This page is part of our decision support tool.
Risk is uncertainty of outcome. It can arise in two ways:
- Threats: damaging events that can lead to failure to achieve objectives
- Opportunities: constructive events that can, if exploited, help with the achievement of objectives but that are also surrounded by threats.
There are two aspects of risk:
- The probability that a risk will materialise
- The impact that the risk would have on the effectiveness, economy or efficiency of the programme if it did arise.
It is impossible to eliminate risk from any financial arrangement. It would, in any case, be undesirable to do so: the desire on your or the provider’s part to avoid a risk can create an incentive on you or the provider (respectively) to deliver the programme’s objectives.
This correctly implies mutuality. When you allocate the risks in a programme between government and the organisation in receipt of finance, you must not offload as much risk as possible onto the recipient. You must allocate risk in a balance that is effective, economical, efficient and fair. You must consider:
- The objectives of the programme [see Establish specific purpose]. Some programmes, such as experimental pilot programmes, are inherently more risky than others. All programmes will carry some risk. It would be unfair to deal with this by allocating all the risks to the potential provider. Doing so would also undermine the achievement of the programme’s objectives: you would deter some potentially good providers from taking part in the programme
- The extent to which each party has control of the risk. You must not expect the provider to bear all the demand risk (that is, the risk that the estimated demand for the service does not materialise) if you have much of the control over the demand. At the same time, it is appropriate for the provider of the service to bear the output risk: that is, the risk that the provider does not deliver the required outputs, leading to a loss of desired outcomes. But this must be on the basis that these outputs have been fully agreed between the funder and provider
- The capacity of the potential provider. For example, an organisation with large reserves will be in a better position to manage risks than a small organisation with small reserves.
If your programme is large or complex, you should hold a risk meeting (or series of meetings) to apportion risks. In a risk meeting, you can share your concerns about the risks in the programme with others and reach a balanced view. It may be appropriate at times for the risk meeting to include both funders and representatives of the third sector. The allocation of risk should also be embodied in the written agreement between funder and provider.
Guidance on risk is available from HM Treasury’s ‘Orange Book’, [Footnote 1] from HM Treasury’s ‘Guidance to Funders’ and from the Office of Government Commerce publication ‘Management of Risk: Guidance for Practitioners’.
The risk of fraud in funding programmes is discussed in Section 3 of this tool.
- HM Treasury, The Orange Book: Management of Risk – principles and concepts, HM Treasury, October 2004.