A fixed price contract between the BBC and Siemens on a troubled digital media project caused major problems when it went wrong after being awarded to the supplier without any competition, according to the Public Accounts Committee.

In January 2008, the BBC Trust approved the Digital Media Initiative project for an estimated cost of £81.7 million, and with projected benefits of £99.6 million to March 2015.

The project was seen as fundamental in re-engineering the way the BBC makes programmes. It was designed to allow BBC staff and commercial partners to develop, create, share and manage video and audio content and programming from their desktops.

In February 2008 the BBC awarded a £79 million contract to Siemens for the development, delivery and operation of the system supporting the project, with the technology to be delivered by May 2009. The BBC awarded the contract without competition under its 2004 technology framework contract with Siemens. However, Siemens did not meet contractual milestones and Siemens and the BBC agreed a "no fault" termination of the contract with effect from July 2009.

In evidence to the PAC, the BBC said it based much of its case for contracting with Siemens on the grounds that in 2007 Siemens had successfully completed a similar digital installation for the BBC in Pacific Quay, Glasgow.

However, said the PAC, the Digital Media Initiative was a much larger and much more innovative project than Pacific Quay.

The PAC heard that the BBC contracted with Siemens on the basis of a fixed price contract and fixed delivery milestones. The risk was therefore transferred to the contractor.

But when things did not go to plan the BBC told the PAC that the terms of the contract meant it was "unable to intervene" in the design and delivery of the system technology without risk transferring back to the BBC.

The BBC told the PAC that it would now "think very carefully" about using a fixed price contract again in similar cases.

Although the BBC had not agreed with Siemens the cause of the delay, it believed that the project had proved "much more challenging than Siemens had first believed" and that Siemens "had lacked in-depth knowledge of the BBC’s operations".

In addition, the PAC said the BBC itself had only limited knowledge of Siemens’s design and development work.

The BBC, said the PAC, now considers that "where software development projects rely heavily on in-house specialist expertise", or "where the project will drive significant changes to the working practices of specialist roles within the organisation", it is better to have direct control of the project in-house.

As part of the no-fault settlement, the BBC reached a deal with Siemens that allowed the BBC to allocate £27.5 million to meet the increased cost of completing the delayed project. This was partly funded through £24.5 million in new efficiencies identified in the technology framework contract with Siemens.

But, said the PAC, although the BBC referred in general terms to other efficiencies it had secured through the technology framework contract, "it did not provide an explanation of why these particular efficiencies had not been identified sooner".

Margaret Hodge MP, chair of the PAC, said the BBC "has made good progress" in delivering its Digital Media Initiative in-house since it terminated its contract with Siemens. It is now on course to deliver the complete technology by summer 2011, she said.

“With hindsight", said Hodge, "the BBC should not have let the contract to Siemens without testing the contractor against other suppliers, especially as there was a high degree of innovation involved".

Hodge added, "We welcome the Trust’s assurance that it would now take a more challenging approach when considering procurements."

The project though is no longer expected to deliver the overall net financial benefit of £17.9 million originally anticipated, said the PAC. While the BBC originally approved the project on the basis that it would cost £81.7 million and deliver benefits of £99.6 million, it now forecasts costs of £133.6 million and benefits of £95.4 million – a net cost of £38.2 million.  

The BBC and Siemens have not provided comment.