The current procurement policy within the UK as it relates to the construction industry is an uneasy amalgamation of policy legacies, the most resilient ones being cost efficiency, sustainability and ‘value for money’ spending initiatives (Erridge, 2009). Whilst there has been considerable publicity over the years around public procurement being central to innovative policies and strategies that promote Small and Medium sized Enterprise (SME) growth, there is a dearth of quantitative analysis pertaining to which types of SMEs actually benefit more from government procurement contracts (ibid). In addition a lack of sufficient empirical analysis which is usually found from widely available literary review is also a shortcoming of this research. A further point in principal is the fact that the scattered locations and varying local economies of the contractor, (Councils, Counties etc) as well as the discrepancy in the patterns of procurement policy at different tiers of government mean that SMEs do not benefit uniformly from existing procurement policies (Elder and Georghious, 2007). The aim of this thesis is to demonstrate how SME growth and promotion as affected by the public procurement policy can be better understood once the discrepancy in the patterns of procurement at different tiers of government is understood (McQuaid, 2002). This is with specific reference to the UK construction industry. After an examination of the current state of SME growth within the UK construction industry as it relates to the public sector procurement policies, the author judges what opportunities and limits there may be for future public procurement policy decisions to facilitate strategic SME growth (Aschhoff and Sofka, 2009).
1.2 The political dimension
It is important to note that a considerable amount of the legal policy in this area is influenced by EU regulation, and that this significantly impacts upon the pace and success of the majority of construction procurements within the UK as it is an EU member state. 2010 saw the UK coalition government in favour of enhancing the role of the private sector more with regards to the formulation of public policy in relation to governance and the procurement of public sector construction projects through the mechanisms of Local Enterprise Partnerships (Loader, 2005, 2007). The economy watches with keen interest the advent and outcome of these new mechanisms hoping they will be reflective of concerns from ‘both sides of the fence’ involving agreements between SMEs and the government (Loader 2007), which has the public sector “buyers” on the one hand and the supply chain (in this case SMEs) on the other. SMEs here denote those contracting business concerns, which represent the main contractors and their sub supply chains (Kovacic, 1992). Through the insights gained from within the construction industry and public procurement departments, the author will be able to better assist the public procurer and supplier to increase the opportunities for SME growth in the UK public sector.
1.3 Aims and objectives of Study
In the light of the above, the author has formulated the following aims and objectives for this dissertation:
- An observation of the ongoing key strategies and processes being followed currently in the public procurement organisations the UK and the problems therein.
- The way the above affects SME growth in the United Kingdom and the key barriers and issues facing SMEs attempting to work their way against these problems in gaining opportunities and chances.
- An analysis of whether and how many of these barriers are too inevitable and difficult to set aside while dealing with the given public procurement rules and objectives?
- Whether these issues be addressed and recommendations for the same?
- Whether there is any suggested further research, which should be carried out to ensure that public procurement strategies promote rather than downplay SME growth?
2.1 A framework model for improvement in UK public procurement policy
The author after the review of various procurement models and theories to facilitate SME growth has decided to elaborate and build upon the current EU procurement model, which not only lays emphasis on competition as being a central element of public procurement policy (based on the spirit of the Services Directive), but also the fact that there is now a reduced role of public service unions (Massey, 2006). This would of course mandate the encouragement of the single market aims of facilitating SME movement across borders through reduced barriers to trade, competition, the use market intelligence and total quality management in the supply chain procedures which reduces costs in the long term (Arrowsmith, 1995). The EU regulated model for this reason demonstrates increased competition at the early stage of market testing and service design but close co-operation at the later stages of selecting and short-listing SME bidders. According to Aschoff and Sofka (2009) this approach can have positive effects on an SMEs innovation performance by promoting growth for those located in areas, which are economically depressed through co-operation at the short-listing stage of the procurement (Audretsch, 2004). It is the author’s opinion that a model which adopts a flexible open approach to procurement policy is one that can more suitably address the various problems which plague SME growth within the UK, especially with regards to an awareness of opportunities, ability to get on the approved supplier list, cost optimization, environmental restrictions, compliance driven public regulatory frameworks, the emphasis on specific qualifications for large scale contracts (which naturally puts the SME at a disadvantage), the ignorance of a large number of SMEs around the use of e-procurement systems and procedures and last but not the least successfully hurdling departmental bureaucracy and ‘red tape’ (Barro,1998).
2.2 An Institutional Framework for enhancing SME Growth
The author has based research upon the institutional model for SME growth through public procurement policy. These are only some of the criteria as they relate to the UK public policy approach, which will be set out from the works of various authors below and, according to Loader, (2005), has been “an acceptable economically efficient approach”. SMEs form the backbone of any economy and in the case of the UK construction industry the same is true in terms of employment creation and the reduction of economic disparity (Kovacic, 1992).
In this model the author has tried to triangulate the current academic views with the UK construction industry as they relate to the potential role of public procurement policy in promoting SME growth (Laffont, 1998). Some of these relate to the government supply side improvement polices as they relate to policies which can improve SME access to information, access to business information, advice and credit management assistance (Nash and Schooner, 1992). This then gives rise for a review of the SME policies as they relate to the extent to which public procurement supports local and regional economic development more widely via provision of a (demand side) market for SME goods and services to the public sector. According to Dollinger (1995) and Massey (2006) these policies should focus upon the following aspects of the SME concerns within the UK construction industry:
2.3 Table 1- An Institutional Framework for Public Procurement Policy
Increasing SME Access to (Supply Chain Policies of the Construction industries)
Criteria for an institutional framework
|Finance and capital, new construction markets, new skills development, and general awareness, encouraging new firm start up.|
|Social capital |
The evolution of the procurement policy and its effect on the economic growth of the construction industry has been examined academically by Erridge (2009), Audrestch (2004), Massey (2006) and Brookesbank (2008). Until recently UK public procurement policy and its agenda were characterized by cost minimization as the primary aim for government policy, which replaced the classic conservative approach of fiscal discipline and state interference, characteristic of the Thatcher years. The cost-minimization aspect was justified by the use of Compulsory Competitive Tendering (CCT) in local authority contracts. Cost reduction and value for money, being secured through the promotion of competition became the main premise of public policy at this time. However, the substantial reforms in the nineties were focused more on cost minimization than the promotion of healthy competition by facilitating or supporting outside contractors during subsequent service tenders. This, of course, went against the consumerist approach, which was aimed at providing benefit to the taxpayer, the ultimate consumer of public projects (Arrowsmith, 1998). The focus has in the past one decade however shifted to a more collaborative and co-operative environment between public-private procurement partnerships where competition is less of an issue and the concern is the securing of long-term efficiencies in contracting relationships. This has been done by the use of Best Value (BV) and PPP (Public Private Partnership) schemes, which focus more upon service reviews, voluntary competitive initiatives and stakeholder consultation (ibid).
