Select Committee on Public Accounts Thirty-Eighth Report



THIRTY-EIGHTH REPORT

The Committee of Public Accounts has agreed to the following Report:

 

NIRS 2: CONTRACT EXTENSION

 

INTRODUCTION AND LIST OF CONCLUSIONS AND RECOMMENDATIONS

  1. NIRS 2—the National Insurance Recording System—is a large and complex computer system which supports the administration of the national insurance scheme. It holds details of some 65 million individual national insurance contribution records. This information is fundamental to the accurate calculation of contributory social security benefits, such as retirement pension and underpins payments to pension schemes in respect of contributors with contracted out personal pensions. In 2000-2001, the Inland Revenue collected over 50 billion in national insurance contributions and the Department of Social Security (now the Department for Work and Pensions) paid out 46 billion in contributory benefits, based on records held on the system.[1]
  2. NIRS 2 was developed by Accenture (then Andersen Consulting) in 1995. The contract covered the replacement of NIRS 1, transfer of data, development of the system to implement legislative changes arising from the Pensions Act 1995, and the operation of the new system until 2004. The original contract was valued at 45 million for operational services with provision for software enhancements increasing that amount to 76 million. We examined the difficulties that were experienced in delivering NIRS 2 on three occasions between 1998 and 2000.[2]
  3. In 1998 the Government proposed significant changes to pensions and national insurance legislation, for example to introduce stakeholder pensions and pension sharing on divorce. The Inland Revenue, who had taken over responsibility for NIRS 2 in April 1999 with the transfer of the Contributions Agency, negotiated an extension to the contract to cover the work needed to support these legislative changes. The estimated value of the extension is between 70 million and 144 million, depending on the amount of work ordered over the remaining life of the contract.[3]
  4. On the basis of a Report by the Comptroller and Auditor General[4] we looked at the need for the new work, the reasons why the Inland Revenue chose to extend the contract with Accenture rather than conduct a fresh competition, and Accenture's performance so far.
  5. In the light of this examination, the Committee draws three overall conclusions.

  • The original contract for NIRS 2 showed the impact of setting too tight a deadline in statute for implementation of the Pensions Act 1995. The Department of Social Security repeated this mistake by not properly assessing the aggregate impact on NIRS 2 of the later proposed changes to pensions and national insurance legislation, or the risks and extra costs involved. Our Report on Ensuring Policies Deliver Value for Money has already emphasised the need for policies to be implemented with sufficient flexibility and for the risks faced to be identified, assessed and regularly monitored.[5]

  • In non-competitive situations, Departments need to have in place rigorous methodologies for assessing the reasonableness of the prices on offer, and arrangements to avoid contractors earning excessive profits. In the case of the NIRS 2 extension, the Inland Revenue's benchmarking arrangements suggested that Accenture's proposals offered value for money. The Inland Revenue are sharing the benefits of improved productivity, and "super profits", but Accenture have outperformed their target productivity levels by a wide margin. On the basis of experience so far, the prices agreed appear to be very generous for a non-competitive contract, where, in practice, the Inland Revenue had little option but to use Accenture because of the high break costs of the original contract.

  • The Inland Revenue face a fresh challenge in 2004, when their contracts with Accenture and with EDS (their strategic supplier of other information technology systems) come up for renewal. Although they are taking steps to generate competition, the barriers may be too great, especially in terms of learning and set up costs for these large and complex systems in a deal likely to be worth over 4 billion. The methodologies they use to estimate and benchmark proposals will need to be rigorous.

  1. Our more specific conclusions and recommendations are as follows.
      1. The major welfare reforms planned by the new Government after May 1997 led to significant changes to NIRS 2, well beyond those that could reasonably have been foreseen when the initial contract was placed in 1995. While the Department of Social Security considered the technical feasibility and costs of each change, they did not assess whether the changes could be delivered within the existing contract. Failure to do so restricted the Inland Revenue's options when it became clear that significant additional work was required, because implementation dates were already set in legislation. The Inland Revenue should explore with the Office of Government Commerce how to build additional flexibility into future contracts, for example by inviting the bidders to propose a separate pricing structure for major enhancements as part of the initial tendering process.
      2. The Inland Revenue took advantage of the contract extension to introduce incentives for delivery and productivity, and to address many of the weaknesses the Committee of Public Accounts identified in its earlier reports on NIRS 2 and other IT projects that encountered difficulties. For example, there is now a clear framework for acceptance testing.
      3. The Inland Revenue negotiated arrangements for sharing the benefits of any productivity improvements achieved by Accenture, and to share any "super profits" above agreed margins. The productivity actually achieved by Accenture on the first two developments (3.4 compared with 7.5 days per function point) and the fact that Accenture appear to have made "super profits" in year two of the contract, do raise serious questions about how rigorous the original estimates and benchmarking were. The Inland Revenue should consider the scope to renegotiate the target productivity rate for the rest of the contract in line with performance to date.
      4. Both parties attributed improvements in performance under the contract to stronger and more robust partnership arrangements. In our Reports on Improving Construction Performance and Non-Competitive Procurement in the Ministry of Defence[6] we highlighted the potential benefits of partnering, including incentivisation of performance; transparency; minimising the risk of disputes; replicating lessons learned on earlier projects and a sensible allocation of risks.

