What are the major risk areas in Procurement?

Some major risk in procurement.

• Failure to secure ongoing supply critical to the organization.
• Insufficient lead-time.
• Misrepresentation of facts by potential suppliers.
• Selection of inappropriate procurement strategy.
• Use of inappropriate evaluation criteria
• Unethical practice
• Breach of confidentiality
• External factors like: Natural calamity, unstable government etc.

Contracting is all about risk allocation and minimizing risk to include cost, schedule and performance. The more vague the contract work statement, the more risk that the Government assumes.

Risk from Program Manager, Contracting and Investor's Perspective:

Risk. A measure of the inability to achieve program objectives within defined cost and schedule constraints. Risk is associated with all aspects of the program, for example, threat, technology, design processes, Work breakdown structure (WBS) elements, etc. It has two components, the probability of failing to achieve a particular outcome, and the consequences of failing to achieve that outcome.

Risk from a Lawyer’s Standpoint:

Does this contract adequately describe all essential work / expectations, is there a schedule and is it enforceable? What are our remedies, if any?

Requiring activities and frequently contracting officers want to get an acquisition on contract as quickly as possible; sometimes too quickly. Thus, contracting officers and acquisition attorneys will frequently have to carefully review the overall acquisition to identify risks to cost, schedule and performance and recommend mitigation measures to decrease these risk areas.

Risk from an Investor's perspective:

What is my expected payoff? The larger the expected payoff, the larger the associated risk, and vice versa. An Investor, who is a shareholder in a contracting company, will seek to carefully balance the expected payoff with the associated risk, and he is incentivized to seek a large payoff, as long as the risk is acceptable. This perspective is unique in the sense that risk represents both opportunity and danger to the Investor, while it only represents danger to the Program Manager and the Lawyer.

In other words, there is a misalignment in the perception of risk between the Program Manager, the Lawyer, and the Investor. It is ultimately the Investor who owns the contracting company, and this misalignment will have an effect on the Investor's behavior and the stock's performance.

The major risks of procurement originates from the lack of proper strategic procurement planning. 

i)  Lack of mission

This form the basis why an  institution or corporate find the need for procurement. Lack of proper definition of the purpose or duty of procurement.

ii) Lack of vision

There is special need to understand the future of an organisation so procurement needs to be aligned and relevant as far as the future of the organisation is concerned. Lack of vision creates conflict of interest 

iii) Conflict of goals

in procurement you need to set realistic goals which are realistic, achievable and must be in great sync with the goals of the organisation.

iv) Conflict of Objectives

In procurement you need to to understand the reason for the assignment and the reason for a particular organisation. Conflict of objectives creates disorder in tracking , time frames,attaining goals, progress check and relevance.

The Main Factors of Risk in the procurement process are as follows:-

1.         Identifying the need and planning the purchase

2.         Developing the specification

3.         Selecting the purchasing method

4.         Purchasing documentation

5.         Inviting, clarifying and closing offers

6.         Evaluating offers

7.         Selecting the successful tenderer

8.         Negotiations

9.         Contract management

.       Evaluating the procurement process

.       Disposals

unethical personnel and vendors

ordering or receiving orders late

but the biggest is finance not paying bills and putting the company into a% risk factor; not having the purchasing power or being put on credit hold

The procurement and contract administration process are prone to risks. There are risks in determining need and planning procurement's, developing specifications, selecting the appropriate procurement methods, preparing solicitation documents and calling for offers, evaluation and selection of firms and individuals, negotiating the contract, and contract administration.

Procurement management is about solving problems and managing risks. Customers need supplies and services to solve immediate and future needs. They usually have little understanding of procurement and unrealistic expectations about the procurement process. Procurement planning and strategy development are important to reduce risk in the procurement process. A comprehensive understanding of the procurement process, principles and guidelines is also important to finding appropriate solutions and minimizing risks.

