2.39 As the majority of new work is awarded to EDS without competition, it is important for the Department to examine the cost of proposals as well as the technical aspects. There are three main types of cost associated with new work: staff costs associated with the development and enhancement of software; infrastructure costs, for example the costs of transmitting data across the information technology network; and capital costs. EDS charges the Department in accordance with the terms and conditions set out in the partnership contract, which, in broad terms, commit EDS to reducing unit costs over the life of the contract and allow the Department to procure additional work at prevailing unit costs. Details of these arrangements are set out at Appendix 2.
2.40 The estimated cost of a software development is based on the number of "function points". These are related to the number of features in a system, for example, the number and types of input and output, and number of cross references within the computer program. EDS provides function point counts for each new proposal which are then validated by the Department's operational research specialists.
2.41 EDS estimates the number of staff days needed to develop a new proposal based on the function point count and expected productivity. The productivity achievable depends on a range of factors, including the complexity of the application, the development tools used, and the platform and programming language. The Department's Feasibility Appraisal Service and operational research specialists assess whether the proposed productivity is reasonable, having regard to productivity achieved on previous projects and the baseline productivity for different types of development. These arrangements, and the requirement to reduce unit costs over the life of the contract maintain pressure on EDS to improve productivity.
2.42 The unit costs of EDS staff are agreed annually between the Department and EDS in accordance with the contract. Aggregate increases are capped to levels indicated by wage indices published by the Office of National Statistics.
2.43 As noted at paragraph 2.31 above, our examination of projects provided assurance that EDS proposals are challenged regularly, resulting in reductions in cost. However, although the contract commits EDS to reducing unit costs, there remains a risk that the productivity implicit in EDS proposals is out of line with the market. This risk, which was considered by the Department when the contract was let, is examined further in Part 4 of the report.
2.44 Additional capital and infrastructure costs associated with new work are charged on a cost-plus basis. The Department monitors prices and has carried out benchmarking work to help assess the competitiveness of EDS charges (see Part 4). In the case of capital, in order to provide an incentive to EDS to negotiate a competitive price with information technology suppliers, the Department allows it to retain half the savings it secures compared with list prices, subject to third party scrutiny of claims.