    THE NEED FOR AN EXTENSION TO THE CONTRACT

  2. The original contract for NIRS 2 made provision for routine enhancements and a ceiling on additional development work. The ceiling was expressed as 2000 function points per annum, at a fixed price per point agreed in May 1997, 2 years after the original contract was placed. However, between May 1997 and April 1999 the Government announced a number of significant legislative changes which affected the areas of national insurance and pensions dealt with by NIRS 2 (Figure 1). These changes far exceeded the provisions in the original contract.[7]
  3.  

     

    Figure 1: Main legislative changes affecting the National Insurance Recording System

     

    Development

    Proposed

    Enacted

    Implementation date

    Restructuring of National Insurance contribution thresholds and limits

     

    November 1997

     

    Social Security Act 1998

     

    Phased from April 1999

     

    Enabling SERPS pensions to be shared on divorce

     

    June 1998

     

    Welfare Reform and Pensions Act 1999

     

    December 2000

     

    Revised rules for calculating Incapacity Benefit

     

    October 1998

     

    Social Security Act 1998 Misc Amendments (Regs) 1999

     

    April 2000

     

    Reform of bereavement benefits

     

    October 1998

     

    Welfare Reform and Pensions Act 1999

     

    April 2001

     

    Introduction of stakeholder pensions

     

    December 1998

     

    Welfare Reform and Pensions Act 1999

     

    Available April 2001. Employers must offer by October 2001

     

    Introduction of State Second Pension

     

    December 1998

     

    Child Support, Pensions and Social Security Act 2000

     

    April 2002 (earliest)

    Source: National Audit Office summary of relevant Government announcements

     

  4. The Inland Revenue consider that the ceiling on enhancements in the original contract negotiated by the Department of Social Security was adequate, based on all reasonably foreseeable assumptions. Those concerned could not have foreseen the extent to which, following the general election in 1997, there would be significant changes in legislative requirements. Even had they been foreseen, in their view it was not appropriate for an Accounting Officer to take into account the possibility of a change of government in planning the system.[8]
  5. After the General Election, the proposed legislative changes were announced over a period of a year, from November 1997 to December 1998. The Department of Social Security assessed the technical feasibility and costs of each of these policy changes, but told the National Audit Office that they were not in a position to establish fully the aggregate effect of the changes on NIRS 2. Their ability to assess the overall capacity for NIRS 2 to accommodate the package of changes within the proposed legislative timetable was limited by uncertainties about the initial stabilisation of the system. As the original system had not been fully delivered, it was more difficult to assess the extent to which it would need to be modified. Thus it was not apparent to the Department of Social Security that the required developments might, in aggregate, exceed the annual enhancement limit included in the NIRS 2 contract, or more fundamentally, whether the system had the technical capacity to absorb the level of change required.[9]
  6. The Inland Revenue confirmed that as far as they were concerned they would normally try to establish the full implications, costs and lead times for implementation taking into account issues that cut across departmental boundaries. The circumstances would determine the degree of flexibility they might need to build in to allow for possible changes, but it would be bad value for money to provide unlimited flexibility to allow for the possibility that at some point in the future the policy might change.[10]
  7. When they took over responsibility for NIRS 2, in April 1999, the Inland Revenue formed a joint design team to assess the options with staff from the Department of Social Security and with technical support from Electronic Data Systems (EDS), their strategic information technology partners, and Accenture. The team considered the scope of the legislative commitments, the feasibility of delivering them through NIRS 2 or alternative means, and the risks and dependencies involved, in order to derive an estimate of the scale and optimum timing of future developments. In October 1999, they concluded that new development work would require between 5,860 and 7,240 function points to be delivered between October 2000 and April 2002. As this exceeded the limit in the original contract of 2,000 function points a year, the Inland Revenue examined ways of meeting the commitments arising from the legislative changes.[11]

 


1   C&AG's Report, paras 1, 1.2 Back

2   Committee of Public Accounts: 46th Report, The Contract to Develop and Update the Replacement National Insurance Recording System (HC 472, Session 1997-98); 22nd Report, Delays to the new National Insurance Recording System (HC 182, Session 1998-99); 31st Report, National Insurance Fund 1998-99 and Wider Issues of Fraud and Error in Benefits Paid by the Department of Social Security (HC 350, Session 1999-2000)Back

3   C&AG's Report, para 2  Back

4   C&AG's Report, NIRS 2: Contract Extension (HC 355, Session 2001-02) Back

5   Committee of Public Accounts: 49th Report, Ensuring that Policies Deliver Value for Money (HC 541, Session 2001-02)  Back

6   Committee of Public Accounts: 2nd Report, Improving Construction Performance (HC 337, Session 2001-02); 29th Report, Non-Competitive Procurement in the Ministry of Defence (HC 370, Session 2001-02) Back

7   C&AG's Report, paras 2.2-2.5; Qs 150-157 Back

8   Qs 3, 72-75, 96-99, 158-161, 191-196 Back

9   C&AG's Report, paras 2.8-2.9; Qs 3, 97-99, 159 Back

10   Qs 3-6, 46-48, 50, 57-58, 162-163 Back

11   C&AG's Report, paras 2.11-2.12; Qs 88-92, 110 Back

 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 7 August 2002