Procurement Manual:
Good Practice 2
2. Risk Management
and Handling Change
A. Risk Management and Handling Changes
B. Supplier performance and
risk management
A. Risk Management and Handling Changes
Changes are almost inevitable during the period of a contract, particularly in the case of large, complex construction and service contracts. They should not necessarily be
seen as causes for concern but, when effectively managed, as opportunities to improve the contract outputs.
It is important, therefore, to understand the implication of
change for both parties. Significant changes will affect the
scope and potentially the viability of the contract for either
party. If a change results in a reduction in the value or
scope of the contract, the organisation could be faced with
claims for increases in charges and/or legal claims that
there was, for example, misrepresentation in relation to
the likely volumes required over the period of the contract.
If the change results in a substantial increase in the value
or scope, it is important that the organisation continues to
ensure that value for money is secured. Public sector organisations should also be aware that the requirements of
the EC procurement directives may affect what changes
can be made.
Change can be driven by a number of factors such as:
C. Apportioning Risk
D. Tracking Changes
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Amendments to the parties’ strategies and objectives;
Changing business needs of the organisation;
Market changes;
Technological developments;
Economic trends that affect the viability of the contract;
Legislative change.
These, in turn, can lead to changes in the service required, the metrics needed, service infrastructure and
workload.
Changes are easier to manage when planned.
Even the effects of an unexpected, externally driven change can often be mitigated through, for example, ongoing risk assessment and the phasing-in of any implementation.
Changes will require negotiation with the provider and the introduction of amendments scheduled to
avoid workload peaks and year-end activities where possible. Changes should be managed using
change control procedures. Wherever possible, the outcome should be agreed with the supplier
before instructing a change.
It is generally expected that you cannot allow for
every possible eventuality but you can hedge your bets!
Procurement Team: University of Exeter August 2010
B. Supplier Performance and Risk Management
Supplier performance and the status of supplier relationships have a direct bearing on a buyer’s
risk profile. This is one of the main reasons why supplier performance and contract management is
necessary. In this respect, risk management can be seen a dynamic process. The risk profile you
face should reflect:
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the importance of the contract;
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the stability of the relationship with the supplier;
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any change in circumstances that will affect the position of the supplier or your dependency
on the product or service being supplied.
Risk management is an established profession in its own right and there are various risk tools and
models that can predict and manage risk. Even if there is a Risk Manager on board, the contracts
professional will still be key to any risk strategy because understanding the contract and the implications of failure is an important part of the risk process.
C. Apportioning Risk
As risk and reward is all about understanding the consequences of agreeing to contract for something in a certain way, good practice is for the Contract Manager and pre-planning group to ask:
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Is asking your supplier to take all the risk the right thing to do?
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Are they sufficiently equipped to shoulder this burden and will you be inflating the price you
pay due to the risk premium the supplier is attaching to a risk, which, by its very nature, may
not occur?
Contract managers need to understand how deals are put together and the implications of how
commercial tensions can alter the shape of the deal and affect risk and reward. Being able to assess opportunities and threats while staying aware of the bigger picture is essential. Best practice
would be to:
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Include risk management obligations on the parties in the contract
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Insist on regular risk meetings and the frequency and format of the reporting as contractual
commitments.
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Fully understand the contract and the deliverables of both parties to be able to monitor the
likelihood of a risk.
D. Tracking Changes
Tracking the obligations due over the term of the contract (especially in the first 6 months) you
should be able to monitor see what is on track and what is slipping. By adding a ‘traffic light’ ranking
system this can easily be distilled into a summary for reporting purposes.
If a potential risk has been identified as particularly problematic, it may be possible to put steps in
place that could be implemented if the worst did happen. For example, it is common for IT contracts
to contain business continuity obligations and disaster recovery provisions.
Procurement Team: University of Exeter August 2010
A contracts professional can’t use a crystal ball to predict and
guard against every possible risk – but the key is knowing what
to do when a risk presents itself and understanding the potential risks
Other useful references
Procurement Manual: Good Practice 1: Contract Management Responsibilities and Duties
Procurement Manual: Good Practice 3: Supplier Appraisal
Procurement Manual: Good Practice 4: Assessing Supplier Performance
Procurement Team: University of Exeter August 2010