4.2  Taking Account of Risk during Delivery Model Selection

From a procurement perspective, the aim of risk management3 is to optimise project or program objectives and outcomes.  The first consideration in selecting a delivery model is the ability of the model to deliver the requirements and achieve project objectives.  One consideration is the ability of a delivery model to promote efficient and effective management of project risks.

Risk management occurs in parallel with project management and the procurement process. It is important to ensure that the procurement strategy is reviewed regularly and updated to reflect project circumstances and risk management.

When making the delivery model decision, consider the following approaches to risk -

•  identify the model that optimises project or program outcomes (not necessarily the model that has lowest risk);

•  conduct a detailed risk assessment incorporating the proposed delivery model;

•  identify risk treatments where appropriate.  Treatments may include the development of costed contingency plans, risk transfer/sharing, inclusion of specific contract clauses etc.  The cost of risk treatment needs to be built explicitly into project cost estimates (and where relevant also consider impact on quality and schedule);

•  give careful consideration to the risk treatment strategy, risk ownership and risk allocation under the project delivery model. Risks should be allocated to the party most capable of managing the risk.

Consider whether the private sector can reasonably be expected to take responsibility for particular risks.  If a contractor has not adequately allowed for a risk that is later realised, this may result in claims, disputes and reduced quality to the government.

By shifting responsibility for a risk to the party best able to manage that risk (and assuming the risk has been appropriately priced), the government may lower the overall project cost;

•  consider another delivery model if, in the planning process, unusually high risks are identified or possible consequences lie outside the organisation's tolerance for risk, and

o  either a management strategy is not available, or

o  the costs outweigh the benefits.

•  stress test the delivery model. Check the delivery model's sensitivity to circumstances when certain risks materialise. Examine the risks identified in the risk assessment process and consider the consequences of these under the preferred delivery model, including if modification to the models will result in more effective risk management. The model may also be modified, or changed, should an unmanageable or intolerable risk appear;

•  a pro-active risk management process will make a positive contribution to cost management, schedule and quality outcomes.  This approach supports the value-for-money objectives; and

•  ensure that risk allocation is clearly and explicitly stated in tender and contract documentation to avoid confusion as to who owns which risks.

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3 Risk management is applied at all stages of the project lifecycle.  It commences with the identification of strategic or higher-level areas of risk at the strategic assessment stage and becomes more detailed as the project progresses through options analysis and business case development stages.
The approach to risk management is based on the Australian and New Zealand Standard for Risk Management AS/NZ 4360.  It is an iterative process that recognises both the potential for adverse outcomes from risk events, and the potential to realise opportunities from the same risk event. The purpose of risk management in procurement is to maximise opportunities whilst minimising adverse consequences.