The fact is that state public procurement policy can actually vary in its normative wording and actual manifestation and practice (Wissoker et al, 1997). Typically the public procurement policy can be used as a means to an end of achieving many different agendas (Kovacic, 1992). The primary one of course being to interfere in the market mechanisms and to remove the constraints on SMEs in competing in the highly competitive world of public procurement bidding and the allocation of government projects (Kovacic, 1992). This also gives rise to a discussion of how the UK has and possibly can ensure that SME growth generates economic support and what the past and current effects of public procurement programmes designed to assist SMEs have been (Nash and Schooner, 1992). The author adopts a tool-kit approach endorsed within the international academic frameworks as they relate to SME growth in relation to SME procurement (ibid). Each element requires a different level of public policy intervention. Such tools typically involve modes of technical assistance and/or knowledge transfer mechanisms, which can be provided by governments to SMEs. Another element could be the facilitating of training programmes involving public private partnerships between both the government and SME. Financial assistance, loans and subsidies for the SME owners can help them grow, through cohesive subcontracting programmes in which the government directs, recommends and encourages larger construction businesses to contract out or allocate their subcontracting opportunities to them (Laffont, 1998). The government also has an option to distort the market conditions to create or mimic more competitive business conditions by adding extra taxes and prices on the contracts awarded to large businesses in order to ensure that the SME gets an improved chance to be awarded or allocated a construction contract (Corden, 1997). The potential danger here of course is the possibility that the large businesses could be encouraged to create small sham companies mimicking SMEs in order to benefit from such programmes, even dishonestly from the SME directed lenient policies (Checchini, 1988). As suggested in the literature (e.g. Cordon (1997) and Laffont (1998)) improvement can be encouraged through targeted procurement where preference margins can be varied along with the value of the intermediate SME inputs into the business tenders that are actually received in response to the tender solicitation (ibid). There has also been a known international policy practice where only SMEs are eligible to compete in a public procurement or contract award. The question remains and, based on the above, that once a government decides to assist small construction industry businesses, can they actually take any practical steps to introduce, implement and maintain or even alter the ongoing public procurement policy (ibid)?
3.1 Research Methodology
To elicit truth from behaviour research would be difficult if it was confined within theoretical boundaries and rigidly structured methodologies. While specifically defining the object of study (SMEs) and the context (construction sector public procurement as it relates to SME growth) help in narrowing down the scope of this particular study within controllable limits; nevertheless, its foundations encompass considerations beyond the scope of this study at times. The author has thus adapted a well-defined epistemological position namely pertaining to the sort of knowledge this research aims to produce. This has allowed the author to transcend belong the social realities that generate negative perceptions about the public sector predicament and a cause-effect relationship will be observed between factors. Therefore the author proposes that adoption of epistemological reflexivity with the author acknowledging that the research question will define and limit the knowledge that can be elicited from this study and that this research design and method of analysis actually ‘construct’ the findings of this study.
The author has avoided deploying methodologies which are too much inclined toward positivism as a purely positivist position especially in this case may be naïve to say the least. A complete understanding of SME perceptions action would require taking into account independent social realities as well. This entails a hybrid approach to the research’s philosophy from a realist perspective to compliment the assumed ontological position, involving the author’s proposed contribution to the construction of meaning. Thus guided by the research philosophy, a questionnaire or survey strategy has been employed by the author which, by acknowledging that purely deductive methods would not provide a complete understanding of decision behaviour, inductive methods have been incorporated in the methodology as well.
Further sections of this chapter will basically look at following issues to provide a clear concept of the research strategy:
- Participant characteristics
- Procedures of research
- The Survey Schedule
3.2 The Questionnaire
Systematic sampling has been utilized to select the amount of surveyed people and consent letters were sent in with the study, which informed the respondents fully about the topic area in detail. They were further informed that the researcher was only interested in their point of view and that there were no correct or incorrect answers. All participants were assured of confidentiality. No incentives were provided to the respondents. One problem was that several questionnaires were not completed in full and were discarded by the public sector and private sector response, which was a primary reason for a less than expected lower response rate. Furthermore, a few respondents could not clearly follow the questions or instructions, and provided random answers probably due to lack of interest. In the finally analysis they have been removed from the analysis.
The Questionnaire was divided into Section A and Section B in order to make it more relevant for the respondents to answer according to their occupation. This also allowed the author to ensure the involvement of a diverse range of respondents, thus permitting a separate analysis and comparison of responses. For this reason the questions in Section A and B were aimed at eliciting a brief qualitative response which has been later analyzed to fit into the public procurement policy model discussed above. The author believes that the qualitative aspect of this survey is necessary for a more profound insight into the procurer perceptions about the state of the UK procurement policy and its potential to help the SME growth in the construction industry.
3.3 Choice of Research Topic
The author would like to comment from the outset on the relevance of this research especially given the current unstable economic climate which is bridled by the risk of financial setback and downturn looming over the likes of the construction industry, which logically gives rise to public sector procurement policy being open for critical review and discussion. The focus of this paper, therefore, is on how public sector procurement policy has and can improve the conditions of business and growth for the SME, which forms both an important and significant composite of the UK construction industry and overall contribution to the economic purse.
The UK Construction is primarily dominated by SMEs, which are reliant upon work they get from public sector bodies either via direct contract or indirectly as subcontractors participating in the main contractor supply chains. It is no surprise therefore that the public sector actually accounts for a third of all the work awarded within the construction sector.
