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07th Sep 2021
Author: Teresa Scott, Executive Director at the Australasian Procurement and Construction Council (APCC)
No matter what type of project, whether it be in the IT or construction industry, project success will be directly dependent on managing procurement risk, such as supply chain disruptions, material costs, as well as quality of materials, delivery timeframes, meeting Australian standards, and health and safety.
In this article, Teresa Scott, Executive Director at the Australasian Procurement and Construction Council (APCC) explains how mitigating procurement risk is an essential capability for every project manager.
Procurement plays a critical role in delivering project outcomes and is about delivering a compliant value for money outcome. But the true value of embracing a more strategic procurement approach is being able to deliver an outcome that is also strongly aligned with project objectives, for example, on time, in budget, and to quality.
Procurement is also the enabler to projects delivering broader economic, environmental, and social outcomes through the project – all very important when spending taxers money if you work in the public sector.
There are several core procurement capabilities that are necessary for the professional project manager, which can be divided into:
The three professional procurement capabilities that all project managers should possess include:
While procurement, like any project activity, has a wide range of risks to be considered, the specific procurement risks often have a much more commercial flavour. When involved in complex procurement activities, one of the critical tasks is being able to identify the complete capability requirements of the good or service. Project specifications need to be translated into contractual form if they are being provided to industry for them to tender for its delivery.
And because every project may be different, there may be many commercial and technical judgements required to modify tailorable templates, scaling clauses up or down, as well as including new clauses, or having a range of mechanisms to manage future uncertainty, additional tasking, or project scope changes.
A related risk is being able to understand all the legal and commercial requirements that may apply, but it also includes whichever government or public service legislation is also relevant. For example, project managers who don’t understand basic contract law principles could very easily find themselves facing unforeseen challenges, such as proposing a liquidated damages clause which the courts may find to be, in fact, a penalty, striking out the entire clause.
Further, if there is a relevant Environmental or Work, Health and Safety requirement which would apply, then these need to be identified, allocated and managed as early as possible in the procurement process. However, an experienced procurement officer will also explain that simply allocating a particular risk to a contractor may not actually transfer the ultimate risk at all, and this can be compounded if there are indemnities or limitations of liability in the contract.
And then there is the industry engagement capability. While this is particularly important during the tender process, it actually starts much earlier in the governance and planning phases of the procurement activity. For example, the need to understand the available market through a comprehensive industry sector analysis. Project managers should also be aware of which companies may tender, which are ethical employers or struggling financially, or whether the procurement strategy accidentally disincentivises local small to medium enterprises (SME) from engagement – that is very important if you work in the public sector.
These professional procurement capabilities then directly impact the procurement life cycle capabilities, which include:
While many of these will be familiar to project managers, often it is the governance and planning phases which require further attention.
Before individual project governance is considered, the overall organisational procurement function governance framework (including mandatory procurement policy, tools and templates, and training) should be in place with clear direction about risk appetite, the approval processes and how critical probity issues should be managed. And then planning is equally important, so that all the risks and processes for an individual project can be identified, and an appropriate procurement strategy adopted that will achieve the best outcome.
As the final contract is the driver for the entire procurement activity, this is something that needs to be considered as early as possible, and then built on across all of the life cycle phases. For example, the final contract should be developed to make contract management as easy, transparent and performance focused as possible. There should be a clear commitment in complex contracts to supplier relationship management, so that when there are scope changes or unexpected external impacts, such as COVID-19, these can be addressed in a fair and reasonable manner. If there are additional tasks for the contractor to take on, these must be incorporated into the existing contract so that all parties have a complete understanding of their rights and obligations in order to reduce potential disputes or litigation.
And, of course, the project manager must manage to the contract. There are many stories of organisations which sign a contract and then fail to properly review contractor performance against it, only later finding that they have inadvertently amended the contract through conduct. This could see the loss of enormous contract value simply because the contract was not being relied upon.
Procurement capabilities should be considered through a systems approach, where each core capability may impact on or modify all the others. And they should also be considered across a proficiency scale, from awareness, foundation (for new staff), practitioner and expert levels. As such, there is always more to be learnt in procurement, as well as how these capabilities may in turn be affected by related skills in other domains such as legal, finance, industry policy, engineering or logistics.
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