes or supply chain finance options, while ensuring such mechanisms are easy to access and do not impose additional administrative hurdles.

Complexity:
The third barrier is procedural complexity. Even highly capable SMEs often abandon opportunities because of convoluted, repetitive, or overly legalistic tender processes. Low submission rates, excessive clarification questions, and complaints about the time and cost of applying are all tell-tale signs.  As an example, I was recently invited to tender for an ‘opportunity’.  The total estimated contract value for the successful bidder was £2,500, but that did not deter the Authority from sending an 80-page tender (excluding T&Cs) with 12 quality questions, a total response word count of over 8000 words, and a requirement for two signed case study from a previous client. I politely declined the opportunity.

To assess for procedural complexity, buyers can perform a simple “time-trial”, asking a non-procurement SME or colleague to complete a draft tender and report on the effort required. They can also count how often information is duplicated across tender documentation.

The solution lies in simplification. Evidence requirements must be proportionate to contract size and risk. Tenders themselves should be concise, written in plain English, and accompanied by clear guidance, word limits, and template structures for method statements.  Not only does this help SMEs to bid, it also streamlines evaluation and appointment.

Open and transparent Q&A processes also make a difference, allowing bidders to learn from one another’s queries through shared clarification logs. I have lost count of the number of tenders where the responses to questions read as though written by a surly teenager, with half answers or outright refusal to answer, and passing the risk back to the bidders. Finally, when seeking innovation, buyers should remove technical barriers that prevent smaller or newer firms from competing — for example, by using challenge briefs or procurement procedures that focus on creative solutions rather than past turnover or size.

Practical, tested interventions

There are measures that can be implemented to improve SME participation that are practical, low-cost, and fully aligned with the direction of the new procurement regime. They can be grouped under four key themes: Design & Strategy, Process & Systems, Commercial & Contracting, and Capability & Market Development.

Design & Strategy
SME inclusion begins at the design stage. One of the most effective strategies is to make lotting the default approach. By splitting larger contracts into smaller, more manageable lots, authorities can dramatically widen access for SMEs. The lotting strategy should be made explicit in project initiation and market engagement documents, with clear justification required if a single-lot approach is used instead. Another option is to reserve a proportion of contracts for SMEs where permitted by policy or legal frameworks. This can be achieved through proportionate social value criteria and local economic development levers. Finally, procurement teams should streamline their procurement procedures to design tailored question sets that are scaled to the contract, and review turnover and insurance thresholds to ensure they are proportionate.

Process & Systems
Procurement packs can also be simplified, removing administrative duplication and procedural complexity wherever possible. Providing a short, modular “SME starter pack”, with templates for onboarding, invoicing, and key contact points, helps smaller suppliers understand requirements quickly and engage with confidence.

Transparency is another simple enabler. Publishing forward procurement pipelines covering the next 12 to 18 months, with indicative lot sizes and timelines that are not only for those large contracts where Authorities have such an obligation, allows SMEs to plan resources, partnerships, and financing in advance. This single step often leads to a measurable increase in SME engagement.

Commercial & Contracting
Commercial practices can either encourage or deter SME participation. One of the most important actions buyers can take is to embed 30-day payment terms as an implied contractual condition, extending protection through the supply chain. Under the Procurement Act, prompt payment is a statutory requirement, and authorities should carry out periodic checks to ensure subcontractors are being paid on time.  

Other contractual provisions can be adjusted to reduce financial strain. Retentions should be limited and replaced with performance bonds only where demonstrably necessary. Where appropriate, staged payments tied to clear milestones can provide both control for the buyer and healthy cashflow for the supplier.

Authorities should also ensure that every bidder receives a meaningful debrief. Structured, concise feedback helps SMEs understand how to improve future submissions and encourages repeat participation. Providing a standard debrief template ensures consistency and reduces administrative effort for procurement teams, however ensure that any feedback is actually helpful to unsuccessful bidders. A generic template response is not only unhelpful, but can dissuade future participation if the bidders don’t know what changes could be made to their proposals to bring them into contention in the future.  SMEs have, by their nature, more limited resources and are unlikely to persist with bidding for a specific Authority if they are unable to tell what they need to do to improve their future odds. It’s a better option to invest their time elsewhere.

Capability & Market Development
Beyond process reform, long-term improvement depends on building both buyer and supplier capability. Procurement professionals should receive training on SME engagement and proportionality, helping teams to avoid over-specifying requirements or “gold-plating” standards that unintentionally shut out smaller firms.

On the supply side, supplier development programmes, such as short accelerators, bid-writing workshops, or onboarding sessions, can make a major difference. Even an annual “how to bid” session for a key category can lead to a noticeable rise in participation and bid quality.

Regular supplier engagement activities, such as challenge briefs, supplier days, or “meet the buyer” sessions (including virtual events), help to humanise the process and build trust.

The cultural fix
Policy levers and contract terms only take you so far. The cultural change required is at buyer level: treat SME inclusion as a strategic objective which is visible in performance reviews, embedded in sourcing strategy, and backed by resource. Make SME access a line-of-sight KPI for senior buyers: require a documented SME access assessment for each sourcing decision where one-supplier or oversized lots are proposed.

Finally, don’t assume the barrier is “SMEs aren’t good enough”.  In most cases, the market rules designed by buyers are the gate. The mix of regulatory changes gives procurement teams practical instruments to re-shape markets. Use them, measure the effect, and treat SME access as an outcome, not an aspiration.

(This article was first published in the November / December 2025 edition of In-procurement Magazine, pgs. 14-18).

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