3.4 Research Strategy
The author used questionnaires to elicit the views of some willing participants from the public procurement supply chain departments within the UK construction industry. This is an appropriate research strategy in this instance, as it is meant to help the author focus on the relevant target audience. It is also an efficient strategy in getting a large number of responses and is also an ideal solution where the researcher has limited financial support or tight time-constrains for the research to be carried out (Zikmund, 1997). This method also allows for the use of a qualitative research paradigm in the form of a survey which is not only economical but can also produce a quick turnaround because it can be conveyed to numerous respondents via the web, email or even post. The questionnaire (Appendix 1) comprised primarily of open-ended questions aimed at eliciting brief, yet relevant responses from the UK construction industry from both the public and the SME sector. The author acknowledged the possibility of self-selection bias and extremity bias due to the time constraints involved and the effect this can have on the exact accuracy of the analysis in the end.
Secondary research was carried out through EU and UK official websites and peer reviewed business journals. Offline research was also carried out from the local University libraries.
3.5 Sample /Respondent Base
The author expected a dual dimension of responses from the responses issued to both individuals involved with public sector procurement on the one hand and individuals involved in the SME sector on the other. It is important that the primary data queries are formulated based upon the two major types of respondents:
The first group would inevitably involve the people involved in the government operations in terms of public procurement tendering and contracting and the second group would involve all private sector individuals and stakeholders in the SME construction industry. The concept of an SME of course varies from one jurisdiction to another and in the case of the UK the financial and public sector definitions might actually be at odds with each other.
3.6 Summary of Queries aimed at the governmental departments
The participants involved in public procurement tendering and contracting were queried about the possible departmental mechanisms, which may exist in their estimation for soft market testing or stakeholder consultation prior to the commencement of their procurement process. They were also asked whether their relevant departments or government bodies by which they were employed actually encouraged the reservation of the contracts for certain small and medium size enterprises during public procurement tendering.
Another take on that question asked the respondents, whether based on their practical experience they believed that E-procurement policies aimed at SME participation could in fact facilitate SME growth. The next question looked at how the respondents perceived the main contractors and their attitudes in terms of subcontracting trends around procurement projects as well as their awareness of any general policy to encourage the growth of the sector, especially during ongoing tendering and allocation mechanisms for construction based, public sector contracts.
The respondents were asked whether they thought that encouraging the SMEs to form a consortia in order to bid for their contracts would actually encourage their growth especially within the relevant commercial sectors of the construction industry. The public sector respondents were also asked to comment on whether their departments had considered providing any training to SMEs, which were interested in the technical aspects of qualifications when applying for contracts or tenders.
Timely payments to SME contracts are also an issue when it comes to ensuring that the SME contractors and their supply chain are supported. It was also important to look into the UK public policy practice of having a stage of approval for Prequalification questionnaires (PQQs) for SMEs. The question asked if the respondent, during their departmental decision-making, practiced or witnessed the use of flexibility mechanisms like accepting ‘equivalents’ for accreditation standards or financial information for the SMEs who might not have a high level of resources to ensure they qualify to compete against larger competition for the same work resulting in the possibility that they lose their chance to be able to have a bid or allocation decided in their favour and ultimately a contract awarded to them.
The subjective experience of the respondents was crucial to deducing their perception of whether they thought the considerations by public departments should be strictly proportionate to the value and subject matter of the public procurement contracts. This was particularly true for considering financial thresholds of the SME during the evaluating and awarding of a contract was taken into account.
Other questions required opinions from the respondents around the types of procedures, which could be taken into account for a bidder’s experience and the references or contacts showed in the PQQ. The other question was whether the PQQ procedure could in fact cause difficulties for the SMEs with limited resources and capacity and whether the same procedures were vetted for suitability given the nature and size of these participants.
A final question as it related to the attitudes of the financial institutions pertained to the main sources of SME funding in the UK industry and whether the government could take into the account the difficulties in obtaining these during the public procurement bidding, allocation and contracting processes.
3.7 Summary of Queries aimed at private sector SME respondents
The SME owners within the construction industry (this group also involved supply chain participants and other private agents) were asked how they would classify their experience with the ongoing governmental mechanisms for soft market testing or stakeholder consultation prior to the commencement of the procurement tendering and contracting process. The respondents were also asked to provide detail about their views on the presence or the lack thereof, of the government procurement policies and procedures as they occurred within the construction industry. Such procedures could be classified as:
- Reservation of contracts for certain SMEs
- E-procurement opportunities currently being provided by the public sector and their potential in facilitating SME growth,
- The treatment by the government of the main contractors who subcontract parts of the procurement contract to SMEs,
- Encouraging local SMEs to form consortia in order to bid for contracts,
- Pre-training for SMEs interested in the technical aspects of qualifications when applying for contracts or tenders,
- Timely payments for the SME contractors and their supply chain,
- The presence, during the stage of approval for Prequalification questionnaires (PQQs) for SMEs of flexible mechanisms like accepting ‘equivalents’ for accreditation standards or financial information,
- Perceived relevance of the consideration by public procurers in considering financial thresholds of the SME when awarding a contract,
- Relevant procedures for taking into account a bidder’s experience, financial resources and references within the PQQ.
A final question for the SME owners involved asking what they thought the main sources of SME funding were in the UK industry and how the government could take into the account the difficulties in obtaining these during the public procurement tendering process, evaluation and contracting processes.
3.8 Justification of the research method employed: Qualitative Questionnaire survey
The author utilized the self designed Qualitative Questionnaire, which sought to draw parallels of the survey findings with the industrial reports and statistics, reviewed as a part of the secondary research. The qualitative nature of the data allowed the author to produce an in-depth analysis, which was not dependant on the choice of a few given variables by the respondents, but was based instead on original remarks or comments by the respondents in writing. Even where some of these responses were short or incomplete, this saved the author time, costs and extensive travel required for the questionnaire as the author sent them out via email and postal methods with an enclosed return envelope. As expected, the author did not expect lengthy responses to most of the qualitative queries to the survey below, however this exercise made it possible to gain some key demographic (gender, location and age) characteristics of both the public and private sector respondents and gain some unique insights, as these questions are open ended. Conclusions from the relevant research literature indicate that such questions can often attract very direct, frank and precise replies by the people who have been exposed to the real problems in the industry and the government operations.
