Publication

Precedented Times: Navigating Systemic Risk in Public Procurement

Published:

July 9, 2025

Author(s):

• Colin Boyd
• Melanie Gillis
• Jennifer Gray, PMP

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In 2020, the global COVID-19 pandemic changed the ordinary course of business. From the direct impact of lockdowns to the downstream effects of shuttered supply chains, labour and material shortages, interest rate fluctuations, inflation, and capital market fluctuations, organizations were forced to navigate the impacts on existing operations in what was referred to as “unprecedented times.” Fast forward to 2025 and volatility analysis remains a focal point of managing operations and planning for growth. The potential impacts of current and potential tariffs on global trade partners and rising geopolitical uncertainty are front of mind.  Public sector organizations are attempting to assess the potential impacts on public procurements – but now often after the risks have actually materialized.

Monitoring global events on an ongoing basis and considering them as part of the administration of existing contracts and negotiation of new contracts is key. The effects of pandemics, tariffs, and geopolitical uncertainty are best classified as systemic risks: risks that have a market-wide impact. Tools and frameworks have evolved for public sector organizations to identify, evaluate and manage systemic risk on public procurements and to mitigate potential impacts, regardless of the source of volatility.

New Procurements

At first blush, a public sector organization, with accountability for the public purse, likely does not want to assume significant systemic risk in relation to a vendor’s supply chains. The overarching principle is that risks are allocated to the party that can best manage them. However, loading too much risk (particularly systemic risks) on vendors can also result in a scarcity of willing vendor proponents.  Increasingly, this can result in failed or non-competitive public procurements. Public sector organizations can employ several strategies to identify and evaluate risks (including systemic risks) during procurements.

Do Your Research. While there’s often pressure on public sector procurement groups to release procurement documentation to market, take some time before doing so to independently identify and evaluate risks that could have an impact on a planned procurement. This independent research could include some or a combination of:

• Consulting with relevant industry associations.

• Consulting with other public sector organizations.

• Issuing a non-binding Request for Information.

• Consulting with subject matter experts.

Taking the time to do some research before releasing procurement documentation allows you to generate your own baseline information with respect to the likelihood and impact of systemic risk events. This research can serve as a useful benchmark against which to evaluate proponent positions.

Leverage Due Diligence Opportunities Through Considered Procurement Design.  Procurement processes can be designed to allow you to have structured opportunities to engage with proponents on potential risks and seek information regarding the potential counterparties’ ability to manage such risks. Through carefully drafted provisions allowing for information gathering and analysis during the procurement process, parties can collectively identify the scope, likelihood and impact of risk events while still maintaining a fair and non-discriminatory procurement process. 

Don’t Forget the Ts & Cs.  You can use a variety of terms and conditions to help identify, mitigate or offload systemic risks, including:

• Reporting Obligations. Reporting obligations can provide for early notification of a systemic risk event and allow parties a better opportunity to mitigate the impact.

• Inventory/Early Ordering. Where lead time may be anticipated (even if the event is not), a provision that allows or incentivizes a vendor to purchase and store items ahead of time may help mitigate the impact.

• Purchasing Controls. Provisions which allow you to have increased control as to where and when you can purchase certain key goods might help to mitigate systemic risk when it arises.

• Expedited Approval System. A provision for expedited approvals or pre-authorizations in the case of a systemic risk event allows parties to stay nimble and pivot quickly to mitigate such risks.

• Price Escalation Clauses. Often a contractual requirement can still be performed following a systemic risk event, at additional expense. A price escalation clause outlines how the parties will share increased price risk if the systemic risk materializes. Key components of this type of provision could include a clear trigger for a price escalation, applicable thresholds, benchmarks or standards to be employed, notice requirements, required documentation, burden of proof, and specifics of how the change in price will be calculated and applied.

• Change Order Provisions. A systemic risk event may necessitate a change to the goods or services being procured. A comprehensive change order provision will outline the process if the goods and services contracted need to change, the required consents, and how the parties will determine and apply changes in costs and/or delivery timelines.

• Delay Provisions. Systemic risk events may delay performance under a contract. A carefully drafted delay provision will outline the process if performance will be delayed, including applicable extensions, liquidated damages, penalties and remedies.

• Change in Law. The impact of a change in law ranges from increased time and expense in performing the contractual requirements to preventing performance altogether. A change in law provision should outline the process if a change in law impacts performance. Pay special attention to the trigger (change in local laws versus extra-jurisdictional), remedies, and foreseeability (to the extent that potential changes in law have been proposed at the date of contract formation).

