How the government views supplier risk

Supplier risk are the risks associated with the government’s choice of a supplier that may impact the project delivery. Types of supplier risk vary from project to project. When tendering it is important to understand how the government perceives supplier risk so that they can be addressed in the bid response.

What types of supplier risk are there?

The first step in understanding how the government understands supplier risk is recognising the wide range of risks that associated with the choice of supplier. Supplier risks include financial stability, capability and capacity, compliance with regulations, reputation, and reliability. Suppliers need to understand how the government perceives these risks so that they can prepare compliant bids and also provide solutions that may give them an advantage.

Financial risk

Financial stability is a primary concern for governments. The failure of suppliers due to financial insolvency will disrupt service delivery and result in cost over-runs. Governments assess suppliers’ financial health, including liquidity, solvency, profitability, and debt levels, to gauge suppliers’ ability to fulfill contractual obligations over the medium to long terms.

Between July 2022 and April 2023, 1,709 construction companies entered administration, according to data from the Australian Security and Investments Commission (ASIC). This includes Porter Davis, Probuild, and Pivotal Homes.

Capability risk

Capability risk in a tender refers to the potential for a bidder to lack the necessary skills, resources, or experience to successfully fulfill the requirements of the contract. This risk can arise from inadequately qualified or trained personnel, poor or outdated technology, or insufficient experience in specific project requirements. Assessing capability risk involves evaluating the bidder’s track record, qualifications, and proposed approach to the project.

Capacity risk

Operational capacity is another critical aspect of supplier risk assessment. Governments want assurance that suppliers have the necessary resources, expertise, and infrastructure to deliver the goods or services in the contract. This means evaluating production and service capabilities, workforce capacity, plant availability, technology infrastructure, and supply chain resilience.

Regulatory compliance risk

Compliance with regulations and contractual requirements is necessary to mitigate legal and reputational risks for government entities. Suppliers must adhere to relevant laws, regulations, and industry standards, as well as meet the specific requirements outlined in procurement contracts. Non-compliance can lead to legal liabilities, penalties, contract disputes, and damage to the government’s reputation.

Reputational risk

Reputational risk is an often underestimated risk. Government projects are under constant press scrutiny and so therefore must maintain public trust and confidence. Suppliers with a history of ethical lapses, poor performance, or negative publicity can pose strong reputational risks to government agencies. The government is wary of suppliers that may focus public scrutiny on their projects; that potentially create political backlash and loss of public trust.

Reliability risk

Reliability is a fundamental concern in assessing supplier risk. Governments rely on suppliers to deliver goods and services on time, within budget, and at the specified quality level. Established suppliers with a track record of reliable delivery and performance compliance are attractive to government buyers, whereas those without a demonstrable history may raise concerns. This is where incumbency can be a key consideration.

The importance of risk mitigation

Like all good communications the better you understand your audience the better you will be able to connect with them. This is most important in tendering where you need to present a watertight solution to the potential client. Addressing and mitigating all potential risks is a good process for creating a unique and successful tender.