Furthermore, this survey was sent to over 50 people in the construction industry within the author’s local vicinity and effort was put into ensuring at least 20 more responses from other neighbouring vicinities. In fact, 65 responses were received. The questions were designed neutrally so as to elicit a response not only from government procurement representatives but also from the actual owners or supply chain agents from within the SME construction sector.
Case Material (ANALYSIS) draft
4.1 SME definition
How can we define an SME for the purposes of the study at hand, that is, an analysis of the UK construction industry? This would certainly mean a short inquiry into what is a Small and Medium Sized Enterprise within a UK context. This definition is important because the majority of the UK workforce is in fact employed by an SME. The BIS, BERR and SBS Statistics show that in 2008 alone the SME concept dominated the majority of the UK businesses in the region which meant that they had to be taken seriously with regards to the ongoing economic recovery of the UK’s current volatile financial and institutional condition. If we look at a more technical definition of the term, it is possible to note that Sections 382 and 465 of the new Companies Act 2006 define a small and medium sized enterprise as a company with a turnover of not more than 6.5 million pounds and not more than 50 employees. Similarly, a medium sized enterprise can be defined as a company with a turnover of not more than 25.9 million pounds and not more than 250 employees. Besides the technical definition, various sectors have varying definitions for the term. The banking sector for instance based on the latest business banking code (2008) defines SMEs as companies with an annual turnover of less than 1 million including the like of sole traders, partnerships, limited liability partnerships and limited companies within the UK. Therefore if the SME applying for a loan is applying for a loan the bank will, in determining its SME status apply a defined turnover limit to the turnover of that individual company but adjusts this defined term were a consortium are apply. Based upon the latest EC Recommendation on the category treatment of what can be called micro enterprises instead of SMEs, there is a recommendation that Micro businesses i.e. those with less than ten employees should be taken in by the public procurement structures of the EU Member States, the European Investment bank (EIB) and the European Investment Fund (EIF) so adequate effort can be made to facilitate the really small and deserving business structures (see Recommendation 2003/361/EC Article 9 and COM(2009) 83 final/2).
For the purpose of comparison only, the USA has treated the same issue by adopting a different approach through its SBA standards office. That approach applies the definition of size differently for each industry. In the case of the construction industry the concept of SME is for instance restricted to 500 employees and an annual receipt level of $33.5 million. This is a practical approach because revenue and employee head count tends to vary from industry to industry.
Based on the above definition and criteria, the questionnaire respondents have been separated and excluded based upon how old their companies were and whether they had fewer than 10 employees. The criteria for selecting an SME for the questionnaire survey have been based upon the BERR UK Small Business Survey data and definitions. For the same reasons, the classification questions also ask about the size and the age of the firm on whose behalf answers are being given to ensure that actual SMEs are widely involved in responding to this survey. Questionnaires were thus being sent out according to these criteria to ensure the validity and relevance of these surveys.
4.2 The perceived nature of the UK public procurement sector
According to one commentator, the UK construction industry is highly competitive and driven by high technological standards.
‘The construction industry is a highly fragmented project-based industry and leadership in construction comes from the clients (public procurers) and not from the contractors and specialists who carry out the work’ (Cooke & Williams, 2004).
The case material on construction dynamics in the UK shows public procurers views as the initiators of projects and those that contract with other parties for the supply of construction goods or services (ibid) .At the end of this relationship, the public procurer has ownership of the outcomes (Miller and Evje, 1999), with legal jurisdiction of the economic advantage (Hillebrandt, 1985). The CCG further defines public procurers as:
“Sponsors of construction work who are part of a local authority or central public-funded body where there are particular constraints affecting procurement practices, including EU procurement regulations. Typically, local authorities initiating capital expenditure where local standing orders or EU rules restrict some of the procurement strategies which can be adopted, but where improvements to current practices are being explored.” (CCG, 2005). According to Boyd and Chimayo (2006) public-sector (central and local government, nationalized corporations) and semi-public procurers collectively form the major segment of construction public procurers and procure over 40% of construction output by value in most countries.
In the Latham report (1994), ‘value for money’ was placed at the top of his list of public procurer concerns. The previous statement is fitting with this dissertation, as understanding the Public procurers’ needs, will help the Researcher evaluate what processes are implemented when managing cash flow. In Latham’s’ report however, a duty has been envisaged upon the public procurer to act in a manner that will allow construction to become value for money, through their use of contracts, and also their selection of contracting parties, on a basis of quality rather than cost only. Latham, (1994), in his report identifies Public procurers as the core of the construction process. Latham goes on to describe how Public procurers vary with some being well informed, know what they want and take decisive steps to achieve it. Latham goes on to conclude that all public procurers’ commission projects which contribute to their wider objectives and understanding the nature of the same can help SMEs ensure their own growth and financial stability.
According to Latham public procurer expectations will normally relate to the projects including the following;
- Value for money
- Largely free from defects
- Delivery on time
- Fit for purpose (functionality)
- Efficient running costs (economic design)
- Satisfactory durability
For Boyd and Chinyo (2006) “Public procurer satisfaction requires achievement in three areas: in the building, in the organization and in the people” (Boyd and Chinyo, 2006). In 1998, Egan wrote extensively about client satisfaction in the UK construction industry and stated that public procurer satisfaction can be achieved through dealing with a number of five key elements of change for the construction industry that is, committed leadership, focus on the customer, integrated processes and teams, quality-driven agenda and a commitment to people.
