The total cost of HM Revenue & Customs' (HMRC) 'Aspire' ICT contract with Capgemini has spiralled from £4.1 billion to an estimated £10.4 billion by the time it expires in 2017, according to the National Audit Office (NAO).
Aspire, which provides 650 IT systems to enable HMRC to collect tax, is the government's largest technology contract, costing roughly £813 million every year since it was first signed in 2004.
In a report released yesterday, the NAO found that Capgemini and sub-contractor Fujitsu have made average yearly profit margins of 16% on the contract; equivalent to £1.1 billion and twice the £500 million forecast when the contract was set up in 2004.
The original contract included the right for HMRC to receive some of the additional profit made by the suppliers. However, this was given away during a major renegotiation in 2012. As a result, HMRC received profits worth £16 million instead of £71 million.
"HMRC's management of Aspire, its most important contract which provides 650 IT systems to help HMRC to collect tax, has been unacceptably poor," said Public Accounts Committee (PAC) chair Margaret Hodge MP.
"By the time the contract ends in 2017 HMRC will have spent £10.4 billion - more than double what it initially expected to spend. What's worse, it has spent £5 billion of this total without first checking whether other providers could deliver a better deal, even though it had evidence that it was paying above market prices."
HMRC commissioned significantly more work through Aspire than originally planned, such as £3 billion on additional projects such as data storage, introducing new desktop services, applications and contact centre services. It also extended the contract by three years at a cost of £2.3 billion.
However, according to the NAO, evidence indicates the department paid above market prices for the work commissioned through Aspire.
Although HMRC said it has squeezed £750 million in savings out of the contract during four major negotiations, the auditor found that the department has had 'limited success' in reforming Aspire.
For example it has not followed through on plans to set up direct contracts with sub-contractors such as Fujitsu and Accenture, and has failed to introduce significantly more competition, taking back services worth just three percent of Aspire's cost last year.
Running out of time
The NAO warned that HMRC is running out of time to replace the contract.
The report said that the department is yet to produce a business case or full project plan for the 'Aspire Replacement Programme'.
"HMRC is planning to replace the Aspire contract in 2017, but its new project is still half-baked, with no business case and no idea of the skills or resources needed to make it work," Hodge said.
"All of this gives me little confidence that HMRC's senior team has the capability to manage large and complex contracts."
The NAO said that HMRC "must now act quickly" to take control of its ICT operations and make plans for the mega-contract to be replaced with a larger number of contracts with a wider pool of suppliers.
Although Capgemini is the 'prime' contractor on Aspire, it has engaged a number of sub-contractors such as BT, Accenture, Fujitsu, Level 3, and an eco-system of over 250 other suppliers to work on the contract.
The auditor warned that HMRC will face 'substantial risks' if it fails to properly replace the contract when it expires in June 2017.
These include having to extend Aspire, needing to run a smaller ICT service, a reduction in the speed or scale of proposed digital services and a drop in the amount of tax collected by the department.
Need for skills
The spending watchdog particularly emphasised the importance of improving the skills base at HMRC.
The report recommended: "HMRC should urgently invest in its operational, technical and commercial skills.
"HMRC's capability needs are unlikely to be met solely through developing existing staff. It needs to recruit or procure new commercial and technical capability," the report added.
In response to the report, an HMRC spokesman said: "HMRC has one of the largest outsourced IT contracts in the world, enabling us to deliver a very wide range of services to more than 50 million customers. We are committed to delivering all this for the minimum cost to the taxpayer."
He added: "The NAO also recognises the progress that HMRC has made over the last two years in developing in-house technical skills, so that we are less dependent on external suppliers. For instance, we recently opened a new Digital Delivery Centre in Newcastle as part of our Digital transformation programme.
"We will continue to improve the performance of the contract over the next three years."
HMRC has one of the largest IT estates in government, with approximately six major data centres and responsibility for 1.1 billion transactions every year.
A recent report by the Institute for Government and Spend Network found that 82% of Capgemini's revenue from the Whitehall came from the Aspire contract alone.