Risk assessment of different sourcing contract scenarios in project procurement

Abstract

Procurement is an overlapping function between engineering and construction phases of engineering procurement and construction (EPC) projects. Due to these overlaps, procurement risks may have cascading effect on project cost and schedule overruns. Thus, management of procurement risk is important to avoid detrimental effect on the success of project. A project requires multiple items from multiple suppliers under multiple contracts, terms and conditions and risks exposure. This study proposes an integrated frame work, of 64 combinations comprising of type of item, type of buyer-supplier relationship, type of pricing regime and six types of procurement risks, to devise an optimal project procurement portfolio. Overall non-critical items pose the lowest and strategic items the highest levels of procurement risks to the project. Amongst types of buyer-supplier relationships, partnership sourcing has the lowest risk exposure. Amongst pricing regimes cost reimbursement has the highest risk exposure and fixed price has the least. For leverage, bottleneck and strategic items partnership sourcing type of buyer-supplier relationship with firm price, cost incentive and cost reimbursement pricing regime, respectively, emerge to be the best combination of procurement strategy. For non-critical items adoption of competitive arm’s length type of buyer-supplier relationship with firm pricing regime is suggested.