Organisations across the UK, particularly those in the public sector, are
grappling with sustained inflationary pressures that directly impact budgetary
control and financial forecasting. These pressures not only affect the economic
health of the organisations but also their ability to deliver services
effectively. To remain competitive and financially viable, organisations must
routinely review both current and projected spending requirements. Failing to
do so results in significant cost overruns, often well above market trends.
Without an annual financial price review, typical costs increase by 7–9%,
amounting to £2.8M–£3.6M on a £40M annual budget. These unchecked increases
reduce purchasing power and diminish long-term budgetary efficiency.
Throughout a standard four-year Framework Agreement, assuming a
consistent annual turnover of £40M, total expenditure could rise by
£9.0M–£11.8M. This represents a 5.63%–7.38% increase above what would be
expected through regular market exposure and competitive pricing. Such
inflationary drift not only compromises value for money but also results in a
long-term erosion of the organisation’s spending effectiveness, often with
limited scope for retrospective correction.
Contractors, particularly within the public sector, tend to anchor
pricing discussions around the Retail Price Index (RPI), which typically
exceeds the Consumer Price Index (CPI). The RPI includes housing costs such as
mortgage interest payments, making it less relevant for assessing typical
supply cost inflation. By leveraging the higher index, suppliers can inflate
pricing beyond actual economic conditions, shifting the burden to public
budgets and ultimately taxpayers.
While many contracts specify CPI-linked adjustments, suppliers
frequently exploit the higher of the RPI or CPI over 12 months. This practice
creates an upward inflationary spiral, disconnected from actual cost bases. In
March 2023, for instance, the CPI inflation rate peaked at 10.1%, a level far
exceeding the real input costs faced by many suppliers, thereby artificially
inflating contract values to the detriment of public sector buyers.
The Misuse of Inflation Indices in Pricing
Suppliers often justify annual increases by citing headline inflation
figures, even when their actual costs have risen significantly less. In March
2023, despite the CPI reaching 10.1%, actual industry input increases were substantially
lower. Average increases for UK businesses included salaries at 7.1%, materials
at 4.1%, energy at 29.4%, transport at 6.8%, and land/building leases at just
2.9%. These figures reveal a gap between general inflation and sector-specific
input costs.
Variability between sectors and geographic regions means that cost
inflation is rarely uniform across all industries and regions. However, even
accounting for these variables, most suppliers experience overall cost
increases that are well below the CPI. Since turnover comprises both profit and
operating margin, basing inflationary increases on turnover rather than costs
results in unjustified price inflation. This practice undermines fair
procurement and introduces systemic inefficiencies into public sector
expenditure.
Calculations based on the March 2023 figures demonstrate the disparity.
A supplier with a £40M turnover and cost components aligned with the average UK
input weights would have experienced an actual cost increase of £1.76M, or 4.3%
of its turnover. Yet, applying a blanket CPI rate of 10.1% would result in an
additional £4.04M charged to customers. The discrepancy of £2.28M constitutes a
5.7% inflation above real market trends.
The Compounding Effect of Annual Price Increases
Annual inflationary increases based on turnover rather than cost rapidly
compound across the lifespan of multi-year contracts. A single year of
overpricing may be manageable, but when repeated annually, the cumulative
effect is substantial. Over a four-year agreement, customers could pay an
additional £7.23 million over the actual supplier cost growth. This undermines
public sector procurement strategies designed to promote efficiency and
accountability.
The practice of using the highest RPI or CPI rate from any point within
the previous year, rather than the rate applicable at the time of negotiation,
further distorts financial planning. Such practices do not enhance the quality
or delivery of goods and services. Instead, they artificially inflate contract
values and contribute to broader inflationary pressures across both the public
and private sectors.
Moreover, suppliers rarely provide evidence to substantiate cost
increases. In the absence of detailed breakdowns or benchmarking, procuring
organisations lack the necessary insight to challenge unjustified rises. This
lack of transparency limits commercial oversight and allows systematic
inefficiencies to persist. The result is a procurement environment that rewards
opacity over value for money.
These challenges are especially acute within the public sector, where
budget allocations are fixed and scrutiny is high. Without a strategic shift in
procurement policy, the current model perpetuates an inflationary loop that
disadvantages both public institutions and taxpayers. A strategic change in
procurement policy and commercial practice is not only desirable but essential
to break this cycle and ensure that pricing structures accurately reflect
supplier input costs.
Structural Weaknesses in Public Sector Procurement
Public sector frameworks are often structured in ways that favour
incumbent suppliers and discourage competitive tendering. This limits the
negotiating power of contracting authorities and increases the likelihood of
accepting inflated pricing structures. By embedding CPI-linked increases
without scrutiny, many public sector bodies inadvertently enable systematic
cost inflation that outpaces market realities.
