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Govt defends £8.5bn IT contract

Officials 'always understood' costs would rise

The government has once again defended the tripling in cost of its Aspire IT contract at HM Revenue and Customs - now forecast to reach £8.5bn - saying it was "always understood" that costs could rise.

The escalating cost of the 10-year IT contract - which has shot up from Capgemini's successful £2.83bn bid for the contract in 2003 - were revealed in a report on the re-tendering of Aspire by the powerful Commons public accounts committee.

In the immediate wake of the report, HMRC promised it would "endeavour to drive similar efficiency savings" from the mammoth deal.

But a formal government response to the public accounts committee does not restate this pledge. Instead it says: "The estimate of £2.83bn was based on 2003-04 prices and approved Inland Revenue funding at the time. It was always understood that costs would rise if more work was added to the contract."

A team led by PA Consulting had developed a 'Should Cost Model' using benchmarked service costs to allow HMRC to challenge bidder assumptions, the response says. This ensured that bids were financially viable and no major elements of the cost had been omitted.

HMRC has subsequently "reviewed the impact of subsequent changes and increases in IT demands", the response says, but the revised figures still showed that Capgemini was offering a lower price than a bid from competitor EDS and the Should Cost Model.

The response says HMRC is keeping Aspire under review through "a rolling programme of internal benchmarking".

Since the contract began, it had delivered a number of systems and services to budget, including the STRIDE project to upgrade 1,100 file servers and 110,000 workstations to Windows XP, the implementation of enterprise resource planning and the re-platforming of the government's biggest database, the NIRS2 National Insurance recording system, the response paper adds.

The government also waved away the MPs' concern about the level of profits generated by Aspire. The committee found that profits could hit £1.1bn as the volume of work included in the contract increases. But the profit margins of around 10 percent to 13 percent are "below the thresholds which trigger the profit sharing agreement" included in the Aspire contract, preventing HMRC from clawing back the money.

The response says profit levels "are as expected at the time of contract signature and should not be regarded as grounds for concern", while the contract contains "mechanisms to regulate value for money which can be used to address concerns about the impact of growth".

HMRC is also working on a cost challenge, looking at how IT running costs can be cut to meet the tighter spending limits set out in chancellor Alistair Darling's comprehensive spending review, the response says.

But the government has admitted that a large profit margin should not have been built into transition costs for the new supplier. HMRC accepted the committee's conclusion, the response says. "With hindsight, it may have been better to agree a fixed fee for transition."

HMRC believed that offering profits on the transition was "the only way to guarantee that the incoming supplier would bring the high quality skills crucial to delivering a secure transfer of services" - a view endorsed by the Treasury at the time, the response says. But Treasury policy "has since developed in the light of experience and is now not to pay a profit on these costs".


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