Managing risks through effective Procurement Practices

Risk is an inseparable part of any organization.Alignment of relationship between risks, growth and return can maximise benefits for the organization. The management of risk involves its continuous monitoring, observance and assessment of changes in contours of existing risks and management of changes in risk profile of a transaction on an ongoing basis. Procurement function is a strategic and most important function for an organisation for its sustenance and profitability. The potential exposure of risks from the breach of contract, liability, delays in completion, force majeure events, natural calamities, warranty issues, patent and intellectual property rights, etc. if not properly addressed can land the company in extremely difficult situations. The major sources of risks are inherently embedded in the ground on which project is to be set up especially in case of hydropower project where geological conditions play a major role. In addition, the political environment, social environment, access and approach to site, macro-economic policies of government especially in relation to taxation and prices of input materials, foreign exchange and above all the expected behaviour of contracting parties form the major potential sources of risks. This article identifies probable models of risk behaviourof an organisation and corresponding types of contract which could be adopted such as Item rate contract, Lump sum contract, Cost plus contract and EPC.Prudence lies in sharing the risk and assigning the risk to a party who is best able to manage it. Risk Management techniques have been suggested fordifferent type of contracts as well for different uncertainties which are normally encounteredand threaten the performance of contracts.