THE CONTRACT TO DEVELOP AND UPDATE THE
REPLACEMENT NATIONAL INSURANCE RECORDING SYSTEM
COMPENSATION
58. The contract with Andersen Consulting allows
the Agency to terminate it if Andersen Consulting default on any
obligation under the contract and fail to remedy it within 30
days. In such circumstances Andersen Consulting may be required
to provide for the provision of facilities and services equivalent
to the services covered by the contract by the Agency itself or
a third party. The limit on the amount Andersen Consulting might
have to pay in such circumstances is £100 million during
the development phase and £2 million for each event
during the operational phase up to a maximum of £50 million
in any 12 month period.[53]
59. The Committee asked the Agency why they considered
£100 million compensation adequate when the cost of
developing and operating the system in-house had been assessed
at more than £300 million. The Agency told us that they
did not believe they would have received any bids had the contract
provided for unlimited compensation and that the figure of £100 million
was more comparable with the expected cost of the contract with
Andersen Consulting. The figure of £100 million had
been arrived at during the contract negotiations and had been
a major sticking point with all three bidders.[54]
60. Following the Agency's agreement with Andersen
Consulting on a revised implementation timetable, Andersen Consulting
agreed to pay up to £3.1 million in compensation to
the Agency toward the estimated £3.8 million additional
costs that the Agency expected to incur as a result of the delay.[55]
No compensation was to be payable in respect of the estimated
lost savings of £4 million and £2 million
to the Contributions and Benefits Agencies respectively which
the new system would have produced had it been operational on
time.[56]
61. We therefore asked the Agency why they believed
that compensation for themselves and the Benefits Agency to cover
the lost benefit savings was not appropriate. The Agency told
us that they had received legal advice that it was unlikely that
they would be able to justify seeking compensation for these potential
savings. This was because the evidence for them was unlikely to
be strong enough to withstand challenge. The Agency told us that
had the procurement taken the more orthodox route it is unlikely
that any compensation would have been received.[57]
Conclusions
62. Where transfer to the contractor of the risk
of failure to deliver is not possible, as in this case, we expect
departments to seek to provide in contracts for financial compensation
sufficient to pay for an alternative solution should the project
fail. In this contract, the levels of compensation provided for
would be quite inadequate in the event that Andersen Consulting
fail to deliver the required service. We recognise, however, that
risks can only be transferred at a cost, and that in any particular
case the cost of transferring the risk may be more than the value
to the public sector of doing so.
63. While recognising that under the contract the
Agency have received £3.1 million compensation for the delayed
implementation, we regard it as unsatisfactory that no compensation
is payable in respect of a further £6 million representing
savings which the Agency would have achieved if the project had
not suffered delay.
53 C&AG's Report paragraph 3.16 Back
54
Q112 Back
55
C&AG's Report paragraph 3.26 Back
56
C&AG's Report paragraphs 3.25, 3.27 Back
57
Q52-53 Back
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