EDS penalised 100 times in five years by Inland Revenue

The Inland Revenue's IT director, John Yard, has admitted his department has invoked penalty clauses 100 times during the first five years of its relationship with EDS. The penalties - imposed for shortfalls in meeting service level agreements - have reached a cumulative value of £2.5m.

The admission came as the Inland Revenue and EDS defended their £2.4bn, ten-year partnership in front of the Public Accounts Committee (PAC).

But Nick Montagu, chairman of the board of the Inland Revenue - who did not hold the post when the contract was awarded in 1994 - said if he had to award the contract again, he would make the same decision. "It keeps us firmly in control," he said. "We're striving to get our relationship with Andersen Consulting on the same basis because it works well."

In response to questions from PAC members on the rising costs of the open-ended EDS contract, Montagu said: "I'm satisfied that we have a firm grip on costs. The vast bulk of increased costs is accounted for by new work."

The original contract award was £1bn.

Rob Hailstone, research director at Bloor Research, said the number of penalties imposed is high. "The purpose of a penalty clause is not to recover costs, it's to concentrate the mind of the supplier," he said. "So if you've had to invoke the penalty clauses 100 times in five years, either the penalty rate is not a sufficient deterrent, or unreasonable service levels have been agreed to."

Richard Sykes, chairman of consultancy Morgan Chambers, said: "The fact that the clauses continued to be invoked at a steady rate over five years suggests there has been no learning curve."

Montagu assured PAC members that when the EDS contract expires in 2004, the Revenue will undertake a rigorous tendering process. "We will be talking around relevant companies and we will make sure the competition is not just a token one to meet European requirements," he said.