The value of the contract

1.12  As noted at paragraph 1.6 above, the contract with EDS is not a fixed-price contract, reflecting the fact that it was difficult for the Department to predict with any degree of certainty the size or nature of its long-term information technology requirements. The Department's current forecast of the projected revenue spend on the ten-year contract is £2 billion. Figure 2 shows the factors underlying the current forecast and the reasons for the changes since the contract was let are explained below. The original projected value of the contract covered the provision of information technology services, but excluded any element for capital because the Department was unable to predict with any certainty what developments would emerge over the next ten years. To maintain consistency, Figure 2 also excludes capital expenditure.

1.13  The market test and competitive tender were conducted using a fixed set of data based on the Department's assets, work types and volumes in 1992-93. This ensured that the bids were prepared on a common basis. As the Department had continued to develop its information technology services between the preparation of the invitation to tender and the award of the contract in 1994, a post-contract verification exercise needed to be carried out to value the assets and liabilities actually transferred to EDS. Under the post-contract verification, the EDS bid was adjusted to reflect the actual situation at the date of transfer. Increases in service levels, and other liabilities existing by the time the contract was awarded, added £203 million to the projected contract value over the ten year period.

1.14  The cost of additional work and volume increases since the contract was awarded is based on expenditure to date and on the assumption that new work will continue to be commissioned over the remaining life of the contract at broadly the same annual rate as in 1998-99. The Department's latest estimate of the cost of new work is over £500 million.

1.15  The tenders and the original estimates of contract value were expressed in constant 1994-95 prices. The estimated impact of inflation to the end of the contract is £248 million.

1.16  The main incentive under the contract for EDS to improve the cost-effectiveness of the service is an arrangement where the price of the original volume of work transferred reduces by about 35 per cent over the life of the partnership. New work is charged at prices based on the reducing cost of the transferred work, including any additional improvements in efficiency. Appendix 2 explains how the pricing mechanism works.