• Force Majeure. Typically, force majeure clauses address contingent circumstances beyond the control of either party that relieve a party of its performance obligations. Like with change in law provisions, special attention should be paid to the trigger (carefully defining which events are beyond the control of either party and warrant relief), foreseeability and mitigation requirements (for example, requiring or incentivizing a party to seek remission of tariffs from the Government of Canada).

• Delivery Terms. In the case of import/export obligations and duties, standard provisions such as the International Chamber of Commerce’s Incoterms 2020 clarifies which party is responsible for certain costs, risks and obligations with respect to the delivery of goods. Typically, the buyer is responsible for all duties, taxes and formalities; however, if the contract terms specify DDP (Delivery Duty Paid), the responsibility lies with the vendor.

Plan for Contract Negotiations. Not all procurement processes allow for negotiation of terms and conditions. However, where permitted, a procurement process that allows for negotiation will provide the opportunity to consider and apportion risks in a more open and collaborative manner. Careful planning for such negotiations (for example, creating a risk register and ranking potential risks) is critical for allow for a productive discussion with vendor proponents regarding systemic risk allocation.

Existing Contracts

Ideally, contracting parties have allocated systemic risks between them when negotiating the contract. The reality, however, is that not all contracts justify the time and expense of risk analysis and allocation, and the applicability or scope of the systemic risk event can’t always be predicted with certainty at the time of contract formation. Accordingly, you will likely find yourself assessing the impact of a systemic risk event on existing contracts. You can do this proactively through:

Overall Monitoring. Consider having an appropriate system in place for identifying events that may impact existing contracts. A designated contract administrator responsible to monitor existing contracts can be helpful in providing a “portfolio” view of vendor performance, lessons learned, and issues arising under your contracts.

Don’t Forget the Ts & Cs (Part 2). When a systemic risk event is identified, you must consider which clauses in the existing contract may be impacted. In addition to the contract terms and conditions outlined above, these are some additional considerations:

• Triggering Events. What’s the applicable standard that will trigger a process to deal with the systemic risk event?

• Qualifying Events. Only qualifying events will trigger action. Consider whether the identified event meets the standards outlined.

• Causation. Consider whether the cause of the event meets the requirements outlined. For example, Change in Law clauses are often limited to direct impacts of changes in law. A law imposing a 25% tariff on goods being sold would likely trigger the applicable Change in Law provisions. However, downstream costs related to inflation, market fluctuations, or other ancillary market conditions that indirectly impact the cost of providing goods or services may not.

• Impact. Consider whether the impact on performance meets the outlined standards. For example, Force Majeure provisions may employ standards ranging from events that make performance “more difficult” all the way up to “impossible”. The degree to which performance is impacted may limit a party’s entitlement to claim relief.

• Notice Requirements. Many clauses require that notice be provided to specified persons in a particular manner. When an event that may impact an existing agreement is identified, the contract should specify the timing and substance of any required notices. This might include notices specified under the contract, or at law, and might also include notices to third parties such as a regulator, secured creditor, or subcontractor. Failure to comply with applicable notice requirements may impact a party’s ability to rely on the provision.

• Mitigation Requirements. Contractual provisions, and the law of damages more generally, may require a party to mitigate its losses when dealing with the impact of a systemic risk event.

• Remedies. Contracts may provide for specific remedies upon a triggering event. For example, a price escalation clause may provide for the cost of services to be increased by a fixed or variable percentage in response to a triggering event. When an event that may impact the existing contract is identified, parties should assess whether the applicable remedy will appropriately account for the impact on the contract.

You Can Still Negotiate. If the contract provisions addressing the systemic risk event are not desirable, the parties might be able to work together to find a mutually beneficial solution. For example, if a supply chain delay can be avoided by adjusting price, or re-allocating risk between the parties, the outcome may be better for both parties. When a systemic risk event is identified, the parties should try to identify opportunities for better results through early and collaborative discussion.

Common Law Alternatives. Contract provisions are not the only option to relieve performance based on a systemic risk event. While the standards are generally higher, when an event that may impact a contract is identified, and the result appears undeniable, parties might wish to consult their legal advisors on whether common law doctrines of impossibility or frustration apply.

Please contact your McInnes Cooper lawyer or any member of our Government & Institutions Team @ McInnes Cooper to discuss how t mitigate systemic risks in public procurement.

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