4.1. Risk Management

Risk is exposure to loss as a consequence of uncertainty. There are a variety of risks faced during the procurement process. There are global risks and risks in every phase and stage of the process, with certain risks of greater importance during each stage. Understanding the main categories of risk faced in the procurement process assists in risk assessment and planning practical management and operational measures that should be taken to mitigate those risks.

4.1.1. Risk analysis and management

The impact of risk can be measured by the likelihood of an unwanted event occurring and the consequences if it does occur. For planning purposes, the impact of risk could be the same for both small damage resulting from a highly probable recurring event and very large damage resulting from a rare event. But the two situations would be managed in different ways. For example, the highly probable event could perhaps be made less frequent through improved procedures and professional practice, whereas insuring (or self-insuring) for the damage of the rare event could be a practical alternative if it can be combined with a class of similar risks.

Risk analysis

Risk analysis is a planning stage which seeks to identify the origin, probability and magnitude of the risks. It helps direct attention to which risks warrant close attention and have the greatest potential for reducing exposure. There are distinct risks at each stage of the procurement process. Risk analysis should form part of each stage of procurement planning and be regularly updated.

Risk management

Risk management seeks to mitigate the impact of the risk by reducing the likelihood of its occurrence and/or reducing avoidable consequences through planning, monitoring and other appropriate actions. Whether in general or in the specific case, procurement officers should identify and analyse all risk factors that are likely to occur on a project, and then decide on the most appropriate management response for each risk/combination of risks.  Responses may include:

  • ignore

  • reduce

  • transfer

  • manage, and

  • decide which party is most appropriate to manage each of the risks identified.

Neither in the business world nor the public sector can risk be avoided entirely, rather it is part of the normal work environment within which we operate. It can to some extent be managed. Some measures to manage risk are based on the quality of the procurement process applied across all activities, while other measures may be targeted to specific risks inherent in certain categories of procurement.

A useful tool to analyse risk and focus management attention is the risk analysis and management matrix. During procurement planning, activities are placed on a risk continuum from “low” to “high” and an impact continuum from “low” to “high” as shown in the figure below.

Risk analysis and management matrix

Benefits of risk management

The benefits of effective risk management include:

  • Greater confidence of right supply at right time, to further specific activity goal

  • better control of uncertainty

  • reduced impact of risk

  • improved decision making

  • realistic estimates less likely to be exceeded

  • stronger team communication

  • lower probability of damage to the image of the organization.

In managing risk, it is important to understand the extent to which a party has control over the risk and the ability to do something about it. Responsibility for risk should be allocated according to the ability each party has to manage the risk. Efforts to make a party responsible for risks over which it has no control are likely to lead to dispute and additional costs in time or money. In fact, such “risk avoidance” leaves the risk in place, when it is in the interest of the organization that it be managed.

Sources of risks

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

  • external factors

  • project complexity

  • project planning

  • procurement process

  • fraud, corruption and unprofessional conduct.

External factors can include political, economic, and even nature. Among the more frequent external factors are the UN organization and partner government decision making processes that are used to approve activities and their budgets. While political and budgetary factors are generally outside the control of the procurement officer, to reduce the risk of late supply, it is appropriate to begin the procurement process with sufficient lead time, and include appropriate caveats to potential suppliers when a solicitation is issued in advance of authorisation, ensuring that it will not lead to binding commitments until and if such authorisation is received.

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. Risks can be reduced by early involvement of procurement officers in the project team, and by regularly reviewing the requirement. In some cases, such as major civil works, this may call for appropriate contractual arrangements that recognise the specific uncertainties involved.

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. The risks can be best reduced through early involvement of procurement officers in planning respective activities to ensure that requirements for and of procurement are properly integrated.

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.  

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. Key among the measures to mitigate these risks are:

  • transparent process

  • competition

  • separation of functions

  • clear rules and procedures

  • standard documents

  • professional training of staff

  • effective control systems

  • accountability.

Competition, transparency and separation of functions are the foundation of risk mitigation, since they ensure any fraudulent or corrupt behaviour will not go unnoticed. These need to be linked to senior management that does not tolerate such behaviour, provides training, systems, authority and controls so staff may carry out the procurement function correctly (see Unit 4.4 Ethics).

All those involved in the procurement process should consider themselves, “risk managers” and be aware of the potential risks at each stage in the procurement cycle in both planning and undertaking their activities.

4.1.2. Risk and risk management in the procurement process

There are risks in each phase of the procurement process, and there are organizational and commercial measures that can be taken to mitigate those risks. Examples of typical risks, possible consequences and what to do at each stage are listed in the tables below:

Strategic organizational procurement analysis and planning

Risk

Possible Consequences

What to do

Failure to secure ongoing supply critical to the organization.

  • Failure to achieve key organizational results.

  • Total costs of procurement too high.

  • Analyse organization’s procurement portfolio, function & capability and undertake strategic procurement planning.

