18 The key points arising from our examination are as follows:
On the need for an extension and the lessons for Departments
a The original NIRS 2 contract between the Department of Social Security and Accenture included flexibility to cater for legislative change then planned, an agreed annual volume of additional development work and routine enhancements. But the scale of change arising from new legislation in 1998 was considerably beyond the level expected when the contract was agreed, and exceeded the levels allowed for in the contract. Departments should consider whether contracts should include specific mechanisms to deal with major enhancements of this nature. This might involve the reintroduction of competition or inviting the bidders to propose a separate pricing structure for major enhancements as part of the initial tendering process.
b The Department of Social Security did not assess the aggregate impact of the proposed policy changes and their timing on NIRS 2 development capacity. At the point when responsibility for the system was transferred to the Inland Revenue, neither Department had a clear view of whether there was the technical or contractual capacity to deliver the changes using the system. In advising Ministers on the implications for existing information technology systems of fixing deadlines for major legislative change, Departments need to understand the impact on their systems, individually and in aggregate, and develop strategies to manage the resulting risks.
c When the original NIRS 2 contract was concluded in 1995, there was little experience of the Private Finance Initiative and none in the field of information technology. An information technology procurement contract of this scale and complexity presented challenges in estimating the size of the requirement and developing pricing strategies which had not arisen in other Private Finance Initiative deals at the time. The Government have produced substantial additional guidance on such arrangements since 1999, in the light of experience with this and other contracts, which includes the following advice:
■ Change control, and similar procedures should be agreed at the outset and allow open discussion about the volume and cost of developments. Contracts should set out clearly how acceptance will be defined.
■ Departments should avoid agreements to agree in key areas of contracts.
The latter point is particularly important because attempts to conclude such agreements may be complicated, difficult and expensive and, in the extreme, may result in a material diminution in the value of a contract to a Department.
On the contract extension
d A contract extension offered better value for money to the Inland Revenue to deliver the required enhancements within the timescale required than the alternatives available.
e In deciding to implement the new contractual arrangements, the Inland Revenue took into account legal advice that the new payment arrangements might leave them vulnerable to claims for compensation. As the risk of challenge was extremely low they decided to proceed in order to meet the proposed timetable for new pensions legislation and to secure improvements in their control of development work. Legislative timetables should be set so that Departments can implement changes while complying with other legal requirements.
f The Inland Revenue contract management arrangements for the extension adhere closely to current guidance on risk management in PFI contracts and information technology projects. Had this guidance been available at the time, it would have led to contractual and operating arrangements considerably different from those originally adopted for NIRS 2. Risks associated with enhancements to the system are shared to a greater extent than under the original contract. The new arrangements have achieved improvements in the relationship between the parties and in the delivery of system enhancements, addressing weaknesses identified by the Committee of Public Accounts.