GUIDANCE NOTE
RISK MANAGEMENT IN PROCUREMENT
The purpose of this Guidance Note is to outline a process for managing risk during
the procurement and contract management process. The issues highlighted in this
note cover some generic risks relevant to most procurements which may need to be
supplemented for the activity being considered. In addition, Project Managers should
also consider Risk Management in relation to the broader project, as the
procurement process may only be one small component of it.
Introduction
Risk is defined as a measure of the likelihood and consequence of an occurrence.
Risk management is defined as the systematic application of management policies,
procedures and practices to the tasks of establishing the context of risk, identifying,
analysing, evaluation, treating, monitoring and communicating risk.
The extent of risk management undertaken should be appropriate to the size and
complexity of the project. The State Procurement Board’s Acquisition Planning
Guideline considers five questions in determining risk:
1.
Is the supply market competitive and has it the capacity to meet the
requirements of demand?
2.
Can the public authority readily continue to function (meet all key customer
needs) if supply is interrupted?
3.
Is there a low probability that the goods/services will be superseded or become
obsolete during the life of the contract?
4.
Is provision and ongoing use of the good/service considered to be highly safe
and will it involve low environmental impact?
5.
Is stakeholder and public interest in the purchase low?
If the answer to any of the above questions is NO, the procurement may be
considered to be high risk. However, further assessment of the risks involved in the
procurement should be undertaken before classifying the procurement as high risk.
When should I complete a risk management plan?
It is recommended that major purchases of standard goods and services and all
purchases of complex goods and services have a documented risk management
plan. A risk management plan is required where a procurement value exceeds
$220,000 and/or the answer is NO to any of the above five questions.
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Who’s Responsibility is it?
It is the responsibility of all employees to assist in the identification and effective
management of risks likely to affect the Attorney-General’s Department.
Notwithstanding this, the Project Manager for a procurement project has overall
responsibility for the effective and efficient management of the procurement including
taking into account the risks at each stage of the procurement process.
Principles of Managing Risk
The key principles of managing risk in procurement are:

Early and systematic identification, analysis and assessment of risks, including
conflicts of interest and the development of plans for handling them;

Allocation and acceptance of responsibility to the party best placed to manage
risks; and

Ensuring that the costs incurred in managing risks are commensurate with the
importance of the purchase and the risks to the agency’s operations.
Risk Management Process
The Risk Management Process comprises the following stages:

Establish the context of risk (what is the extent, nature and interrelationships of
the procurement)

Identify the Risks

Analyse and Quantify the Risks (determine likelihood and consequence)

