Independent Senator Nick Xenophon has taken aim at the Federal Government for bypassing local firms to award contracts to overseas companies.

He says that under "value for money" criteria, the Defence Materiel Organisation (DMO) has gone with a foreign company rather than Adelaide company Rossi to make 100,000 pairs of boots for the Australian military.

The five-year deal is worth about $15 million.

Senator Xenophon says current rules preclude the DMO from considering the wider benefits for the local economy of awarding a deal to an Australian business.

"What rankles me is that with the $40 billion that the Commonwealth spends on procurement each year they don't take into account local employment factors, the local multiplier effect of having something made here in Australia," he said.

"Even if there is a small price differential, in terms of value for money you're getting value for money in terms of jobs being kept here."

Rossi 'not told' why it failed

Sorry, this video has expired It came down to money: Australian boot manufacturer ( Interview by Joe O'Brien )

Rossi Boots CEO Neville Hayward is upset the company was not given enough detail of why it failed with its tender.

"We don’t know what the price differential was as we were told that was commercial in-confidence," he said.

"We do know our boots' quality is world-class and, unlike imported boots, we employ Australians who pay their taxes, like our company, and spend their wages in the local community."

Mr Hayward has gone to Canberra to urge the tender process be reopened and procurement rules reviewed.

"It's a pretty tough economy and we're feeling the demise of other businesses which potentially could have worn our type of product," he said.

"What this would have done is shore up the immediate future for us with a contract such as this.

"Frankly it's hard to believe. This actually would have meant increased staff. That would have been more jobs coming into Adelaide at a time that we need them to be coming in so the benefit is pretty obvious I think to the economy and what we want is a fair go for ourselves and for all Australian companies that are manufacturers."

Business SA chief executive Nigel McBride also is critical of the procurement arrangements.

"We understand that there are rules applying to government tendering but the rule about "value for money" should also include the value that the "multiplier effect" adds by way of using local product, the local jobs it would provide and the additional tax revenue that the Government would receive," he said.

"The cheapest tender is not always the best.

"The two biggest spenders in our state really are the Commonwealth Government and State Government. Now if both levels of government don't understand the need for small- to medium-sized enterprises to get a fair go, some fair access to this kind of spend, we're simply going to face a time where more and more small businesses fail."

An inquiry into government procurement rules, established by Senator Xenophon and Senator John Madigan of the Democratic Labour Party, is due to report later in the week.