Handling risk in procurement

In procurement there is always an element of risk and one has to be careful because a risk that is improperly managed could be fatal to the extent that it could destroy the entire business.

In procurement there is always an element of risk and one has to be careful because a risk that is improperly managed could be fatal to the extent that it could destroy the entire business.

Risks can come in form of the contractor failing to deliver, the products or service proving unsatisfactory in operation, the contractor’s business failing or the contractor absconding or the commercial environment may alter substantially for reasons outside of your control.

It is therefore very vital that measures be taken to alleviate such risks.  This seeks to put procedures in place to lessen the severity of an unplanned event, should it occur.

Risk identification. In designing a contract, the dangers likely to be encountered should be identified so that immediate measures are put in place to counteract those unplanned for incidents.  The associated risks can then be analysed and evaluated.

In procurement, there are threats associated with all contracts. The risks associated with these threats should be carefully assessed and appropriate steps taken to lessen their severity.  It may be that the price of a particular commodity is very unstable. The threat is that it may become so expensive that it becomes unaffordable.

Risk analysis. Dan Ntagugura, a consultant with KPS Associates, argues that in order to achieve a comprehensive risk analysis even for the smallest projects all stakeholders need to give it proportional effort.

He adds that risk analysis is a critical stage preceding project implementation.  He however explains that most Project managers are not aware of its importance, but most of the time it’s considered only on the basis of its underlying cost and time of undertaking rather than its purpose.

“Even when risk analysis is carried out, assessors may be barred by bias from declaring those technical threats which may hinder the project from being approved,” Ntagugura says.

“Whereas such is common in public projects where “absorption of funds” rather than efficient procurement decisions, similar cases are likely to occur in the private sector especially where approval mechanisms are merely dotted.”

He emphasises that firms should ensure some kind of progressive three-step process where risks are identified, analysed and respectively managed.

He adds that if this is done with a project team approach by competent employees and with adequate resources, it will help visualise and unlock potential bottlenecks likely to hinder success of the project to be implemented.

Risk management. Monitoring of risks should begin bid preparation, such as foresight of price escalation should be included in the bid documents, Ntagugura explains. He adds that the contractors can also always carry out risk assessment before they submit the bid documents.

He further explains that the project team can make a random collection of potential risks either through just brainstorming or by way of past experience or structured research.

A great deal of time and objectivity is required for this particular step as every issue is pointed out, provided it’s relevant to the context at hand and could be vital in order to subsequently achieve a thorough analysis, he adds.

He explains that risk management is a continuous process, which occurs simultaneously with the project execution and unless the right actions are undertaken before risks occur, it may be impossible to reverse potential occurrences or their impact on the project.

“While executing a project, there’s nothing else to manage but risk, however, one can only manage what they are fully and precisely aware about,” Ntagugura says.  He says that a manager’s competence is measured by how well they forecast and how effectively they counteract failure.

To do this, managers must not work in isolation, but in teams of multi disciplinary background as the scope of risks is crosscutting too, he advises.

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