Evaluate and Prioritise the Risks

Treat the Risks
In addition, communication and consultation, and monitoring and review should take
place throughout the process.
Common Procurement Risk Areas
There are 7 key areas where common procurement risks may arise:
-
Planning and Preparation
-
Product / Services
-
Procurement Process
-
Industry and Suppliers
-
Management
-
Stakeholders
-
Contract
Annex A lists many of the common risks which may arise in relation to these areas
with some frequently used risk mitigation strategies. However, this list is not
exhaustive, not all issues will apply to all procurements and the suggested risk
mitigation strategies may not be appropriate for a particular procurement. An
individual risk assessment should, therefore, be carried out for each procurement.
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ANNEX A
COMMON PROCUREMENT RISKS AND OPTIONS FOR MITIGATION
RISK
COMMON MITIGATION OPTIONS
1. Planning and Preparation
Unrealistic
time
expectations
Conflict
with
contracts / supply
/
cost
existing
Limited capacity to access
necessary information
Legal complexities
-
Specification to be clear and comprehensive to limit scope creep or variations.
-
Give clear timeframes and payment terms based on completion within specified timeframe.
-
Establish expected timelines and key milestones for the procurement process. Take into account other work
pressures and build in some cushioning to allow for unexpected delays. Consider which elements are contingent on
the successful completion of others. Identify elements which are outside of the project team’s control.
-
Market research (including discussions with other government Departments who have carried out similar
procurements) may help in identifying likely costs and timeframes.
-
Consider building in a time/cost contingency to allow for any unforeseen costs, tasks or delays.
-
Investigate whether there are existing supply arrangements in place.
-
Ensure existing policies & procedures are followed.
-
Seek expert advice where necessary.
-
Ensure adequate resources are available for the project.
-
Consider contingency arrangements if assumptions are incorrect.
-
Make contact with other departments and/or jurisdictions who may have undertaken similar procurement projects.
-
Seek Crown Law advice if:
o
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ANNEX A
RISK
COMMON MITIGATION OPTIONS
o
Delays in obtaining approvals
Incorrect method of approach
selected
there are legal implications to your proposal.
-
Confirm approval requirements and likely timescales (e.g. discuss with Procurement Services)
-
Check when schedule meetings (eg PGC and State Procurement Board) are occurring and ensure that you schedule
the procurement to take these dates into account.
-
Factor in time to prepare documentation and seek the required approvals.
-
Ensure key parties are aware of any time constraints.
-
Check availability of key parties.
-
Market research may identify potential supplier issues.
-
When in doubt consider an open market approach as the first option potentially through an expression of interest
process.
-
Seek advice of Procurement Services.
-
Market research may identify possible suppliers.
-
Provide specific details about the product / services required and use generic descriptions where possible.
-
Build in an appropriate lead time.
-
Specification should be clear and comprehensive.
-
Engage expert assistance where necessary.
2. Product / Service
Limited availability
Complex to manufacture or
deliver
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ANNEX A
RISK
Integration of the product into
existing environment
Delays in delivery, testing
and installing
Unsafe use of hazardous
materials or practices
Final product / service does
not meet expectations.
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COMMON MITIGATION OPTIONS
-
Consider whether alternative, less complex products would be acceptable.
-
Evaluation of bids should take into account bidder’s previous experience / expertise in manufacturing the product;
quality assurance of product; testing of final product; warranties / guarantees.
-
Consider implementation and transition strategy (e.g. requirements for testing and support; training).
-
Consider requiring an implementation or transition plan as part of the assessed components of the response.
-
Consult internal clients re. business needs, current capability etc.
-
Evaluation of bids should take into account bidder’s previous experience / expertise ; warranties / guarantees.
-
Ensure expectations are confirmed in writing and in contract if relevant.
-
Consider the application of liquidated damages to cover costs/delays (consult Procurement Services).
-
Consult internal clients re. business needs, current capability etc
-
Undertake OHS&W risk assessment
-
Consider requiring evidence of OH&SW management systems and plans and part of the assessed components of the
response.
-
Put in place appropriate arrangements (e.g. elimination; safe work practices; training; signage; guidance)
-
Specification should be clear and comprehensive. It should set out the roles and responsibilities of all parties.
-
Where possible ensure market documents include a description of the intended use and confirmation that
product/service will meet that expectation.
-
When evaluating bids take into account Respondents’ understanding of the requirement, methodology, references
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ANNEX A
RISK
COMMON MITIGATION OPTIONS
etc.
-
Include appropriate Key Performance Indicators (KPIs) in contract.
-
Put in place appropriate performance / progress monitoring arrangements.
-
Ensure payment is made only on successful completion of Deliverables.
Lack of probity / unethical
behaviour
-
Ensure procedures / processes clear and that staff are aware of them (e.g. team training session; documenting
procedures)
Proper processes are not
followed
-
Staff and external advisors involved in the procurement process should sign a conflict of interest declaration
-
Ensure appropriate security arrangements are in place (e.g. secure storage for bids)
-
Ensure that processes are in line with government policies.
-
Seek advice from Procurement Services or Crown Solicitor’s Office where issues arise.