Latham concludes that the SME element in the construction industry in particular is not giving its public procurers the satisfaction that they should expect from the typical SME service provider. He concludes, “Such criticisms may be challenged by the industry as exaggerated or unfair, but if Public procurers are expressing them, then the industry has a problem. They must not be ignored.” (Latham, 1994)
4.3 Conclusions from the literature review and case material of UK public procurement policy for the SME construction industry growth
By addressing the questions and points raised in the literature review above, the author hopes to furnish a cohesive analytical framework, which will aid the policy assessment framework for the UK government in supporting SME growth, and thus aims to provide an institutional model for evaluating the current policy options. Just like all parties in the construction industry, the public procurement client has to endure a certain element of risk when managing a project involving SMEs, including but not limited to
- Poor record of cost and time certainty for clients
- Adversarial attitudes and high levels of disputes and litigation
- The intense competition for work
- Low margins and profit risk
- The SME industry’s poor safety and occupational health record
- Pressure on construction teams, especially site management and operatives, to save time and money
- Pressure from health and safety provisions and compliance costs
This framework should be based upon institutional commitment, which can essentially become a significant hindrance to devising and implementing durable public procurement programmes which can be designed to assist SMEs. For the programmes to be successful the state has to be able to give credible commitment to both its institutions and policy. This can be done through either SME participation in establishing policy through participatory pluralism, and/or through an economic model which can rectify the inefficiencies associated with the use the political process which can divert scarce economic resources to the less fortunate small businesses. The prerequisites for the successful manifestation of the above remains the setting up of a sound legal policy environment which will basically identify the qualifying SME participants, using the stakeholder approach which is aimed at disseminating information and extensive consultation and government collaboration. The problems with public tendering concern bureaucracy and transparency. The magnitude of these issues is largely due to the baseline capacity of the government institutions in monitoring, auditing and enforcing government policy and programme effectiveness. Moreover, it may also be difficult or impracticable to ensure and achieve effective delivery of results to a government programme designed to assist SMEs if the institutions that are required to implement the programme are missing in incapable. This is, however, not the case within the UK as not only does it have a well established public sector, it also has a well planned legal and regulatory structure to initiate, implement and promote any public policy agenda aimed at influencing market conditions towards improvement. In addition to the above, SME programmes need to be backed up by strong legislative codes and polices and not left exclusively for the public sector body rules and codes. A closer look should also be given to the public procurement awards and contracts based on the criteria laid out in SME growth based legislation.
4.4 Analysis and findings from case material
The responses to the questionnaires provide a wider view of the issue by combining the responses for a) respondents actually involved in the supply chain or construction industry as private entities and b) people involved in the government departments responsible for the awarding and execution of such public procurement contracts. The questionnaires also allowed the author to analyze the demographic characteristics of the SME industry in terms of the gender, location, financials and age of the respondents. These were then crosschecked against the industrial data available and the author will also seek to triangulate these responses with the responses.
The identical questions about funding (one inserted in each Section A and B) were designed to point out the main source of SME funding and also to understand the ease or difficulty with which funding is available to them. Matching the responses of the public procurement officials and the SME contractors was of considerable help to the author in discerning the gap in perception from both sides, which may be causing difficulties for the SME businesses. These findings were then tabulated and compared against the most recent UK literature on public procurement and SME construction.
Once a public body or institution decides that it needs to own a procurement programme, there needs to be an effort to ensure that SME assistance may conflict with efficiency or value for money goals in public procurement. This has to be coincided with the budget that needs to be put in towards the training elements of the success of the SME programmes in terms of the government managers and SME managers.
After investigating the data available on the UK construction industry and its correlation with the construction industry SMEs, it was possible to see that even rigorous statistical studies of the current state of affairs in the sector about allocation and subcontracting to SMEs through well established and unbiased measures, has a rather inaccurate quality to it based on informational asymmetry, sampling inefficiencies and the tendency to have less than credible data collection procedures.
Furthermore, a successful SME programme should be prepared for a regular evaluation and implementation review of the salient issues where the SME growth strategy can be monitored periodically. Last but not least despite their attractiveness, such schemes and measures should have upon them, automatic abort buttons after which they can be delayed, modified and replaced if they become ineffective or begin to cause economic distortions which can actually damage the profitability and overall benefit for the business entities within the public procurement scenario. In addition to the above, programme reform is often difficult not just for policy reasons but also for the current political and budgetary scenario, with varying policies ensuring that adequate information is provided to the SMEs to compete, thorough public participation and accountability.
4.5 Analysis and Findings from the Survey Strategy Employed
Summary of the responses and findings
- The procedures and practices used in many tenders disadvantage SMEs over larger companies.
- Many small businesses and contractors therefore do not bid for public work all and feel discouraged by the government response.
- They cannot afford dedicated financial departments due to the complicated, costly and time-consuming tender processes.
- General perception of being viewed by the public sector as unreliable and constrained in their resources.
- The construction procurement process is opaque and needs more transparency in terms of information and decision criteria being dispensed to the general public.
- Basic difficulties exist in finding information about tenders. These are still not being made abundantly clear through the means of Internet and traditional advertising.
The term ‘SME’ itself is misleading, many responses suggested. It was abundantly indicted by the responses that SMEs must not be seen as one group and that Micro entities face very different challenges to medium sized companies, involving less staff and resources, and tighter finance credit restrictions. Given that 99% of UK businesses are “SMEs”, then such a classification is indeed too wide. A common complaint was how the medium sized enterprises were performing much better in bidding for and winning public procurement contracts than the real “Small” businesses. The reforms and efforts had thus missed the point of the welfare of the real small businesses. In order to address these issues, there should be individual targets for public sector procurement contracts to be awarded to SMEs, especially the very small enterprises which are badly affected by technological barriers and government red tape. Finally, it is true that, overall, the construction public procurement process should be made more transparent and selection should be on the basis of value for money.
4.6 Detailed analysis
Quite a few interesting responses were gleaned from the questionnaires particularly from the clients involved in the public procurement and contracting sector. Most of the replies were in the negative as far as the query for departmental processes for soft market testing or stakeholder consultation prior to the commencement of the procurement process was concerned. There was an equal divide between the respondents working for the central and local government. Twenty per cent of these responses, however, pointed to some form of market testing involving the government stakeholders trying to carry out some market research. The answer for measures encouraging reservation of contract for certain SME concerns was negative too but many respondents believed that SMEs were in one way or other “encouraged” to participate in this process. No details were provided, however, as to how.
As far as E-procurement was concerned, the majority response (57% was that E-Procurement could facilitate SME growth and based on their departmental experience if criteria was allowed for when selecting tendering lists and according to one respondents, “Some e-tooling can help like competed which was set up by LDA for SMEs and TfL encouraged to use”. The answers to Q4 were mixed and involved and it was stated that the general government policy did not encourage growth of the same during the bidding and evaluation processes as they did not consider it their responsibility to support SME subcontractors on behalf of the main contractors. One response read, “Consortiums are encouraged depending on the procurement” which was a positive sign although more details could have been appreciated.