Planning of a procurement activity

Risk

Possible Consequences

What to do

Insufficient lead-time.

  • Inadequate supplier response.

  • Higher prices.

  • Involvement of procurement officers in project planning phase.

Requirement definition

Risk

Possible Consequences

What to do

Biased or restrictive specifications/ToR/SoW.

  • Claims of unethical or unfair dealings.

  • Inadequate supplier response.

  • Use functional performance specifications.

  • Apply relevant international standards where available.

Inadequate specification/ToR/ SoW.

  • Significant variety in offers received.

  • Insufficient responses.

  • Offer of goods/services that do not meet needs.

  • Difficulty in evaluating competing offers.

  • Possibility that evaluation process may not stand up to audit scrutiny.

  • Follow advice in the organization’s Procurement Manual.

  • Be familiar with the requirements of the specification/ToR/SoW.

  • Get training in writing specifications/ToR/SoW.

  • Allow industry to preview requirements.

  • Seek offers again and incur extra management effort.

Requisition splitting.

  • Claims of unethical or unfair behaviour.

  • Inability to achieve economies of scale.

  • Higher total cost of acquisition.

  • Training requisitioners in procurement.

  • Separation of functions to ensure possible breaches are identified and prevented.

Sourcing

Risk

Possible Consequences

What to do

Wrong approach to market.

  • Inadequate or inappropriate supplier response.

  • Higher prices.

  • Selection of inappropriate procurement method.

  • Analyse supply markets.

Misrepresentation of facts by potential suppliers.

  • Claims of unethical or unfair dealing.

  • Breach of contract.

  • Independently verify supplier qualifications.

Outdated information on potential suppliers.

  • Inadequate supplier response.

  • Maintain supplier rosters.

Informal commitments to suppliers by requisitioners

  • Claims of unethical or unfair dealing.

  • Train requisitioners.

  • Separation of functions.

Selection of procurement strategy

Risk

Possible Consequences

What to do

Delayed requisitions to create false emergencies.

  • Claims of unethical or unfair dealings.

  • Higher total cost of acquisition.

  • Early involvement of procurement officers in project planning.

  • Training of requisitioners

  • Seek justification of emergencies.

  • When not justified follow regular procurement process.

Selection of inappropriate procurement strategy.

  • Inadequate or inappropriate result.

  • Not achieving best value.

  • Agree on desired outcomes & objectives with client.

  • Seek offers again and incur extra management effort.

Preparation and issuance of solicitation documents

Risk

Possible Consequences

What to do

Use of inappropriate evaluation criteria.

  • Inadequate or inappropriate result.

  • Not achieving best value.

  • Consider implications of the evaluation criteria.

  • Seek offers again and incur extra management effort.

Terms and conditions unacceptable to suppliers.

  • Loading of costs in offers.

  • Many qualifications to tenders.

  • Too few bids.

  • Check with the market.

  • Develop commercially acceptable terms.

  • Use standard conditions of contract.

  • Check that responsibility for risks is not allocated to suppliers for factors outside their control.

Uncertainty among suppliers because of new and unusual conditions of contract.

  • Loading of costs in offers.

  • Disruption.

  • Adverse impact on the organization’s professional recognition.

  • Use standard conditions.

  • Seek the legal office’s approval to conditions of contract.

  • Allocate risks appropriately.

Provisions of inadequate information.

  • Loading of costs in offers.

  • Great variation in offers.

  • Difficulty in clarifying and closing offers because of extensive requests from suppliers for clarification

  • Ensure that staff is suitably trained.

  • Review documents before issue.

  • Know your market.

Actual or perceived favouritism in providing information.

  • Supplier complaints.

  • Political intervention.

  • Withdrawal of offers.

  • Implement standardized procedures for responding to inquiries.

  • Advise all suppliers of all responses to inquiries received.

Receipt and opening of offers

Risk

Possible Consequences

What to do

Actual or perceived breach of confidentiality.

  • Supplier complaints.

  • Political intervention.

  • Mistrust by suppliers.

  • Establish formal security procedures.

  • Perform regular security audits and reviews.

  • Advise suppliers of security measures.

  • Train staff.

Evaluation

Risk

Possible Consequences

What to do

Failure to observe effective evaluation procedures.

  • Inconsistency in evaluation of offers.

  • Potential for ethical dilemmas.

  • Subjectivity in outcome of evaluations.

  • Perform regular audits of procedures.

  • Ensure that staff are suitably trained and experienced.

Failure of offers to meet needs.

  • Need to re-tender.

  • Ensure that the specification is understandable.

  • Know the marketplace.

Failure of evaluation to identify a clear winner, leading to selection on subjective grounds or new criteria.

  • Claims of unethical or unfair behaviour.

  • Ensure that selection criteria are appropriate, well defined, and measurable before tenders are called.

Selection of inappropriate supplier.

