Procurement risks associated with contract awards

A procurement award achieves two critical objectives in both the public and private sector in the selection of the best or optimal product or service required by an organisation, and the selection of the specific supplier with that solution.

PURCHASING & SUPPLY: NYASHA CHIZU

Selection is necessary given that many suppliers would offer different solutions in the form of alternatives and substitutes that require critical analysis of the technical solutions in view of the business case and associated costs. The award further identifies the appropriate supplier that has the best evaluated solution. This analysis goes beyond the choice of a supplier that offers the best solution in relation to the business case and costs. It is important to contract suppliers of the right pedigree with capacity to support the product, to transfer technology and to provide specialised after-sales service as may be necessary.

There is a high risk of failure to meet client expectations when the wrong or inadequate product or service is selected. Failure to meet customer expectations has direct impact on revenues that overflows to the profitability of the organisation. It further affects the goodwill of the organisations that also directly impacts on the balance sheet. Selection of an inappropriate supplier leads to a total or partial failure to fulfil the contract. The effects of selection of an inappropriate supplier leads to the same effects associated with selection of the wrong or inappropriate product. It is, therefore, necessary to effectively manage the sources of risks to ensure that the bottom line is not unnecessarily affected.

Failure to select the right product of service could be as a result of the IT theory of Garbage-In-Garbage-Out (GIGO). The quality of your output is dependent on the quality of the inputs. Quality is a factor of specifications. Specifications are designed by technical personnel in the procuring organisation. The challenge and risk emanate from various angles. Technical personnel derive satisfaction from superior technologies that may lead to higher costs that reduce profitability. This is very common in construction projects when appealing models translate to expensive designs that increase costs of the actual project and fees claimed by the consultants.

Risks may be derived from the lack of capacity to design appropriate goods or services due to lack of appropriate skills in the organisation. This is critical given that many confuse qualification and skills. To be more direct, qualified personnel may not be skilled. Skill is something one acquires from doing something over time, whereas a qualification is acquired from a one-off learning experience. Skill is, therefore, derived from experience and some define experience as lessons learnt from mistakes and successes during execution and is a continuous process. In this case, a qualified person that has been employed over a long period of time might not be skilled because of the lack of exposure to specific or different tasks. This is food for thought for employers.

Scope creep may lead to the selection of an inappropriate supplier. Failure to specify the expectations of the procuring entities may lead to selection of a supplier that does not have the requisite capacity and facilities necessary to service the requirements. Another dimension is related to corruption in procurement. The design of specifications could be influenced by corrupt tendencies to direct an award to a predetermined supplier resulting in risks emanating from costs, failure to satisfy requirements and loss of profitability.

To minimise risks, organisations should ensure that specifications are designed by a team of experts with relevant skills. Secondly, organisations should design skills enhancement programmes within their organisation. Skills are acquired from actual execution and it is important that staff are afforded chances to learn from the actual doing.
This is necessary given the impact of the risk and its impact on the business.

Nyasha Chizu is a fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity. Feedback: nya.chizu@gmail.com Skype: Nyasha.chizu

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