It was agreed by the majority of the respondents (almost 70%) that encouraging SMEs to form consortia in order to bid for contracts was a good option to promoting their growth as long it was clear to them that who they were contracting with. The general response to the query of their departments considering providing any training to SMEs interested in the technical aspects of qualifications when applying for contracts or tenders was negative but almost 37% admitted that “open days” were held from time to time. Forty per cent of the responses were negative to the query about SME contractors and their supply chain are paid for their work on time but the majority admitted of the presence of 10 day mechanisms being in place for the SMEs.
Ninety per cent of the respondents said that during Prequalification questionnaires (PQQs) /ITT STAGE, use for was being made of the processes, which involved accepting ‘equivalents’ for accreditation standards or financial information. Speaking about his experience of the perceived relevance of the consideration by public departments in considering financial thresholds of the SME when awarding a contract, one respondent stated: “Proportionality is what is normally taken but may be reduced for a framework where by risk assessment is reviewed on a call-off basis”. The majority answer (67%) was yes to the query of this being strictly proportionate to the value and subject matter of the public procurement contract.
Seventy per cent of the respondents thought that the procedure being taken into account in terms of a bidder’s experience and references in the PQQ/ITT was a part of the criteria and the general rule was to see whether, “they were capable of carrying out the work – technical evaluation. Take up 3 refs.”The responses to the query of ensuring SMEs and local communities (or other external stakeholders) benefitting from the procured contracts involved those like, “collaboratively working together” and “for however long contract is set up for”. Grants, Sponsorships and Government funding mostly and local authorities were indicated as the main sources of SME funding with regards to the UK Construction industry and how can the government take into the account the difficulties in obtaining these during the public procurement bidding, evaluation and contracting processes.
As far as Section B was concerned, the number of these respondents was similar to the ones for section a thus paving the way for a balanced response. We saw a number of responses about the experience of the SMEs with the governmental processes for soft market testing or stakeholder consultation prior to the commencement of the procurement bidding and contracting process as being negative, often being labelled due to the complex, costly and outdated nature of the tender processes
Seventy per cent of the respondents believed there was no stable system of the reservation of the contracts for certain small and medium scale enterprises and this was also true (80%) of the E-procurement opportunities and their potential to facilitate SME growth. The SMEs participants in the subcontracted parts of the procurement process were clearly not happy and 89% of the responses here were negative.
There was evidence of the knowledge of the 2008 attempts at reforms in most of the responses, whereas many SME individuals stated that they were aware that valuable public sector contracts were hard to win for Small and Medium Sized Enterprises (SMEs) and this was clearly despite Government policies and interventions, especially through the House of Commons All Party Parliamentary Small Business Group (APPSBG), supported by ACCA (the Association of Chartered Certified Accountants) which recommended in 2008 that many barriers still need to be removed to help SMEs win public sector contracts. The general opinion was of the immense complexity and cost of operations despite the recommendations made in the earlier Glover Review which had been announced in November 2008 accounting from the 99% SMEs in of all UK enterprises to be able to win a greater and more representative share of public procurement contracts. The Glover Review (as it can be recalled) made quite a few useful recommendations which the Government had since endorsed (until the present time of 2011) but many responses were indicative of how these reforms could have gone further to help SMEs access public procurement contracts, as this was extremely vital to UK’s economic recovery.
There was little knowledge shown for respondents for mechanisms involving local SMEs being encouraged to form consortia in order to bid for contracts, and that the way any pre-training for SMEs was being given out, especially for those interested in the technical aspects of qualifications when applying for contracts or tenders. “Open Days” were acknowledged as existing, but not “informative enough”. Having said this, timely payments were acknowledged and this seemed to be a positive variable for economic growth.
The next query pertained to the extent to which the respondents were aware that the public sector body promoted flexible PQQ/ITT processes like accepting ‘equivalents’ for accreditation standards or financial information and the answer was in the negative thus indicating “ complexity” and lack of information in this regard. Financial thresholds were present in the criteria, as the SMEs noted, thus pointing to problems in SME growth. The respondents (69%) were less than satisfied with their knowledge and understanding of the procedure being used for the procedure for taking into account a bidder’s experience, financial resources and references at the PQQ/ITT stage.
As far as the main sources of SME funding in the UK construction industry were concerned, little confidence was shown in the means of procuring the same and it was felt that the government could take into the account the difficulties that exist in obtaining it, especially during the public procurement bidding, evaluation and contracting processes by taking into account the various and differing circumstances of the SMEs. Many respondents were more than happy to name their construction clients and companies in the public sector with whom they had had a negative experience. From the point of view of public procurement contracts, the following were then identified as the main construction industry sectors:
- Infrastructure, repair and maintenance
- Public and private housing
- Non- residential public property (e.g. hospitals and schools)
- Industrial (e.g. factories and processing plant)
- Commercial construction for public enterprise.
The individuals from the public department made an indication of their role or membership of forums like ‘Construction Clients Group’ (CCG) ‘Construction Industry Council’ (CIC). Sources of Funding available to the SMEs were identified as equity investment, local and regional public sector funding, bank/building society borrowing, local and regional public sector funding, shareholder investments, specialist lending, the national lottery, European funding and corporate sector funding.
