Quick answer: If your organisation pays in 60 days, imposes retentions without good reason, or passes down onerous terms through the supply chain, you are actively shrinking the pool of suppliers willing to bid for your work — and no amount of supplier development activity will fix that.
The problem nobody wants to name in the committee room
I have sat in more procurement committees than I care to count where the same conversation happens. Concern about thin markets. Discussion about why SMEs aren't bidding. A proposal for a supplier engagement event. Approval of a new supplier development initiative.
And then, in the same meeting, sign-off on payment terms of 60 days and a retention clause that would make a commercial lawyer wince.
The connection is rarely made. It should be.
What your payment terms actually signal
Suppliers — particularly smaller ones — read your payment terms before they read your specification. They have to. Cash flow is existential for an SME in a way it simply isn't for a large organisation with a treasury function and a revolving credit facility.
When a 12-person civil engineering firm sees 60-day payment terms on a public sector tender, the mental arithmetic is immediate: they will be financing your project for two months on every invoice. For a contract worth £200,000 a year, that can mean carrying £30,000 or more of working capital at any given time. Many of them simply can't. So they don't bid.
You don't see them in your tender returns. You conclude the market is thin. It isn't. You've filtered it out before it got to you.
The Procurement Act position
The Procurement Act 2023 and its accompanying provisions aren't silent on this. The government's wider prompt payment agenda — 30-day payment terms mandated in public contracts, the requirement to report on payment performance — exists precisely because Parliament understood what slow payment does to supplier markets.
Under the Act, contracting authorities are expected to include 30-day payment terms as standard, and to flow those terms down through the supply chain. That second part matters. A prime contractor who is paid in 30 days but pays their subcontractors in 60 is not complying with the spirit of the regime, and increasingly, not with its letter either.
If your standard contract template still has 60-day terms in it, your legal team needs to look at it again.
Retentions: the hidden cash drain
Payment terms are the visible part of the problem. Retentions are where things get quietly punishing.
Retaining 5% of contract value against defects is a practice with a long history in construction and related sectors. It also represents a significant interest-free loan from your supplier to you, often held for 12 months or more, sometimes never released at all if your internal processes for signing off practical completion are as chaotic as they are in some authorities I have encountered.
The construction industry has lobbied for retention reform for years. The government has consulted on it repeatedly. In the meantime, if you are holding retentions, ask yourself honestly: are they proportionate to the actual risk? Are you releasing them promptly when conditions are met? Do your suppliers know when and how they will be released?
If the answer to any of those is unclear, you have a problem — and it is showing up in your tender return rates.
Supply chain terms: the part you think isn't your problem
It is your problem.
If you are awarding large contracts to prime contractors who then impose 60, 90 or 120-day terms on their supply chain, the SMEs doing the actual delivery work are being crushed by terms they had no hand in negotiating. This directly undermines any social value commitments your prime has made about SME and local supply chain engagement. You cannot credibly require a contractor to use local SMEs and then allow them to pay those SMEs quarterly.
Include supply chain payment requirements in your contract terms. Ask for evidence of compliance during contract management. It is not onerous. It is just actually managing the contract you have awarded.
What good looks like
30-day payment terms, stated clearly in the tender documents, not buried in a schedule. Retentions limited to genuine risk scenarios, with a clear release process that someone is actually responsible for. Supply chain payment terms that flow down proportionately. A payment performance report that someone reads and acts on.
None of this is complicated procurement practice. It is basic commercial fairness, and it is one of the most direct levers you have for making your supplier market broader, more competitive, and more resilient.
Practical takeaway: Pull your current standard contract template and check the payment terms, retention clauses, and any supply chain payment provisions. If they haven't been reviewed since the Procurement Act came into force, they are overdue. Fix the terms first. Then run the supplier engagement event.