 The following is a summary of the generic areas of Procurement risk

1-Project Definition Risk      (Project not adequately defined)

The very first activity in the contract cycle is the project definition stage. It is often the case that goals are not clear, or the goals are not properly translated into a suitable project. Consequently, the outcome is not in accordance with the actual objectives. This problem often manifests itself as in people 'jumping to a solution' before being clear about what they are trying to achieve. 

• It is good practice to define the objective in functional terms rather than any particular solution. This allows easier implementation of innovative ideas or technology.
• Sometimes goals are set that are unrealistic, or simply cannot be achieved.
• The procurement process is vital in this stage. A sound procurement process enables these risks to be avoided, reducing the overall cost of the project, and enhancing the likelihood of a successful outcome.

2-Performance risk  (Contractor unable to deliver to specification)

The most significant risk to the successful completion of a project is that the Contractor does not have the capability to deliver to specification. This creates the potential for money and time to be wasted, and weakens the Principal's position in regard to engaging an alternative Contractor. Suggested means of ameliorating the risk include:

• Qualification of suppliers, including accreditation for any relevant processes.
• Comprehensive tender evaluation criteria.
• Requiring tenderer to detail extensively their capabilities, and management plans for key areas of the contract.
• Referring to the Contractor's past performance.
• Similar vetting of any subcontractors.
• Ensuring that contract arrangements are suitable.  e.g. staged tender process.
• Require either proven technology & methods, or trials, tests & demonstrations.
• Ensuring Contractor's financial stability.
• Performance based specifications allowing use of best available technology.
• Clearly defined and agreed post-delivery (after-sales) obligations.

3-Financial risk        (Contract costs exceed estimate) 

Perhaps the second biggest risk to a successful project is that its costs will blow out far beyond the estimates that were used in the economic justification. There are a wide variety of possible sources of and treatments to address this risk, including the following:

• Shared understanding and agreement as to the scope of the project.
• Sound competitive tendering processes.
• Fixed or variable prices, contract rates.
• Performance penalties and incentives.
• Coordination of work.
• Cost adjustment process.
• Exchange rate variations.
• Loss of or damage to goods.
• Insurances, bank guarantees.
• Project management, cost control.
• General conditions of contract.
• Method of payment.

4-Functional Risk     (Task is not done to requirements)

Possibly the third biggest risk to a successful contract is that it may not achieve the desired requirements. This may be due to the requirements not being clear either to the Principal or to the Contractor. Issues requiring consideration include:

• Is it the best method of achieving those objectives?
• Has it passed economic evaluation?
• Are the functional requirements clearly documented?
• Does the specification clearly outline functional and technical requirements?
• Can we measure and verify the achievement of these requirements?
• Do the tenderer understand the requirements?

Methods of communicating the requirements and verifying that they are understood include:

• A good specification and description of work, with clear definition of relevant documents.
• Site inspections.
• Tender inquiries.
• Requirement for tenderer to acquire all necessary information.
• Post tender submission.
• Post tender meeting.
• Sound tender evaluation procedure.

 Methods of ensuring ongoing adherence to the requirements include:

• Project management/quality plans, procedures, audits.
• Test and verification procedures.
• Site conferences.
• Recording of activities.
• Measurement of outcomes at specified milestones, and initiating corrective action.

 5-Schedule Risk    (Contract takes too long)

A significant risk area is that delays can occur in the schedule, which may ultimately threaten the project completion and costs. Methods of mitigating this risk include:

• Identification and discussion on delivery risks with the contractor (pre and/or   post tender).
• Agreed contract program, with milestones.
• Staged program, including studies and trials if project is innovative.
• Regular reporting requirements on the part of the Contractor.
• Regular monitoring of progress and corrective action as required.
• Payments related to progress.
• Coordination of the work.