|Problems identified in the E procurement processing systems by SME and Public Sector individuals|
|Incorrect cost data provided at beginning|
|Human error when processing data.|
|Out of date computer software.|
|Computer software that is too difficult to use.|
|Cost data provided that is difficult to interpret.|
4.7 Presentations, Data Analysis, and Discussion of the Survey Results
Figure i: Pie Chart showing the types of clients the SMEs have thus showing the importance of the Public client to economic recovery of the UK
Figure ii: Table Showing the Response Rate of the two types of respondents (Section A and B respondents)
|Mixed and other||13||34.21|
Figure iv: Pie Chart Showing What Sectors of The public sector Construction Industry were being complained against the most by the SMEs
Figure v: Bar- Chart Showing the perceived Value of Projects the Public sector is involved in providing to the SMEs
Table 1: Value of Projects in Which Public Sector Clients are Involved in Which would stress upon importance of better public sector accommodation of the SMEs
|Value of Projects the Client is involved in||Value||F||%|
|1 million -2.5 million||13||100|
|> 2.5 million||13||100|
Table 2 Surveyed Clients’ Annual contribution to SME Turnover
|Surveyed Firms Annual Turnover from Public Clients|
|Size||(£ Million)||Public Client||Percent|
|Very small||Up to 5 million||1||7.69|
|Small||5million to 20 million||1||7.69|
|Medium||20 million to 100 million||7||53.85|
|Large||> 100 million||4||30.77|
Table 2 Membership of a Recognized Construction Clients Forum in the public sector procurement
Table 3 Membership of a Recognized Construction Clients’ Forum
|Construction clients Group (CCG)||10||76.92|
|Construction Industry Council (CIC)||4||30.77|
Table 4 SOURCES OF FUNDING AVAILABLE TO THE CONSTRUCTION SMEs
|Sources of Fund used by Construction Client|
|Bank/ Building Society||4.69|
|The National Lottery||1.48|
|Local & Regional Public sector||1.93|
|National Public Sector||1.37|
The author has been able to formulate a set of recommendations which cover very specific areas, such as those involving education of the SMEs of the technological and bureaucratic procedures, as well as those of the people working for the government procurement departments. It is recommended that in line with the value for money agenda competition and excellence should drive the public sector agenda. This involves the legal and managerial aspects both in the prevention of biased and improper public spending decisions, which marginalize the small and deserving businesses.
However while there should be a clear focus on enhancing the value and competitive advantage in the public procurement sector some subsidies and an element of preference for small creative firms would be more than welcoming. This involves looking out for the rights of subcontractors in the SME field and also those offering other supply chain services. It would be also unfair, however, to make the public sector buy small when there is a need to promote excellence and efficiency by making the SMEs communicate properly, and address the requirements of the national procurement strategy even if it has high standards and strict capital requirements.
Ever since the advent of the EU competition rules it is also no longer possible to use the slogan “buy British” which is meaningless and discriminatory at a point UK has signed to fair competition rules of the EU – although very many EU member states (France, Spain, Italy, Greece etc) are suspected of only obeying EU rules when it suits their national interest and do discriminate against foreign companies – allegedly). The construction departments in each public sector should opt for a combined system of governance and even setting up of bids and proposals for there to be a uniform process of action.
It was seen in the analysis that there is a clear lack of access for the suppliers who are SMEs who may or may not have resource access of the larger companies. This can be done by promoting websites, advertising outside the OJEC and having buyer meets suppliers open days to actually teach these SMEs the importance of complying with the tender process so they have a better chance of getting public contracts.
The author believes that most of the problems of information access can be solved by the setting up of a central data base or similar systems which will advertise opportunities that fall below the public procurement set standards. This simply means that the same should be easily accessible to suppliers and the SME contractors which would be one way of opening up competition and leading to a greater workload being shifted to the SMEs. The finance community rather than the procurement staff should be in charge of the contract limits if the same are to be used as tools for the financial evaluation of the supplier and can even advise the SMEs in case of problems as to how they can show financial credibility in their tender applications.
It is interesting to note that most of the SME owners are not very technical or highly educated. Most of them, at least the ones interviewed were over the age of 35, were largely self-made. It was felt that they were perhaps unable to cope with the contract limits and technical e-procurement strategies that were needed, and had to go through the considerable expense of providing the same material to the register of supplier information – all so that the suppliers would not have to go through the expense of providing the same material. Also, there should be open days for online submission of bids and documents. There should be a national list of approved supplier lists, which may not be very widespread now but can surely build a database of financially reliable SMEs who will then be assured of being given the chance they deserve at public procurement. This would make the procurement processes more transparent indeed.
It is also recommended, for SMEs in the United Kingdom, that there is the need for education-based reform needed now to understand how to facilitate and educate the SMEs about finding out opportunities and the venues for information. Again this can be done by extensive online and offline information being provided about the basic processes of the procurement process like designing a response, understanding the output specifications and dividing links between government procurement sites to further provide information about the bidding and tendering process. Furthermore, the question for small business is often not solely where to find opportunities, but also actually how to go about exploiting them for a profit in a mutually beneficial way. One the SMEs are given a chance to work more, the prices of services and tenders will naturally come down. Developing guidelines, workshops and seminars and road shows to get the messages out for people can do this and important help can be given in this respect by the OGC, Chambers of Commerce, Business Link, CIPS, and CBI etc. Furthermore, the use of a help desk for SMEs with queries and comments/complaints on behalf of current and potential suppliers would be welcomed. SMEs should be encouraged as far as possible to understand their strengths (and, by extension, weaknesses) and to ensure that they have a realistic chance of winning business and not just upon having a realistic chance of encouraging the same to bid widely.
On the other hand, there also remains a need to educate procurers to understand the big picture of procurement strategy to enhance the local business climate of the region. In addition to the above, buyers should understand the big picture of procurement issues when accommodating SMEs, namely by considering what benefits they can offer, how to offer better accommodating frameworks of response, and how to ensure that SMEs know how to form strong and mutually beneficial consortia accordingly. Essentially, the concept of “think small” is not going to catch up in the public sector too quickly especially at the point when better and stronger middle sized firms with credible financial backing are in existence. Now is the time, in line with the EU competition guidelines, to further develop framework contracts which develop best practice guidance or even firm policy in some areas like those relevant to SMEs, transparency, and EC/UK procurement regulations.
In conclusion, it can be seen that there are multifarious strong factors and trends working against SMEs wishing to sell construction based activities and solutions to the public sector – which is itself under enormous pressure and facing massive cuts in 2011. Times have changed, and the entire SME culture itself needs itself to change, in order to keep up with the competitive demands of the public sector. There is a move towards supplier aggregation, consortia and the consolidation of purchasing activities into more economically efficient packages – and also towards reduced risks. This analytical study of the UK public procurement system basically required an exhaustive investigation of all previous research and thoughts regarding the relevant topic areas: i.e. identifying the construction public procurer, the approaches used by these of public procurers, and the risks involved with misalignment of polices and technologies within the SME sector. This critical review of related research was necessary to give an in-depth insight into the study area. It has been seen that the existing literature and research into the area of ‘construction’ and public sector procurement is limited in some respects, as most studies focus on medium rather than small businesses. This may be justified by the unique characteristics of small businesses as opposed to medium enterprises. In the light of the case study undertaken in the Literature Review and the survey questionnaire, in this chapter the author aims to revisit the research questions in an attempt to identify the main types of problems faced by the SMEs in their mode of operations and involvement with the industry and then make the necessary recommendations.
