Managing Risk in the Procurement Process
Procurement in the public sector demands the highest integrity. The slightest error or inconsistency in conducting procurement processes or activities can lead to accusations that, even if ultimately proved to be without merit, can cause significant and lasting damage to the reputation of an individual and/or a procurement agency.
One proactive measure a procurement agency can take is to perform a risk assessment within its organization and its processes to identify areas of concern, weakness or high risk in procurement. Conducting a risk analysis enables action to be taken to correct deficiencies and to avoid greater problems in the future.
One way to analyze risk is to develop and use a checklist to measure how well a procurement agency is in compliance with law and ethical standards. Checklists can be valuable to prevent and detect corruption and fraud by guiding procurement staff throughout the process in a more transparent and effective manner while helping to detect and report irregularities.
Using a checklist, a procurement agency can identify any possible irregularities, suspicious cases or difficulties in the procurement process. Developing such a checklist should take into account the specific agency’s procurement rules and regulations. Checklists are generally developed around the major phases of the procurement cycle and cover the various risks associated with each phase.
Mapping procurement risks
The first step involved in risk assessment is to map the various risks associated with various stages of the procurement cycle and to identify indicators (“red flags”) for the detection of suspected irregularities. For instance, here is an outline addressing the major phases or components of the procurement process, along with some of the inquiries that a procurement agency should make to determine whether there are unacceptable risks inherent at each stage.
Phase 1. The Procurement Function. Do an analysis by looking at the legal basis for the existence and operations of the procurement agency, considering issues such as:
- Is the legal basis for the procurement agency in accordance with law?
- Are its operations set forth clearly and in a well-organized and documented fashion in accordance with applicable laws and regulations?
- Are the means of financing procurements clearly stated and in accordance with law, regulation and budgetary requirements?
- Are there internal control systems in place to ensure compliance with the legal and regulatory requirements?
- Are procurements done in a transparent manner and well documented?
- Is the procurement agency monitored by or does it report to another agency or body, and are reports made in a timely fashion?
Phase 2. Preparation of the Procurement. Take specific procedural steps to prepare a purchase or contract. Review the specific requirements of a particular purchase both from a legal and financial standpoint, and take into consideration various elements to ensure transparency, fairness and accountability. Questions might include:
- Are there any special procurement regulations applicable, especially if funding is coming from restricted sources?
- Has the public authority calculated the contract value accurately?
- Is the description of the good or service being acquired, as well as the quality of performance, adequate to needs and legal requirements, and is it clearly understood by the participants in the process?
- Are the tender documents comprehensive, transparent and free from restrictions or conditions that would unduly discriminate against certain suppliers?
- Are there provisions for the submission of alternative tenders? If so, are the specifications as to what may be considered clearly set forth so that they may be considered in a fair and legal manner?
- Has the public authority put procedures in place to monitor the input of experts employed to assist the procurement function?
Phase 3. The Procedure Chosen to Procure. Is the chosen procedure correct and appropriate for the good or service being acquired? Sometimes public agencies fail to consider alternatives such as leasing or purchasing through cooperatives, which could result in considerable cost savings. Some questions applicable here include:
- Did the public authority decide upon an adequate and admissible procurement procedure?
- Were alternative methods considered?
- Did the procedure chosen ensure fair competition and transparency?
Phase 4. Publicizing the Procurement. The manner of soliciting bids or proposals is not just a matter of meeting the minimal requirements prescribed by law. The manner of advertising should take into account the nature of the good or service being procured and the likelihood that advertising will reach the intended target audience of potential vendors. In this analysis, one might ask:
- Did the public authority advertise the procurement in compliance with the law?
- Was the means of publication such that the bulk of prospective vendors were able to access information?
- Was timely and equal access to contract documents and information provided to interested potential vendors?
Phase 5. The Award. Consider factors such as the composition of the committee determining the award and other issues relating to the transparency and integrity of the award and its process. Some questions might include:
- Were all of the public agency stakeholders’ interests taken into consideration during the award, such as financial concerns, suitability of the chosen supplier to meet the specifications, legal concerns, etc.?
- Were any bids or proposals excluded and, if so, why?
- What type of review or appeal process is available?
- Was adequate time taken for consideration of the proposals before the award?
- Were bids properly evaluated?
- Was the decision on the award process accurate and adequately communicated?
Phase 6. Post-Award Events. A procurement agency’s work should not end with the award of the contract. There should be reviews of procurements shortly after conclusion to determine if there were any issues that need to addressed, problems that arose or improvements needed. The procurement agency should further follow up on the procurement during and after delivery of the goods and service to ensure that it meets the intended requirements and expectations. Feedback should be sought from counterpart agencies, as well as participants in the procurement process.
