Risks and Procurement Go Hand-in-Hand
Risks associated with various aspects of the project might include correctly interpreting the customer’s requirements for a deliverable, selecting projects that are appropriate for the organization, and availability of resources within the organization to carry out project work activities, but there are also risks associated in the process of conducting procurement. Most projects require items to be purchased and/or some form of contract agreement that will have the potential of introducing risk. This being the case, why are risks associated with things that have to be purchased?
Risk Is a Threshold Within Procurement—The fundamental philosophy regarding risk is the identification of a potential problem that might or might not happen. When the purchasing agent is tasked with obtaining an item from a supplier/vendor, there are three primary components that determine the transaction’s success:
- Buyer’s Responsibility—To start the transaction, the purchasing agent must ensure he has all the information required to correctly identify what needs to be purchased. He must also identify a seller that can provide the item in the correct form, fit, and function; at a reasonable price; and within time constraints. If the purchasing agent has correctly identified a seller that can fulfill these requirements, the transaction can be initiated. The purchasing agent, project manager, or other staff must confirm delivery of the item and that it has met all identified requirements. The purchasing agent must then ensure that full payment has been made, and the transaction can be closed.
- Seller’s Responsibility—In response to an inquiry by a purchasing agent, the seller is responsible for ensuring she understands all of the requirements of the item that is intended to be purchased. The seller must inform the buyer of any special options associated with a particular item that the company offers as well as verify her ability to get it to the buyer. The seller must be truthful that the offered item meets all requirements communicated by the buyer and not mislead for purposes of making the sale. The seller must also verify pricing is correct and be upfront about any extra fees or costs applied—such as shipping and handling, and/or tax—to give the buyer the full actual cost of the item. The seller must also be diligent in ensuring the item is delivered to the intended location by the date she committed to and packaged in such a way that the item will not be damaged during shipment.
- Delivery Responsibility—As the purchased item leaves the seller’s location and is in transit to the buyer’s location, the responsibility lies with the organization contracted to deliver it. As the seller has a responsibility to correctly package an item for delivery, it is the delivery company’s responsibility to ensure the item is not damaged in transit, regardless if the item’s destination is a third party, the buyer, or the seller.
As we have seen in these primary components of successfully managing the transaction of procuring an item and having it successfully delivered and being correct in form, fit, and function, we can see that risk is associated with every aspect of conducting procurement. We can look at procurement as having a level, or threshold, of risk associated with it, and this is why risk and procurement go hand-in-hand.
In the case where the purchasing agent is using a contract agreement to obtain an external resource, there will also be a buyer/seller relationship, and in some cases a delivery component required. The same buyer/seller responsibilities exist within a contract and can even include the complication of special terms and conditions the can add even more risk in using contracted resources.
We know procurement is part of every project to some degree, and given the nature of things that have to be purchased or contracted, procurement can introduce a large component of risk throughout the project lifecycle. The project manager must be aware that the procurement process can generate potential problems and that he must work closely with those involved in procurement to manage risks associated with it.