3.19 The original contract aimed to transfer risks to the contractor. For example, the risk of development cost overruns was borne by Accenture because payments were for operational performance and did not take into account input costs. Delivery risk was considered to be transferred because the contractor was not paid until they had delivered an acceptable system.
3.20 However, when difficulties emerged with the delivery of the new system the Contributions Agency still had to meet its statutory responsibilities. Although the contractor was not paid for the functionality they did not deliver, and thus bore financial risk, the business risk of non-delivery remained with the Contributions Agency.
3.21 The original contract was designed to share the risk arising from demand for changes to the system - the contractor accepted risk in relation to legislative changes already agreed and documented in the contract, and regular enhancements, which were to be delivered within the contract price. There was no defined mechanism for purchasing further enhancements should the scale of change exceed the contractual maximum, which meant that the Contributions Agency bore the full risk of additional enhancements being required. This risk materialised when the further legislative changes were announced in 1998, which had to be delivered to tight timescales (paragraph 2.8).
3.22 The contract extension alters the way in which development work is managed and paid for in a number of ways:
■ Previously, development charges were rolled into the operational charges for the system as a whole. Under the contract extension the Inland Revenue make stage payments covering the contractor's development costs and a share of an agreed target profit margin.
■ Mechanisms are introduced to encourage timely delivery.
■ Post go-live support is provided for an agreed period of time after each release at a price based on the number of function points delivered, as a means of incentivising the delivery of good quality, fault free products.
■ Productivity targets are agreed for each project under the extension, and the cost of variations shared between the parties.
■ If overall profits are higher than a target margin, the difference is shared between Accenture and the Inland Revenue. There is an open book accounting arrangement, which allows the Department's internal audit to check costs.
■ There are improved processes for resolving problems and dealing with difficult issues.
■ The extension has also introduced the concept of qualifying events. These are events which have such a material impact on the relationship that urgent discussion to identify options for resolution are held. The intention of this clause is to introduce greater flexibility to the arrangements, and to reduce the risk of litigation.
The combined effect of these new provisions is that the risks of new development work not being delivered to cost and time are shared between the Inland Revenue and Accenture (Figure 9), which recognises the Department's view that they have an essential role to play in effective software development. The provisions correspond closely to the Treasury Taskforce principles of PFI IT contract risk management and the recommendations of the McCartney report, which were issued after the conclusion of the extension agreement.
9 |
| Most development risks are shared | ||
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| Risk | Ownership | Comment |
|
| Delayed delivery | Shared | Inland Revenue bear business risk. Stage payment regime rewards delivery. Financial penalties are imposed for non-delivery. |
|
| Productivity deviates from target | Shared | Enhancements priced using agreed productivity target. Variations are shared between Inland Revenue and Accenture. |
|
| Poor product quality | Shared | Inland Revenue bear business risk. Accenture receive fixed payment for operating live system to agreed service levels. Penalties for failure to meet service targets. |
|
| Volume change | Shared | Payment mechanism varies cost by level of work ordered within a set floor and ceiling. If demand varies above and below that level there is provision to renegotiate. |
|
| Completion and acceptance disputes | Shared | Accenture receive stage payments for meeting project milestones. Completion and acceptance arrangements apply to each project phase. Joint testing. |
3.23 The Inland Revenue continue to bear the business risk of non-delivery of NIRS 2 functionality. As the risk of non-delivery increases with the volume of change to a system, the Inland Revenue have taken steps to manage the risk actively by:
■ introducing and applying their standard project management methodology to system changes under the contract;
■ managing new software developments as a series of individual, separately controlled projects which are overseen centrally and allocated a specific release date linked to the legislative timetable;
■ establishing joint management and development boards joint testing arrangements; and by
■ further developing a risk and issues register which allocates risks to individuals, and includes action plans and status monitoring.
3.24 Accenture continue to own and run the NIRS 2 system. They therefore still bear risks relating to the operation and availability of the system, the technology deployed, obsolescence and residual value.