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30 March 2012 | Angeline Albert
Defining risks and responsibilities in contracts does not prevent them from happening, purchasers have said.
SM’s latest poll of 100 purchasing specialists asked: ‘Do you define risks in a contract and state who has responsibility for specific risks?’ A total of 66 per cent said they do but most agreed it does not prevent all possible risks, although it can minimise the financial impact of problems and lead to a better working relationship.
One senior purchaser at a construction company, who did not wish to be named, said that through her work – which is mostly with suppliers of services – almost all contracts include clear service level agreements and key performance indicators. These include ensuring specific risks are defined and responsibility for their mitigation is given. She said that this is beneficial for suppliers because it is clear what is important and what is measurable.
Most buyers said it was important to ensure that risk is identified and priced accordingly so they can decide who should take responsibility for it – in other words, them or the supplier. However, most said only high risk, high value or highly complex procurement contract risks were defined.
Kay Smith, senior procurement specialist at Bangor University Law Schoollaw school, said: “The answer should be ‘yes’ all the time but it only happens in practice on the more risky strategic/high value contracts because of resource issues. An example would be a project or complex service contract. The benefits are that you are ready if a problem occurs. How far to go would again depend on level of value/risk.”
Many buyers agreed that risk definition had its limits. Of those who said they don’t define risks and state who has responsibility for them in contracts (34 per cent), a number said the contract itself risks becoming a static statement and contract and performance monitoring too prescriptive.
Tom Woodham, supply chain consultant at Crimson & Co, said: “In my experience it is more effective to have a separate, related process that regularly reviews the risks, responsibilities and mitigations related to each contract or sometimes a group of contracts in combination.”