 6- Legal Risk (Contract is in breach of laws)

A significant risk is that the contract may not be conducted in accordance with relevant laws. This presents a two fold problem. Firstly, the relevant laws must be known, and secondly compliance must be assured. Risk areas are as follows:

• Compliance with international treaties - the number of these treaties is increasing all the time, as the level of international cooperation on problems that are seen to be global increases
• Interference with other services such as electricity, telecommunications, gas and railways. Damage or interference with other services requires that the injured party be compensated.
• Protection of the public from danger or nuisance due to explosives, noise, vibration, traffic hazards, chemicals etc...
• Minimizing inconvenience to public and disruption to business, through restriction of access to private property. This also applies to landholders whose property is acquired for the purpose of road works.
• Compliance with Council requirements.
• Compliance with Taxation laws.

Compliance with other laws such as:

• Road Traffic Act.
• Railway operations.
• Environment Protection.
• Pest Plants.
• Country fires.
• Historic relics.
• Aboriginal Heritage.
• Compliance with labor laws such as awards, training, occupational health, safety and welfare. 

7-Prudential Risk     (Contract breaches good business ethics)

This is the risk of anything that could result in damage to either the finances or the reputation of the organisation through lack of probity or unfair practice.

These risks must also be managed in accordance with the Prudential Management Framework which is an overarching set of principles and practices that are to be applied in projects and arrangements with the private sector.

 Prudential risk includes such matters as:

• Open and fair tendering practices. No party should be discriminated against, or favored, by any clause in the contract, or any part of the tendering procedure. This covers such matters as submission of tenders, opening of tenders, non-conforming tenders, and acceptance of tenders.
• Administrative arrangements must be such as to prevent unauthorized access to information, fraudulent use of authorities, conflict of interest, and to ensure fair dealing at all times. This includes any contractually mandated directions must be in writing, for example instructions from the Principal's site representative.
• Any systems must be secure from unauthorized use and access to information, fraud, unfair advantage, failure etc.

 8-Political Risk         (Action which, whilst not illegal, has political impact)

Transport is a portfolio that attracts considerable public interest; many people are affected in one way or the other by decisions about the transport system. Consequently, there is always likelihood that a project will attract political interest.

The Agency must ensure that the political sensitivity of proposals be properly considered, and are subject to due consultation with the public. These processes should be open and transparent, so that any political impact is either minimized or at least seen well in advance.

• Proper consideration of public interests.
• Inconvenience to public services.

9-Environmental Risk

All products (goods and services) have some impact on the environment. These impacts may occur at any or all stages of the product’s life cycle; from production, delivery, use, maintenance and disposal. If unman-aged, environmental issues have the potential to increase life cycle cost of the product, adversely impact on human health, contribute to ecosystem deterioration and resource depletion.

Environmental issues to consider include:

• Energy: consumption, efficiency, sources (renewable).
• Water: consumption, efficiency, sources (potable, non-potable, recycled).
• Materials: minimization, non-hazardous, low toxicity, sustainable sourced, recycled content.
• Greenhouse gas emissions: minimization, carbon offset, fuel types.
• Air and water pollution: minimization of toxic emissions and discharges.
• Waste: avoid, reduce, reuse, recycle, recover, treat, and dispose.

There are long list, but for me is to secure my down payment is the most important, and then time frame, and other evaluation criteria which can be listed as below;

1. Identifying the need and planning the purchase

2. Developing the specification

3. Selecting the purchasing method

4. Purchasing documentation

5. Inviting, clarifying and closing offers

6. Evaluating offers

7. Selecting the tenderer

8. Negotiations

9. Contract management

Risks to procurement can come from several types of sources, namely:

1.     External factors: External factors can include political, economic, and even nature.

2.     Project complexity: Project complexity may lead to objective difficulty in specifying requirements, either because conditions are not fully known or the requirement is subject to change for political or other reasons

3.     Project planning: Where project planning not properly carried out, this can contribute to each of the negative outcomes referred above, as well as to friction in relations among colleagues.

4.     Procurement process: The procurement process contains in each of its stages, multiple specific risks and consequences. Managing these risks is part of the professional responsibility of each procurement officer.  

5.     Fraud, corruption and unprofessional conduct. Fraud, corruption and unprofessional conduct can enter into any stage of the procurement process, producing the risk of loss of organizational resources and budget for inappropriate supply, with corresponding great damage to the image of the organization.