Local authorities spend just a third of procurement budgets with local businesses, according to research from the Federation of Small Businesses (FSB).
The survey of 148 UK councils revealed that on average they spend 34.8% of their procurement budget with local companies.
In London councils spend as little as a fifth of their procurement budget with local businesses compared to 54% in Northern Ireland.
The FSB found that more than a third of councils do not actively record the geographical location of where their money is spent and 49% do not know the size of the businesses they trade with.
Of the local authorities that do collect the data, London-based councils spend the smallest proportion of their procurement budget with SMEs, at just 27% compared to a national average of 49%. The highest spend by local authorities with SMEs was found to be in Northern Ireland, at 71% of the total procurement budget, followed by Wales, at 61% and Scotland, at 51%.
In England, councils in the Yorkshire and Humber region and the north-west spend the highest amount of their total procurement budget with SMEs, at 63% and 60% respectively.
The FSB called for more accurate and public recording of council spending to help inform strategy and decision making, and to help build a better understanding of the link between procurement and local economic development.
It urged local authorities to put in place and monitor payment policies for small business suppliers, which should ideally follow the lead of national government pledges to pay within 10 days of receipt of goods or services.
The FSB also wants councils to have initiatives to support small firms with the tender process and to provide detailed feedback to unsuccessful businesses so they are better placed to bid in the future.
FSB chairman John Walker said: "Knowing where spend is going in the local area, as well as what type of businesses are getting contracts, would help councils focus on improving their procurement processes and ultimately boost local communities by helping councils to ensure their local small businesses are getting a fair chance to compete for contracts."
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