A common misconception is that CPI-based pricing is inherently fair and
reflective of actual cost pressures. However, this assumption overlooks the
distinction between a supplier’s turnover and its exact cost base. In many
industries, costs account for only 42% of turnover. Applying CPI increases to
total turnover, rather than the cost base, results in overcompensation and
unjustified margin inflation.
Contract management practices in many public institutions remain
underdeveloped. Procurement teams often lack the necessary tools, training, and
authority to challenge price increases effectively. Additionally, the absence
of centralised commercial oversight or data analytics capabilities weakens the
ability of organisations to benchmark supplier performance or detect
inflationary trends. As a result, many price increases go unchallenged.
The combined effect of weak contract governance and unchallenged pricing
practices is a procurement environment that fails to deliver consistent value
for money. Institutional inertia and decentralised procurement decisions
exacerbate this issue, leaving public sector organisations exposed to
spiralling costs. A more proactive, commercially driven approach is urgently
needed to reform existing practices and protect public finances.
Introducing Smarter Procurement Strategies
To combat these structural inefficiencies, public sector bodies must
adopt a more commercial approach to procurement. Implementing open tendering
and robust market engagement can significantly reduce pricing disparities.
Competitive bidding encourages suppliers to align their proposals with actual
input costs, thereby discouraging reliance on headline inflation rates. It also
allows new market entrants to challenge incumbents and foster innovation.
Contract clauses should be designed to reflect genuine cost pressures, rather
than arbitrary inflation metrics. By incorporating inflation-sharing mechanisms
or indexation based on actual supplier costs, contracts can foster transparency
and fairness. Procurement frameworks must evolve from price acceptance to price
verification. This shift not only reduces costs but also strengthens
accountability across the supply chain.
Public bodies need to insist on detailed justifications for any proposed
price increases. Cost models, supplier audits, and benchmarking against
industry standards should become standard practice. By requiring transparency,
organisations can effectively scrutinise claims and reject unjustified uplifts.
This will also enhance supplier discipline and build trust in public
procurement processes.
Additionally, minimising maverick or non-compliant purchasing is
critical. By consolidating demand, aligning specifications, and reducing
non-value-adding expenditures, public sector organisations can enhance their
purchasing power and operational efficiency. Investing in procurement
capability and developing category management strategies will support long-term
financial sustainability and help mitigate inflationary risks.
Quantifying the National Cost of Procurement Inefficiencies
The failure to address procurement inefficiencies has considerable
national implications. If unchecked, UK public sector suppliers could pass on
an estimated £5.9 billion in unjustified costs annually. These figures reflect
not only excessive mark-ups but a systemic inflationary impact that raises the
overall CPI, placing additional pressure on public services and consumer prices
alike.
Adopting a coordinated, category-led commercial strategy could deliver
substantial savings. By applying consistent commercial principles and
challenging supplier pricing, the public sector could reduce overall spending
and create downward pressure on inflation. A drop in the CPI rate from 10.1% to
8.4% could be achieved through disciplined procurement practices alone,
offering widespread economic benefit.
The impact of more innovative procurement goes beyond individual
contract savings. It promotes broader fiscal responsibility, enhances public
service delivery, and boosts the credibility of procurement as a professional
discipline. Savings achieved through rigorous cost control can be reinvested in
frontline services or used to mitigate future financial risks.
Public sector leadership must take ownership of this agenda.
Implementing reform across thousands of contracting authorities requires
coordinated policy, training, and leadership across commercial sectors. By
embedding commercial thinking and leveraging data insights, public procurement
can become a powerful tool in managing inflation and delivering public value at
scale.
Reforming Procurement for Inflation Control
Procurement reform represents a practical and immediate step towards
reducing the impact of inflation across the UK economy, enabling suppliers to
adjust prices based on their turnover. At the same time, actual costs remain
significantly lower, thereby alleviating unnecessary financial strain on public
sector organisations. This outdated pricing model must be replaced with a
cost-reflective, value-driven framework.
Establishing clear pricing rules, enforcing justification protocols, and
applying data-driven procurement strategies can significantly improve cost
control. Procurement teams must be equipped with the skills and tools to
negotiate effectively and safeguard public funds. Transitioning towards more
intelligent frameworks that account for supplier costs rather than broad
inflation indices is crucial.
Ultimately, the shift required is both cultural and structural, calling
for a renewed focus on commercial discipline, accountability, and transparency.
With the right strategy and leadership, the public sector can curb inflationary
spending, reduce budgetary pressure, and ensure that procurement plays a
strategic role in delivering national financial resilience.
By addressing the underlying causes of procurement-led inflation and adopting intelligent commercial practices, the UK public sector can regain control over its spending trajectory. This will not only save billions in taxpayer funds but also help stabilise national inflation trends and contribute to a stronger economic future.
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