Thousands of small firms could be affected in the year ahead as a result of the financial troubles facing the outsourcing sector, the North East chair of insolvency and restructuring trade body R3 has warned.

According to figures from the Institute for Government, the value of subcontracts to small firms from government projects is estimated at over £34bn a year.

And now, Andrew Haslam, North East chair of R3 and head of specialist business advisory firm FRP Advisory LLP’s Newcastle office, is warning regional subcontractors to be more vigilant when entering into such arrangements.

He says: “Many thousands of subcontractors rely on indirect payments from government projects, but these subcontracts are not always the prize they may seem.

“Margins are usually very tight, so it is easy to make a loss, and ultimately small firms rely on the main contractors to pay them.

“Subcontractors should go into these projects with their eyes open. They need to ensure that their costings are absolutely accurate, their terms and conditions are tight enough to take account of unforeseen circumstances, and that they maintain strict financial management throughout.

“In insolvency cases, subcontractors are usually classed as unsecured creditors, and come behind banks and employees in the queue for payment. Many small subcontractors do not have cash reserves to fall back on, and in cases where a contractor collapses, those which might be at risk should take professional advice as soon as possible.”

According to an Institute for Government report from December, £284bn, or around a third of annual public expenditure, goes to external suppliers, with indirect payments to small firms accounting for around 12 per cent of that £34bn.

The report suggests the government currently has little understanding of how many subcontractors there are, and calls for better data and greater transparency in the supply chain.

Andrew Haslam adds: “£34bn is a significant chunk of the economy and clearly this money supports thousands of businesses and jobs in regions like the North East.

“While the government is good at picking up the pieces when something goes wrong, it has not been so good at putting prevention plans in place.

“Any company which becomes part of the subcontracting chain needs to be aware of the risks involved, and prepared to take swift action if necessary to safeguard their own business in the case of the insolvency of the main contractor.”