Early indicators of abuse
Despite the best efforts of procurement agencies, there will be times when questions are raised about the transparency or integrity of the process. Often charges of corruption, whether real or imaginary, may be alleged. The best defense that a procurement agency can take is a proactive one — to know what to look for as potential indicators of corruptive behavior and to take measures as quickly as possible to prevent corruption from happening. In order to do so, it is useful to examine the most common indicators of potential corruption and abuse in the procurement system.
According to the World Bank, activities of corruption in procurement generally fall into three categories:
Demand for payment. This occurs when a government official demands a bribe or kickback from a firm or individual, or a firm or individual offers a bribe, in exchange for a contract award.
Bid rigging. This occurs when officials manipulate the bidding process to ensure that the ultimate contract will be awarded to the bribe-paying firm.
Fraud. In order for the bribe-paying firm to recover the cost of the bribe, and to exploit the corrupt relationship, the firm inflates prices, bills for work not performed, fails to meet contract specifications or substitutes substandard products during implementation. This often involves the cooperation of corrupt officials or at least a “blind eye” to the fraudulent activities conducted.
Corrupt activities can occur at almost any stage in the procurement process — during the project development and selection phase, the tendering process, the evaluation phase and contract implementation. These activities could include the selection of projects with a higher return value; tailoring specifications to limit competition or to favor a particular bidder; abusing confidentiality; limiting advertisement and publicity; manipulating the preparation, submission and evaluation of bids; false invoicing; overbilling; underperforming; failure to meet specifications; contract changes and renegotiations; and many more.
Indicators — often referred to as “red flags” — can highlight activities or factors that require a closer look to determine whether there is a problem. Lists of commonly identified “red flags” are often available from anti-corruption interest groups or trade associations. Such lists should not be considered as exhaustive in nature, and each agency should conduct its own risk analysis and determine areas or activities of concern peculiar to that agency’s situation. Any significant risk identified during that analysis should be added to that agency’s list of “red flags.”
The search for “red flags”
Several studies have identified common indicators of potential fraud and corruption in the procurement process. Ten most common “red flags” have been cited by the World Bank, including:
- Complaints from bidders and other parties may signal that additional due diligence and investigation may be warranted in a particular procurement.
- Multiple contracts below procurement thresholds may indicate contract- splitting schemes used by corrupt officials to avoid higher level review or competitive bidding.
- Unusual bid patterns such as unexplained inflated bid prices, round or unnatural numbers, apparent rotation of winning bidders and other seemingly irregular activities may be a sign of collusive bidding by at least some of the vendors.
- Inflated agent fees, or the unnecessary involvement of middlemen or third parties may be used to disguise corrupt payments.
- Fictitious companies or consulting firms may be used by some dubious bidders to submit bids that are unreasonably high so that a real bidder can submit a higher-than-normal bid price and give the appearance it is competitive.
- Rejection of the lowest bidder on unjustifiable grounds may indicate bid rigging with project officials having a hidden interest in a contractor.
- Sole source awards given over and over to the same bidder should be scrutinized, especially if these requests are made for reasons of urgency and with no other legitimate purpose.
- Changes in contract terms and value with regards to the price, amount or type of services between the selection and the signing of the contract, while sometimes unavoidable, may nevertheless be an indicator that warrants more review.
- Contract change orders after the contract has been signed, especially if multiple in nature, can indicate collusion between the client and contractor to increase the value of the contract without delivery of additional product or services.
- Poor performance, or deficiencies in the goods or services, or even non-delivery can indicate fraud and corruption.
Looking for respect
Three attributes can generally describe those procurement systems which have earned a high degree of respect among the business community. They are:
- Fairness: all competent suppliers should have equal chances to participate in tenders;
- Transparency: all procedural steps are based on open, predictable, known and written procedures, including the process and criteria used for awarding the contract to ensure that all participating bidders are treated on equal terms; and
- Availability of a recourse mechanism: an open and independent means whereby an aggrieved bidder can present a contest and be assured that due consideration will be given it to assure transparency and integrity.
A public procurement agency can apply these principles at all phases of the procurement cycle by ensuring effective record keeping and documentation; making sure that all bidding, procedure, evaluation and award documents are public and available in a timely manner; and ensuring public access to information through effective communication channels. Doing so can avoid many problems and improve the confidence and respect in the agency.
About the author
Kenneth Barden is an attorney with over 15 years experience as a municipal lawyer and 14 years of experience in international development consulting. Most recently he has been an advisor on projects in the West Bank and Azerbaijan.