-
Carry out sufficient consultation on Specification to help ensure that it meets business needs
-
Supply market (e.g. availability of goods / services; practicalities of implementation) should be taken into account
when drafting the Specification
-
Confirm scope and specification with users in writing prior to release of market documents.
-
Document any changes to scope and/ or specification in writing and obtain user confirmation.
-
Prepare Risk Management Plan – monitor and regularly review
3. Procurement Process
Government
followed
policies
not
Changes to scope and / or
specifications
Risks are
managed
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not
adequately
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ANNEX A
RISK
COMMON MITIGATION OPTIONS
-
Monitor procurement process is progressing in line with expected timelines
-
Ensure your evaluation methodology encompasses a number of criteria / factors important to the result. Hence value
for money – eg. Cost, experience, ability to achieve the result, quality
-
Ensure specifications are clear, simple & specific.
-
Research Market.
-
Consider likely market response to the indicative terms and conditions
Limited number of potential
suppliers
-
Approach specialised suppliers for quotes rather than tender if limited supply
Industrial disputes
-
Seek Crown advice in the event of legal implications for highly sensitive or complex procurement.
-
Ask for information about industrial relations (including any recent industrial action)
-
Ensure that potential contractors/suppliers have a clear understanding of what you are seeking.
-
Indicate that joint bids or bids for components of requirement may be acceptable (seek Procurement Services
advice).
-
Build in performance management tools.
-
Specify timeframes and performance indicators – eg. KPI’s agreed to
-
Manage the contract and build a relationship with supplier once contract signed.
Tender process does
achieve value for money
not
4. Industry and Suppliers
Lack of interest in response
to tender
Lack of capacity of individual
contractors
Complacency in long term
supplier relationships
Non
performance
contractors
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ANNEX A
RISK
COMMON MITIGATION OPTIONS
-
Develop and stick to a contract management plan.
-
Provide regular feedback on performance of contract and hold quarterly meetings.
-
Ensure clauses within contract regarding termination and non-performance.
-
Ensure payment terms are not to the disadvantage of Government.
qualified
-
Ensure you have suitably qualified staff on the project team from various skill sets and levels.
Lack
of
communication
amongst team/facilitators
-
Hold regular meetings to update the team and address any concerns early in project.
Responsibilities of project
staff not clearly defined
-
Ensure the project team are aware of their responsibilities.
Expectations and objectives
unclear
-
Have documented processes & procedures for team to follow.
Contract is poorly managed
-
Nominate a project/contract manager who will be responsible for the contract and the supplier’s performance.
-
Develop and stick to a contract management plan.
-
Seek expertise opinion/participation for specialised tenders. In particular at the designing specifications and
establishing evaluation methodology stages.
-
Ensure contract management systems and processes, meeting minutes etc. are documented.
5. Management
Inappropriately
project team
Loss of corporate memory
relating to the contract
6. Stakeholders
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ANNEX A
RISK
COMMON MITIGATION OPTIONS
Public sensitivity/high level of
media scrutiny
-
Ensure security of documentation throughout procurement process.
Conflict among stakeholders
-
Ensure a conflict of interest declaration, is signed by all participants in the project.
Change
in
government
policy/political demands
-
Ensure that all stakeholders are given the same information and are not unduly disadvantaged.
Ineffective
communication
and consultation
-
Maintain regular and clear communication & consultation with stakeholders throughout the term of the contact and
procurement process where appropriate.
-
Standard government requirement is to require bidder to keep offer open for 120 days. Consider whether this is
sufficient time to carry out the evaluation, finalise contract negotiations and get all required approvals.
-
Plan and prepare in advance to avoid any delays or complications with execution or renewal of contracts.
-
Review standard contract terms & conditions to suit the complexity of the project.
-
Seek Crown Law advice on draft terms and conditions
-
Seek crown advice if contract or project is complex.
-
Ensure contract includes provision for dispute resolution procedures.
-
Devise and implement a strategy for effective performance management. Issues to consider will include:
7. Contract
Offer lapses before execution
Legal flaws
Default by the supplier /
termination of the contract
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o
Key Performance Indicators (KPIs)
o
Frequency, scope and timing of reports
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ANNEX A
RISK
COMMON MITIGATION OPTIONS
o
Audit
-
Consider contingency arrangements in event of supplier failure.
-
Devise and implement a contract management strategy
-
Consider application of liquidated damages to cover loss/costs/delays.
Payments made in advance
of goods/service received
-
Treasurer’s instructions prohibit payment in advance of goods/service received. Payment should only be made upon
completion of the project or completion of specified interim stages / Deliverables.
Acceptance
of
suppliers’
terms and conditions
-
Use either the Departmental standard terms and conditions or make arrangements with Crown Law to develop terms
and conditions appropriate to your procurement.
-
Do not accept suppliers’ terms and conditions without discussion with Procurement Services and/ or Crown Law. In
all cases, revised terms and conditions should not disadvantage government.
-
Ensure appropriate insurance policies are in place to reallocate responsibility of risk to the third party.
Bank guarantees/financial
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