Managing Risks

During Tendering and Contract Procurement

Tanya Jackson, Principal Consultant

Presentation Overview

• Case Studies• Drivers• Elements to Consider/risk allocation• The Risk Management Process• Risk Mitigation• Implementation of an ongoing

management plan

The Biogas and Upgrading Plant (the Vaxtkraft Project) in Sweden

• Started in 2001-02• A similar plant had never been built before• Technology had to be developed after the

contract had been signed• The project involved innovation including the

creation of new markets.• A complete system for handling waste was

integrated with a production facility for bio‐fuel• local public agencies could introduce vehicles

that would run on bio‐fuel.

The integrated waste management contract with the Greater Manchester Waste

Disposal Authority (GMWDA)

Expenditure on Waste Management

48%

15%

15%

22%

Breakdown of Expenses

Contract and subcontract expenses

Wages and Salaries

Fees

Other

General government sector expenditure on waste management activities was $2.2b during 2009-10. (Australian Bureau of Statistics)

Drivers

• Lack of existing facilities or infrastructure is one of the main factors hampering resource recovery activities.

• NSW Government’s Focus Area 4 of the “Reducing Waste: Implementation Strategy” (Facilitating investment in waste infrastructure)

Why Worry About Risk? • Three aspects of significant government

projects that make risk management desirable:

1. The project size

2. Potentially long lives

3. Where private sector funding is required, what are the residual risks for government

Crucial Elements to Consider• Strategic project development • Potential partnerships • Technology due diligence• Market capacity and market testing• Contract design and process• The balance of risk, affordability and value for

money• Financing the procurement process • Current legislative and strategic waste issues

Definitions

• Risk = the ‘effect of uncertainty on objectives’ ISO 31000 (2009) /ISO Guide 73:2002

• Risk = Likelihood x consequence (AS/NZS 4360:2004)

The Risk Management Process

Extracted from AS/NZ 4360:2004

Establishing the Context Involves;

1. Identification of risk in a selected domain of interest

2. Planning the remainder of the process3. Mapping out:

• The social scope• The identity and objectives of stakeholders• Risk evaluation criteria

4. Analysing risks

5. Mitigating risks

Framework for Risk Identification

Contract

Planning and Preparation

•Unrealistic time/cost expectations•Conflict with existing supply arrangements•Lack of a clear procurement strategy

•Inaccurate specification•Delivery and installation delays•Limited options/availability

•Technical capability and capacity•Lack of communication from supplier•Ineffective evaluation

•Failure to adequately address public concerns•Conflict•Changes in government policy

•Legal issues/ Insolvency issues•Time validity•Supplier default

Product/Service/ Technology

Tendering and Procurement

Process

Qualified Suppliers

Management

Stakeholders

•Probity Issues•Scope or specification changes•Value for money

•Limited number of suppliers•Competing contracts•Lack of capacity

Risk Analysis

• Different risks can impact projects in different ways.

• Risk assessment criteria needs to address multiple impact areas and be defined for each impact area.

Potential Areas of Impact

• Cause damage to an organization’s reputation

• Have a financial impact• Affect ability to comply with

regulations/legal implications• Impact on the operation of the

project/timeframe for delivery• Have a strategic impact

Levels of Consequence

• Catastrophic• Major• Moderate• Minor • Insignificant

In developing criteria for financial risk assessment councils should be aware of their risk appetite including triggers such as economic reporting requirements, levels of authority for expenditure, budget tolerances etc.

Likelihood• The timescale should reflect that of the project to which

the risk assessment relates.Descriptor Description Indicative Frequency (expected to

Occur)

Almost Certain The event will occur at least once during the project timeframe

Once or more during the project timeframe

Likely You have seen the event occur several times previously on other projects

Every third or so project

Possible The event might occur Once every ten projects

Unlikely The event does occur from time to time Once every thirty projects

Rare You have heard of something like this happening elsewhere but have never experienced it

Once every hundred projects

Risk Ranking and Matrix

Rare Unlikely Possible Likely Almost Certain

Catastrophic High High High Extreme Extreme

Major Moderate Moderate High High Extreme

Moderate Low Moderate Moderate High High

Minor Low Low Moderate Moderate High

Insignificant Low Low Low Moderate Moderate

Management or Mitigation Requirement

Risk Rating Action Required

Extreme Risk Immediate action required including allocation of responsibility and required resources

High Risk Senior Management Attention

Moderate Risk Management Responsibility must be specified

Minor Risk Manage by routine measures

Insignificant Risk Address as appropriate

Developing a Risk Management Plan

• Consider the risk treatment options available:

1. Accept the risk

2. Transfer the risk

3. Reduce the likelihood of the risk

4. Avoid the Risk

• For risks you are prepared to accept, a detailed risk management plan should be developed.

Purpose of the Plan

• To ensure;–Senior management support –Adequate allocation of resources–Consistency in approach with the

organization’s risk management policy–Ongoing management for the risk is

embedded into existing practices and procedures.

The risk management plan should consider;

• The current controls in place• The planned course of action to minimize or

mitigate the risk• Allocation of responsibility• Timeframe for implementation• Effectiveness of the treatment• Severity of the remaining risk• Monitoring and reporting procedures

Embedding and Ongoing Management

• Back up the activities with:– A risk management policy,– A risk management plan and:– Ongoing support arrangements

• Use existing systems, processes and practices.

• Ensure the risk register is regularly reviewed and updated throughout the various stages of the procurement process/project.