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Some major risk in procurement.
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.
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:
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:
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:
Methods of communicating the requirements and verifying that they are understood include:
Methods of ensuring ongoing adherence to the requirements include:
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:
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 other laws such as:
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:
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.
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:
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;
Identifying the need and planning the purchase
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.