The first thing the author wants to note here again is the overall evidence of the emphasis on the use of new information technology by the stakeholders to enhance the SME tendering and procurement process; however, the SMEs themselves were reluctant and uneasy with these “aids” to trade and many showed a preference for old methodologies of paper work rather than electronic documentation: in short, people never really like change. It has already been noted in the case study above, and a need has been stressed, on the importance of adopting a ‘post Egan’ and ‘post Latham” approach within the construction industry to start moving away from what is seen as the traditional approach to construction and procurement. Such an approach should involve better research and development techniques with the aim of producing new and innovative techniques, technology, and logistics for the timely construction of projects without exhausting the finances and budget. In this vein, this review of the UK case study has highlighted the use of technology and computer software engineering techniques for the development of a more simplistic and “SME friendly” approach to public procurement.
Coming to the results of the data collected through the questionnaire, it is possible to get a ‘bird’s eye view’ of the public procurers’ designation (demographic details), the extent to which construction public procurers use sources of fund available to them, and the risks and threats the public procurers see in prompting SME opportunities. It is surprising to note the popularity of the e-procurement mechanisms, particularly with public sector procurers, but there is no overwhelming evidence of a complete takeover by these e-procurement mechanisms over the tendering process yet; and, as observed in the literature review, there is an overall reluctance on behalf of the SME contracting industry to become more digitally innovative – though this may well change as the ‘digital native’ younger generation grow up and into management positions in the industry. The value approach has proved to be generally popular overall with both public and private clients. It has been seen that public procurement approaches in the UK construction industry should focus on the following in the future:
- The scant SME cash reserves,
- Tender balancing,
- Issues of delayed payment to SME subcontractors,
- Issues of delayed payment to SME suppliers,
- SMEs approach to borrowed funds.
The UK construction industry is dynamic in nature, yet the concept of promoting an equal opportunity project system cannot exactly be handled through theory and policy alone. While it is imperative to understand the public/private dichotomy within the procurement sector of the construction industry while keeping in mind the cost and quality as predominant criteria, there is also a need for looking at the bare practicalities of the conditions these SMEs actually operate within and their level of education, opportunity access and awareness.
Therefore, and on a final note, there is an overall need for a realization within the public sector procurement to infuse the new culture of “creating value” to be embedded across public procurement processes and the entire industry’s supply chain. This will involve greater involvement on behalf of the SME contractors and specialist suppliers during the early project stages, along with a need for innovation and cooperation, though whether this will actually happen is indeed a moot point.
The role of public sector procurement policy in SME growth strategy within the UK construction Industry.
|· I am involved with Public procurement-tendering and contracting (Please now proceed to answer section A ONLY)|
|· I am involved with an SME within the construction industry (Please see Q5, then proceed to answer section B ONLY)|
|· Other ______________________________________________________________ (Please answer either section A or B based on description of your profession/occupation)|
|Please answer sections A if you are an involved in public procurement tendering and contracting.|
|1) What departmental processes exist to your knowledge for soft market testing or stakeholder consultation prior to the commencement of your procurement process?|
|2) Does your department/government body encourage reservation of contracts for certain small and medium supported concerns during public procurement tendering?|
|3) Do you think E-procurement can facilitate SME growth? What is your departmental experience for this?|
|4) How do you support the main contractors who subcontract parts of the procurement contract to SMEs and what is your general policy for encouraging growth of the same during your bidding and evaluation processes?|
|5) Do you think that encouraging SMEs to form consortia in order to bid for contracts is a good option to promoting their growth?|
|6) Has your department considered providing any training to SMEs interested in the technical aspects of qualifications when applying for contracts or tenders?|
|7) How has your department ensured that the SME contractors and their supply chain are paid for their work on time?|
|8) During Prequalification questionnaires (PQQs) /ITT STAGE, do you make use of flexibility processes like accepting ‘equivalents’ for accreditation standards or financial information?|
|9) What is your experience of and perceived relevance of the consideration by public departments in considering financial thresholds of the SME when awarding a contract? Do you think this should be strictly proportionate to the value and subject matter of the public procurement contract?|
|10) Through what procedure do you take into account a bidder’s experience and references in your PQQ/ITT?|
|11) How do you ensure SMEs and local communities (or other external stakeholders) benefit from your procured contracts?|
|12) What are the main sources of SME funding with regards to the UK Construction industry and how can the government take into the account the difficulties in obtaining these during the public procurement bidding, evaluation and contracting processes?|
|Please answer sections B only if you are an SME owners, supply chain participants and private agents etc ONLY.|
|*Kindly complete the blank spaces to a and b|
|1) How would you describe your experience with the governmental processes for soft market testing or stakeholder consultation prior to the commencement of the procurement bidding and contracting process?|
|2) What are your views on the operation of or the lack thereof of encouragement provided by public sector procurement policies and procedures as they occur with the construction industry with regards to A – J below?|
|A) Reservation of contracts for certain small and medium scale enterprise?|
|B) E-procurement opportunities and their potential to facilitate SME growth?|
|C) The way the public sector body treats/relates to the main contractors who then later subcontract parts of the procurement to SMEs|
|D) Encouraging local SMEs to form consortia in order to bid for contracts|
|E) Pre-training for SMEs interested in the technical aspects of qualifications when applying for contracts or tenders?|
|F) Timely payment to the SME contractors and their associated supply chain?|
|G) The extent to which you are aware that the public sector body promotes flexible PQQ/ITT processes like accepting ‘equivalents’ for accreditation standards or financial information.|
|H) Perceived relevance of public sector bodies in considering financial thresholds of the SME when awarding a contract.|
|I) Your knowledge and understanding of the procedure for taking into account a bidder’s experience, financial resources and references at the PQQ/ITT stage.|
|J) What are the main sources of SME funding in the UK construction industry and how can the government take into the account the difficulties that exist in obtaining it, especially during the public procurement bidding, evaluation and contracting processes?|
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