  • Failure of supplier to fulfil contract.

  • Perform financial and technical checks on suppliers before awarding the contract.

  • Reject offers from unacceptable suppliers.

  • Improve evaluation procedures.

Selection of inappropriate goods/services.

  • Failure of the goods/services to meet the need.

  • Ensure that users are involved with the evaluation.

  • Improve technical evaluation procedures responsibility for handling in-confidence documents.

Insufficient number of responses.

  • Need to start procurement again.

  • Delays to procurement schedule.

  • Poor value for money due to limited competition.

  • Use a proven and recognised way to notify the suppliers of the requirement.

  • Allow for sufficient time for suppliers to prepare offers.

  • Consider publishing two to three-year forward estimates of major purchase budgets.

No response from known high-quality suppliers.

  • Failure of offers to meet needs.

  • Greater uncertainty about suppliers’ capabilities.

  • Seek early industry participation.

  • Know your market.

  • Request tenders from selected suppliers.

Procurement review and award

Risk

Possible Consequences

What to do

Contract approval not obtained.

  • Delays in contract award.

  • Ensure adherence throughout process to rules and procedures.

  • Ensure adequate documentation of process.

Contract finalization and issuance

Risk

Possible Consequences

What to do

Masking, by apparent agreement, of different expectations of buyer and supplier.

  • Contract disputes.

  • Delivery delays.

  • Possible cost variation.

  • Define terms carefully.

  • Record each party’s obligations.

  • Clarify all ambiguities. before signing the contract

  • Keep full and accurate documentation.

Deadlock on details of agreement.

  • Delays in delivery.

  • Need to restart the procurement.

  • Increase in costs because of legal action.

  • Investigate better ways of sharing risks.

  • Distinguish between essential and non-essential goals and requirements for negotiations.

Undue concession to suppliers

  • Reduction in value for money.

  • Claims of unethical and unfair practices.

  • Purchase of less suitable product.

  • Inefficiency and misuse of resources.

  • Negotiate on commercial terms.

  • Ensure that negotiators are adequately trained.

Failure to secure mandatory conditions.

  • Inability to finalize contract.

  • Delays in delivery.

  • Possible variations in cost.

  • Inefficiency and misuse of resources.

  • Distinguish between essential requirements and others before negotiating.

  • Consider variations in the contract.

  • Refuse the offer.

Grossly unfair or onerous requirements on the supplier in the contract conditions.

  • Contract disputes.

  • Invalidity in the contract.

  • Legal action.

  • Poor working relationship with the supplier.

  • Negotiate on commercial terms.

  • Consider fairness and reasonableness of terms.

  • Ensure that negotiators are adequately trained.

Failure to reflect the terms offered and agreed in the contract.

  • Contract disputes.

  • Make a final check of the draft contract with the supplier.

  • Keep records of all negotiations and agreements.

Inadvertently creating a contract without appropriate prior approval.

  • Increased expense to negotiate out of the contract and paying damages.

  • Committing other associated work before main contract exists or falls through.

  • Ensure that staff is appropriately trained.

  • Establish procedure to ensure that appropriate approval is obtained first.

Contract management

Risk

Possible Consequences

What to do

Variations in price and foreign exchange.

  • Cost overruns.

  • Agree on prices and the basis of prices.

  • Determine the basis and formula for calculating variations in the solicitation document.

Unwillingness of the supplier to accept the contract.

  • Delays in delivery.

  • Need to restart the procurement.

  • Seek legal redress if non-acceptance causes loss.

  • Negotiate the concerns of the supplier but ensure that the integrity of the contract remains.

Failure by either party to fulfill the conditions of the contract.

  • Contract disputes.

  • Failure or partial failure to satisfy the needs.

  • Delays.

  • Inability of anyone to work on the project or procurement.

  • Legal action.

  • Review Past Performance Record.

  • Ensure proper contract management.

  • Hold regular inspections and get progress reports.

  • Ensure that all staff working on the project know the contract conditions and the buyer’s responsibilities.

  • Establish appropriate record-keeping systems.

  • Maintain accurate records and documentation.

Logistics

Risk

Possible Consequences

What to do

Leaving the choice of the freight forwarder to the suppliers.

  • Many different freight forwarders handling the organization’s transport of goods.

  • No control over performance of freight forwarders in case of delays.

  • Choosing the right Incoterm so that control of Freight Forwarder is under the control of the organization.

  • Long Term Agreements with prequalified freight forwarders.

Shipping of certain goods without having the recipient government’s permit of importing these goods.

  • Goods arrive at the country of destination but cannot enter.

  • Recipient may be required to pay the cost of storage in the port and applicable liner charges until the permit / authorisation is issued.

  • Cargo may deteriorate or go missing during this waiting period.  

  • Knowledge of which countries require which licenses for which goods.

  • Request such licenses already in advance, i.e. as early as possible during the procurement process.