We talked to Ray Gambell, principal consultant, and Brian Farrington, managing director, from procurement and supply chain consultancy Brian Farrington about the risks SMEs face when dealing with public sector contracts.
To what extent does public sector procurement risk exist?
The true extent will never be known, although National Audit Reports shed light on the more extreme examples. Procurement risk will exist, but the skill is to identify the potential risks and then to create risk mitigation strategies. Procurement must take the lead in this and become more proactive.
Does the risk only exist on high-value procurements?
It certainly exists on high-value contracts, but will also apply on low-value purchases. Procurement should adopt a risk assessment on all purchases, prior to entering into a contractual agreement. The procurement of a CCTV surveillance system may be deemed “low value” but if the system fails the public are placed at risk because the police cannot be alerted to actual or threatened crime.
Is the public sector equipped to identify and manage the risk?
Typically not, in our experience. There is no agreed risk modelling tool although it may be a focus at the early stage of a major project when a Gateway review [a series of short independent peer reviews to highlight risks and issues] occurs. There is a robust tool, Procurisk [which was developed by Brian Farrington], which is specifically designed to systematically assess procurement risks, through the use of datasets that include contract management risks.
One necessary skill is the ability to conduct due diligence on a supplier?s finances, noting that there are frequent bankruptcies.
What are the consequences of failing to manage procurements risks?
There are three significant consequences; reputational disaster, failure to provide an essential service and escalating contract prices. These have been known to apply at the same time. One council was faced with a HSE prosecution associated with a contractor?s performance with a housing gas installation. The work had been sub-contracted without the council?s knowledge or agreement.
How does the drafting of contracts apply to procurement risk management?
The public sector thrives on “standard forms of contract”, some of which have not been reviewed for many years. Not only that, procurement and stakeholders have never been trained in the nuances of contractual clauses. One example is the failure to recover damages from non-performing contractors or service providers. An example is domiciliary care when the service provider fails to attend and the service recipient is exposed to personal discomfort or, more seriously, to severe health hazards.
Does the failure to manage procurement risks impact on the costs of services?
Quite definitely! Construction and IT regularly provide instances of a failure to manage procurement risks impacting on the cost of services. Dog kennelling is an example, where a service provider charged excessive overtime rates for collecting dogs “out of hours”.
We?ve seen examples of IT service engineers being paid double time for travel to the nominated site. Examples have also been encountered where contract prices escalate because the specification was inadequate.?
Is the public placed at risk when the procurement risks are not effectively managed?
There are countless examples, not least with breaches of control of personal data. Records have been found on public tips because the contractor did not use the agreed waste disposal methodology. Another example is the failure of contracted security services to fulfil their obligations.
Where can we find actual examples of procurement risks not being managed?
A good starting point is National Audit Reports and releases of information when the public and press request them under the FOI provision.
How do public sector risk mitigation strategies impact on SMEs?
The inappropriate use of risk mitigation strategies can negatively impact SMEs. For example ?the one size fits all approach? to terms and conditions may include insurance obligations far in excess of those suitable for the size and risk of contracts being considered.?
We have seen examples of requirements for ?5m professional indemnity insurance for a one day training course. This can have negative effects in excluding potential providers and increasing the costs to the supplier, who will reflect these in higher charges to the client.
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