Inflation in public sector procurement

You don’t need to look at the news headlines to know that money is a big issue for lots of people right now. Everywhere you look, prices are going up.

Organisations are feeling the pinch, too. Many are cutting back costs, renegotiating contracts, and pursuing efficiencies that will help reduce the impact of spiralling costs on their customer-focussed targets and bottom line.

But what happens when you’re providing essential services, and you can’t cut back? When your suppliers are feeling the pinch too, how do you agree and manage contracts that represent a fair situation for both sides? And how do you manage the uncertainty when you know those costs will likely continue to spiral throughout the length of any agreement?

Public sector procurement challenges

It’s no secret that public sector procurement has faced its fair share of challenges over the past few years, including changing EU procurement regulations as a result of Brexit, recovery from the COVID-19 pandemic, difficulties?attracting staff with the right skills, the need to?manage supply chain risk, and ongoing budget constraints. Add to this further uncertainty caused by the conflict in Ukraine and widespread inflation in the UK, and it’s not difficult to see why?public sector procurement professionals might need a helping hand right now.

We’ve talked before about how strong supplier relationships established and maintained through sound processes,?effective contract tendering?and?negotiation, and?ongoing communication and transparency, can help procurement professionals to navigate challenging times.

But, when both buyer and supplier are cash-strapped and costs are uncertain, who foots the bill when costs inevitably creep up? Especially when, right now, it feels like the sky’s the limit in some areas.

Public sector supply: what’s happening?

Suppliers are feeling the pain, and it’s impacting how they are able to work with public sector organisations, especially in terms of the goods and works they can provide.

Some of the different factors increasing costs and uncertainty include:

? Rising cost of materials: Government figures published in April this year put costs for critical building materials at a record high. In February, the cost for rebar had increased by 44% on the same time last year, fabricated structural steel by 36%, particle board by 45%, imported plywood by 29%, and pre-cast concrete products by 26%.

? Shortage of quality materials: Increased demand across the board, together with the delayed impact of COVID-19-related shutdowns on stock levels in production and manufacturing, is causing shortages of some materials and resulting in a reduction in quality in some areas as materials suppliers race to fill the gap.

? Labour shortages and increased costs: Labour is in short supply, and is costing more. Meanwhile fuel, energy and all other costs are rising for suppliers too, just as they are for buyers.

Supplier challenges: the impact

Suppliers are less able to provide long-term assurances about input prices and delivery timescales. No one is going to commit to a sustained fixed price arrangement in this climate. Many are not prepared to enter into long-term contracts when the future is so unpredictable.

In order to get things done, many public sector providers are removing their higher level service requirements and standards for suppliers in an effort to help counteract their rising costs. Social value clauses are being placed to one side. With?ethical considerations?high on the public sector agenda, no one wants to be responsible for driving a supplier out of business, particularly one in their local area and employing local people.

In all this, delays in projects being completed are inevitably having a knock-on effect on housing association tenants, nursing and care home residents, and other public sector stakeholders.

No one wants to do less, but the reality is that budgets are beyond stretched.

The public sector wants to get things done in a timely way. But, until the current rigid public sector procurement rules preventing negotiations mid-contract are revised next year, they don’t necessarily have the flexibility to do so.

Many suppliers actively want to work with the public sector – but they don’t know how to right now.

The future of public sector procurement

At eXceeding, we believe that – in spite of recent and ongoing challenges – the future of public sector procurement is bright.

During extended periods of economic uncertainty in the past, public sector procurement has been a catalyst for growth in local communities. As the rising cost of living reduces consumer spending, private sector organisations feeling the impact of that reduced consumer spending become more risk averse, resulting in less investment and less growth in the economy. However, targeted Government procurement activities have proved to be a direct stimulus for local economies, ultimately boosting the overall economic picture.

Public sector procurement has been shown to boost employment among local people, increase innovation, and promote the development of skills and training opportunities for local communities.

Public money is one of the few levers governments have to mitigate against economic uncertainty. By making more cash available to SMEs through increasing the number of public sector contracts going to tender, governments can indirectly stimulate the forces that help to mitigate the rising cost of living.

Meanwhile, an increase in public procurement activities provides the supply and price stability that ultimately leads to more confidence in the wider market.

What intervention the UK Government may or may not choose to make in the next few months remains uncertain, and we’re not claiming to have any insider knowledge of the Chancellor’s plans for future economic stimulus. But if more public money is made available, we believe it makes sense that public sector buyers and suppliers are ready for it.