Reactive (response to change)

Defence Industrial Strategy 2025: what the SME procurement reforms mean for your business

The Ministry of Defence published its Defence Industrial Strategy in September 2025, targeting a 50% increase in SME spending to £7.5 billion by 2028. A new Office for Small Business Growth launched in February 2026 to help smaller firms win MoD contracts. This editorial explains the key reforms and how to position your business.

Change event: Defence Industrial Strategy 2025: SME procurement reforms and £7.5 billion target Effective 1 February 2026

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What is changing

The Ministry of Defence (MoD) published its Defence Industrial Strategy 2025: Making Defence an Engine for Growth on 8 September 2025. It sets out the biggest overhaul of defence procurement in a generation, with specific reforms aimed at opening up the £29 billion annual defence supply chain to more small and medium-sized businesses.

The strategy builds on the Procurement Act 2023, which came fully into force on 1 January 2026, replacing the previous EU-derived procurement regime with a single unified framework.

Current MoD SME spending
Approximately £5 billion per year (20% of UK defence spending)
New SME spending target
£7.5 billion per year by May 2028 (50% increase)
Direct SME contract share
Currently 4% of MoD contracts awarded directly to SMEs
SMEs in defence supply chain
Approximately 12,000 UK businesses
UK defence jobs supported
430,000 (1 in every 60 UK jobs)
Total defence budget 2025/26
£62.2 billion, rising to £73.5 billion by 2028/29
Defence spending target
2.5% of GDP from April 2027 (2.6% including intelligence agencies)

Office for Small Business Growth

The MoD launched the Defence Office for Small Business Growth in February 2026. This is a dedicated unit within the MoD designed to help SMEs navigate defence procurement. It offers:

  • Tailored guidance from commercial experts on how to bid for and win MoD contracts
  • A confidential channel for firms to raise concerns about procurement processes, unfair treatment, or barriers to entry
  • Forward visibility of upcoming procurement opportunities through a published schedule, enabling better planning and investment

The office addresses a longstanding concern: while 12,000 SMEs work in defence, only 4% of contract value goes directly to small firms. Much of the remaining SME spend flows through prime contractors as subcontracting, where smaller businesses have less visibility and bargaining power.

Faster contract timelines

The strategy commits to halving contract award timelines across the board:

  • Five-year processes reduced to two years
  • Two-year processes reduced to one year
  • One-year negotiations shortened to a matter of months

For SMEs, long procurement cycles are a significant barrier. Smaller firms often cannot sustain the cash flow and staff commitment needed for multi-year bidding processes. Faster timelines reduce this burden and make defence contracts more accessible.

Single Source Contract Regulations reform

The Single Source Contract Regulations (SSCR) framework governs contracts awarded without competitive tender. In the year to April 2025, 49% of new MoD contract value was awarded non-competitively — the highest proportion since 2016.

The strategy proposes an overhaul of the SSCR to:

  • Improve incentive alignment between the MoD and suppliers
  • Increase SME access to single-source opportunities
  • Drive innovation, productivity, and simplification
  • Introduce closer scrutiny of incumbent contractors

This reform is significant because single-source contracts have historically been dominated by a small number of large prime contractors. Opening these up creates new entry points for specialist SMEs.

Priority investment areas

The strategy identifies sectors where defence spending will concentrate over the next decade. If your business operates in any of these areas, you are likely to see increased procurement opportunities:

  • AI and autonomous systems — minimum 10% of equipment spending ringfenced for emerging technologies including drones and AI
  • Cyber security and digital capabilities — at least £1 billion earmarked for an integrated Digital Targeting Web
  • Munitions manufacturing — six new munitions factories and procurement of up to 7,000 UK-built long-range weapons
  • Shipbuilding and combat air — major programmes including the Naval Support Integrated Global Network (£7.89 billion over 10 years)
  • Space and quantum technologies
  • Construction and facilities management — including upgrading 40,000 military homes

What you need to do

If you want to supply the MoD:

  • Register on Contracts Finder and the Defence Sourcing Portal to see upcoming opportunities
  • Contact the Defence Office for Small Business Growth for guidance on the bidding process and requirements
  • Get Cyber Essentials certified — this is required for most government contracts handling sensitive information
  • Obtain security clearances if your work involves classified material or sites
  • Review the Procurement Act 2023 requirements — all above-threshold public contracts now use the central digital platform with mandatory transparency notices
  • Check export control requirements if your products or technology have military or dual-use applications

Regional spread of defence spending

Defence spending is distributed across the UK, not concentrated in London. In 2023/24, 68% of MoD spending went to businesses outside London and the South East. The largest regional shares were the South West (£6.9 billion), North West (£3.8 billion), Scotland (£2.1 billion), and West Midlands (£1.6 billion). Wales received £910 million and Northern Ireland £240 million.

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