The Inland Revenue and Accenture have come under fire from the Committee of Public Accounts, for "holding tax payers to ransom" over the decision to extend the National Insurance Recording System (Nirs) contract.
The project to replace the previous Nirs system was extended in April 1999, at a cost of between £70m and £144m, to cope with unplanned enhancements including stakeholder pensions and pension sharing on divorce.
A National Audit Office report published in November supported the Inland Revenue's claims that extending Accenture's contract offered better value for money than paying directly for the enhancements.
But representatives from the cross-party committee said that a £44m contract get-out clause had placed the government department over a barrel, forcing the Inland Revenue to stick with Accenture despite a history of poor performance on the project.
Accenture paid £3.9m in compensation for delays in 1997 and 1998 that held up payments worth £1.5bn to pension companies.
George Osborne, the Conservative MP for Tatton, said: "By the time you recognised that you needed an extension to the IT system, it was too late to choose anyone other than Accenture."
Chairman of the Inland Revenue, Sir Nicolas Montagu, admitted the cost of breaking the contract was a major element in the decision not to go to another supplier.
"There were initial problems, but when we extended the contract those problems were a thing of the past. There were alternative options, but none offered as good value for money and would have been less desirable in terms of business risk than extending the contract," he said.
Sir Nicolas added that initial problems with Accenture had since been ironed out. "The success of outsourced IT depends on a strong partnership. Each has to understand the requirements of the other party. You need a solid relationship and a robust partnership that offers genuine wins for both partners."
Lis Astall, a partner in Accenture's government practice, said higher staff costs compared with other suppliers who responded to the original tender, could be justified by the productivity levels achieved by the consultancy.
"We recruit and retain the best people and train them. If you multiply our staff costs by productivity, you get better value for money."
Accenture won the Nirs2 contract in 1995, bidding £100m less than its rivals. Last year the government said problems with Nirs2 meant pensioners have been underpaid £43.5m.
The Nirs contract will be up for renewal in 2004, and is potentially worth £4bn. "This will be a serious and robust competition," Sir Nicolas warned.
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