Contract guidance for SME participation

This guide helps agencies facilitate participation by small and medium enterprises (SMEs) in government procurement. 

The NSW Government Procurement: Small and Medium Enterprises Policy Framework requires agencies to be aware of the impact of their procurement action on SMEs. The participation of SMEs in government procurement contributes to:

  • the development of the NSW economy by supporting SMEs, a significant and large group of employers across NSW
  • developing competition and innovation in markets
  • achieving value for money in government procurement.

In effect, agencies must consider the circumstances of SMEs when putting contracts together to make sure:

  • a suitable procurement process is chosen
  • the contract documentation is as simple, brief, and clearly expressed as possible
  • standard templates are used, but if different contract documents are used, the contract terms are commercially reasonable and address risk proportionately.

Agencies should note that contracts may be made directly with SMEs but SMEs may also be involved as a subcontractor to a supplier.

What is an SME?

An SME is defined in the NSW Government Procurement: Small and Medium Enterprises Policy Framework as 'a small and medium enterprise from NSW, other states and territories of Australia and New Zealand, with up to 200 full-time equivalent employees'.

Agencies should note that SME is different from a 'small business'. A small business is an Australian and New Zealand based firms that have an annual turnover of under $2 million in the latest financial year and this is relevant to payment of invoices to small business within 30 days or pay interest if not paid by then under Treasury Circular 11/12.

Selecting an appropriate procurement process

The first step for agencies is the selection of an appropriate procurement process to the SMEs that are likely to be interested in supplying the relevant goods and services.

In selecting the procurement process, agencies will be meeting some of their obligations under the NSW Government Procurement: Small and Medium Enterprises Policy Framework to maximise opportunities for SMEs to participate in government procurement.

For the procurement process, agencies should look at:

  • Small and Medium Enterprises Opportunities Statement sets out information such as identification of SME suppliers in the market, how the proposed procurement will support SMEs, and actions to encourage SME participation. The SME Opportunities Statement should be developed contemporaneously with any procurement strategy. Where a category plan is in place, or is being developed, there may be benefit in developing an SME Opportunities Statement at that time.

In completing these documents, agencies will be addressing the way in which SMEs can participate in any given government procurement.

Procurement process, market engagement and contract structuring design principles

The contract templates on ProcurePoint can be used by agencies to ensure the contract documents used in connection with a procurement are suitable for a SME.

If an agency uses different contract document, it must make sure those contracts are consistent with the following contract structuring principles so that they are suitable for SMEs in relation to all arrangements such as:

  • one-off contracts
  • contracts made under arrangements (see below)
  • the establishment of arrangements including panel contracts, or prequalification or registration schemes
  • processes that do not lead to award of contract, such as expression of interest process.

Agencies should ensure that a proposed market engagement takes account of the following:

  • reduce the burden and time taken to apply for SMEs. For example, documentation governing the panel or scheme should be simple, expressed in non-legal, plain language, and designed to reduce the need for legal review
  • provide for self-registration by SMEs
  • recognise prior registration/listing with other jurisdictions
  • consider market engagement arrangements that encourage innovative responses from the market and may allow SMEs to compete with other larger suppliers, such as expression of interest processes
  • consider market engagement arrangements that encourage partnering arrangements so that SMEs may form partnerships, joint ventures or consortia
  • measures for SMEs that do not use the internet.

Contract development

Agencies should check if an existing standard template can be used.

Where a different contract is used the following contract design principles should be applied:

  • The contract structure should be easy to navigate, with clear relationships between the different parts of the contract. For example, clear labelling of head agreement and schedules, a clear explanation of how the contract is structured and which parts take precedence, placement of key terms in prominent positions within the document.
  • The contract should be as brief and as concise as possible, appropriate to the nature of the procurement.
  • The contract should be written in plain English as far as possible.
  • Review the final contract documentation to ensure suppliers (particularly SMEs) do not need to conduct legal review of the documentation. This objective is enhanced where templates are used.
  • Appropriate allocation of risk to the supplier for considering the type of goods and services.

Main contract terms

As an overarching principle, agencies should consider the risk profile of the goods and services being procured – whether there have there been claims or problems in the past – and reflect these matters in the substantive contract terms. In selecting the insurances and other clauses relevant to risk, an agency would generally conduct a risk assessment as part of good government practice.

The following ‘starting positions’ are to be considered with the final contract being developed having regard to the nature of the goods and services being procured.

Contract period

Refer to the guidance on contract period in the Goods and Services Procurement Policy Framework. The nature of the goods and services and other matters are an important consideration, government agencies should consider how the contract period impacts the participation of SMEs (such as, whether long contract terms prevent a barrier to entry for SMEs who are not sufficiently established to enter into long term contractual commitments).  

Insurance

Government agencies should identify the insurable risks and consider the type/s and level of insurance to be requested. Professional indemnity insurance should only be required rarely and only if services of a professional nature are being provided and recognition should be given to professional liability limitation schemes. The levels of insurance set out in the template documents, even if different documents are used, can provide some guidance about insurance levels.

In addition to considerations applying to all suppliers, there are the following SME specific issues:

  • whether the type and level of insurance is available for SMEs in the market
  • whether the cost of the insurance is potentially prohibitive for SMEs
  • whether insurance is the preferred treatment for the risk, or whether another method is available to protect the Principal’s ability to recover from the supplier (either alone or in combination with insurances).

See Mandatory use of the Treasury Managed Fund (TMF) for all government insurance requirements. View the Treasury Circular TC12-12 

Liability

As a rule, liability of suppliers to government agencies/Principal in the contract should be commercially realistic in light of which party can control the risk, and preferably capped (for example at a multiple of the contract value) at an appropriate level for the nature of the goods or services.

Payment terms (30-day payment scheme)

Small businesses, as defined in the 30 Days to Pay Policy, are entitled to automatic payment terms specifying payment within 30 days. Where the policy applies, contract terms should reflect these requirements.

Dispute resolution

Dispute resolution processes should be as expedient and as low-cost as possible. In contracts with SMEs, mediation should be used for small businesses with a turnover of less than $2 million. Disputes should be referred to the Office of the NSW Small Business Commissioner for mediation.

Government policy

Where an SME supplier is required to comply with a government policy under a contract arrangement, additional effort should be made by agencies to clearly identify those policies and any particular requirements that are significant for government.

Specifications

The development of appropriate specification requirements is a matter for agencies, having regard to the nature of the goods or servicing being procured. However, general guidance is that specifications should be outcomes-based as opposed to technical requirements. Specifically they should not contain a mandatory requirement that a supplier has previous experience supplying to government.

Indirect contracting/subcontractor arrangements

As noted above, this guidance applies primarily to direct contracting with SMEs. However there is also a need for agencies to consider the impact of government contracting on SMEs where non-SMEs are contracting with government and subcontracting to SMEs down the contracting chain.

In those circumstances where an SME Participation Plan is required, provision should be made in the contract for implementation of the Plan by the head supplier.

This is for guidance only. Where there is uncertainty about application, agencies are requested to apply this guidance in a way that achieves the spirit and intent of the SME Policy Framework. That is, to actively and effectively facilitate the participation of SMEs.