Risk allocation

Ensuring that risks are owned or jointly owned by the party or parties best able to manage and bear them, and understanding how they intend to handle them, is key to delivering value for money and successful outcomes.

Risk allocation defines which party or parties will assume each risk, identifying which risks each supplier will be (or remain) responsible for and to what extent, and identifying which risks the contracting authority will be responsible for and to what extent. Risk allocation should be supported by good risk management aligned to the project and programme strategic outcomes set out in the Project Scorecard.

Inappropriate allocation of risk remains one of the main concerns of suppliers looking to do business with government. It is also one of the most frequent issues raised by the National Audit Office in their audits of government contracts. It will therefore be a key area of discussion with prospective suppliers, which should start as part of early engagement. For example by exploring opportunities to develop solutions that help to mitigate risk through joint working before construction commences (see chapter 3). The approach to risk management and proposals for risk allocation should be subject to extensive scrutiny before formally going to market.

How risks are allocated should take into account both the practical capability and the financial capacity to manage and absorb that risk should it occur. We are always accountable to the public for the delivery of public works and reputational risk cannot be transferred to the supply chain. Poor risk allocation can cause a number of negative effects including supply chain instability, poor value for money and stifling innovation. Prior to awarding a contract there should be a joint understanding of risk ownership and respective roles and responsibilities.

A good approach is to:

•  Apply appropriate focus during commercial strategy development to test risk treatment approaches with the market and explore the balance of risk between the supplier, the supply chain they will rely on and the contracting authority.

•  Develop early risk work focused on achieving project strategic objectives and alignment.

•  Compile a risk allocation matrix that considers which organisations in the supply chain are best placed to manage and bear each risk (i.e. whether it is a supplier, government or joint risk) and the extent to which they are responsible for each risk. Iterate through engagement with potential bidders, then manage proactively during the life of the contract.

• Include the sharing of appropriate risk registers and transparent communication on risk allocation with prospective suppliers and the supply chain. This should lead to a joint register with contracted suppliers which is aligned to project and wider outcomes.