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Procurement Perspectives Risk management is critical for success

Journal Of Commerce
Procurement Perspectives Risk management is critical for success
Stephen Bauld

Who is best qualified to manage the risk on major capital projects?

I recently spoke at the Saskatchewan Heavy Construction Association’s (SHCA) spring meeting and this was the most talked about subject.

When I think about it, at most construction conferences I attend, this has to be one of the biggest concerns for contractors, when it comes to pricing a project.

It is clear that a sound and comprehensive system of risk management can play a critical role in problem avoidance when undertaking a major capital project.

The term “risk” describes a formal management process that helps ensure the financial stability and safe operation of and organization.

It entails a planned and systematic process to monitor and control any risk exposure that arises inherently or externally to the conduct of a particular line of business, or the management of the affairs of an organization.

It is (or ought to be) at least one of the most critical areas of senior management within every organization.

It involves answering three interrelated questions: What are the most significant risks that the organization faces (with respect to each aspect of its operations, as well as on a global basis); how are they likely to arise or occur; and what can be done about them either to minimize their potential impact, or otherwise to make proper provision for them?

In dealing with these questions, risk managers must address personal, financial, and legal issues in a wide range of areas.

Most public institutions now accept the importance of risk management, at least at the conceptual level, but the extent to which an appropriate risk management process is factored into decision-making varies, even in relation to such obviously serious areas of concern as a major capital project.

Effective risk management should assist in the efficient allocation of resources.

It provides a tool for giving due weight to any activity being resourced on the basis of the actual risk levels.

In many municipalities, however, particularly those that are smaller, risk management must be completed within existing resources. There are simply no funds available to buy additional expertise.

Some municipalities try to remedy the problem by investing in training to develop a common understanding within the municipality as to the need, in the hope that this will lead to effective management.

How effective this is, as an approach to striking a balance between assuming acceptable risk and controlling that which is more serious, is unclear.

Risk management within the major capital project process involves not only dealing with the allocation of risk between contractors, consultants and the organization, but also assessing the likelihood of contractor default and the occurrence of major loss through fire or similar catastrophe.

In the major capital project context, it is important that undertaking such a significant project creates entirely new dimensions of risk, outside the normal scope of organizational activity.

In construction, for instance, provincial workers compensation regimes often impose potential liability even in respect to workers not employed by the organization.

Risk can be defined as any factor, event or influence that threatens the successful completion and operation of a project in terms of cost, time, or quality.

Risk may be classified in a number of different ways and these risk categories are not mutually exclusive.

For instance, a high level of public dissatisfaction with the level of service provided may increase the political risk associated with a given project.

All of these different causes of risk can be relevant in the case of a major capital project. To avoid the types of highly disruptive political controversy that can envelop even a private sector capital project, risk management should be part of the overall strategic plan.

Stephen Bauld, Canada’s leading expert on government procurement, can be reached at stephenbauld@bell.blackberry.net.

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