© National Audit Office 2025

Improving government’s productivity through better cost information

Cross-government

Session 2024–2026
15 Septemeber 2025
HC 1291

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Report by the Comptroller and Auditor General

Ordered by the House of Commons
to be printed on 11 September 2025

This report has been prepared under Section 6 of the National Audit Act 1983 for presentation to the House of Commons in accordance with Section 9 of the Act

Gareth Davies
Comptroller and Auditor General
National Audit Office

9 September 2025

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The National Audit Office study team consisted of:

John Bell and Jonathan Pownall, under the direction of Yvonne Gallagher.

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Summary

1 Understanding the cost of government’s services is important for achieving sustainable productivity improvements. By service we mean the people and underlying operations and activities to provide an outcome for a user. Examples include applying for an entitlement or submitting information required by regulations. Information about costs helps organisations to identify poorly performing services and inefficiencies, prioritise resources and assess the opportunities for innovation and digital transformation.

2 Given the financial pressures on public bodies and the importance of achieving productivity improvements, our aim with this report is to help government get the most value out of the money it spends on managing and running departmental services. This report is an initial assessment of the need for better cost information and the practical steps government can take. In this report we bring together recent findings and recommendations, and consider:

the limitations in government’s understanding of service costs and previous attempts to improve cost information; and

how government can address these limitations drawing on established techniques and good practice.

3 We have not undertaken a systematic review of service cost information held across government in departments and their arm’s-length bodies. We emphasise that understanding running costs is not just about knowing the total of the cost base. Rather, it is about having a more granular understanding of where costs arise in individual activities that collectively make up an overall end-to-end service. This may include areas such as handling applications, customer contact centres, in-person services, back-office checks, producing physical outputs, and the systems that support these functions. In Part Two, we describe government’s own attempts to acquire such information.

Summary findings

4 Some government departments have a limited understanding of the costs of individual services. Government expects to spend £450 billion annually on its operations, and yet some departments do not know the costs of individual services at a more granular level of detail, nor where excess costs arise from people having to work manually around cumbersome, old systems and poor-quality data from fragmented data sources.

5 The lack of cost information is a barrier to achieving government’s productivity aims. The 2025 Spending Review has set ambitious targets for productivity and efficiency across government. However, our previous work has shown that poor data often leaves departments unaware of the underlying cost drivers and hence the opportunities for improvement from better processes, data and technology. Without detailed cost insights, government cannot prioritise intervening in the most expensive or inefficient areas, nor assess the return on investment in digital transformation or service redesign.

6 Previous attempts to improve departmental cost information have suffered from inconsistencies in approach and lack of sustained focus on data infrastructure. The ‘Top 75’ programme led by the Central Digital & Data Office (now Government Digital Service) between 2022 and 2025 aimed to identify the costs in the 75 most used government services. A lack of sponsorship to improve data in departments and other public bodies limited its progress and the programme closed with only 29 of the top 75 services being assessed as ‘great’. This highlights a recurring challenge: that without sustained effort, government will find it difficult to identify the basic data needed to understand what drives the cost of services and where money is being wasted so as to improve efficiency and productivity.

7 There remain significant opportunities to improve the quality and use of service cost information in departments. Before closing, the ‘Top 75’ programme identified services with high costs due to poor data, legacy system limitations or inefficient processes. Our own work has identified services where costs are not fully understood, in areas such as some fee-paying services or departmental recruitment processes.

Conclusion

8 Improving productivity is essential if government is to deliver on its growth agenda, address fiscal pressures and improve outcomes for the people who depend on public services. The lack of reliable and usable cost information about government services makes it harder to identify opportunities for improvement, drive efficiency and realise meaningful cost savings. Previous efforts to develop cost estimates have often lacked consistency or momentum, limiting their impact. Yet the potential value of robust cost data is significant. It can inform better decision-making, support productivity gains, and help deliver on the government’s growth agenda. Public bodies should act with urgency to build a clearer, more consistent understanding of service costs.

Recommendations

9 HM Treasury and the Government Finance Function should agree with Cabinet Office the accountabilities and responsibilities for taking forward the following recommendations.

10 HM Treasury and the Government Finance Function should:

a work with leading-practice sponsor departments to produce a new guidance document for departments, setting out how the principles of process and activity costing could and should be applied to government services, including specific, practical examples of what can work, providing a greater level of detail than just high-level principles.

11 Permanent secretaries and departmental senior leaders should:

b create incentives for those involved in business processing and service delivery to underpin and ensure compliance with the new guidance, such as new performance objectives.

12 Departments should:

c define the scope and boundaries for all major services and designate a senior responsible service owner at a high level of seniority for each, with sufficient accountability for the end-to-end service and understanding, managing and improving service costs at the operational level;

d embed ownership at the service level to help ensure consistent ways to provide evidence-based conclusions that can guide decisions such as where to cut costs, invest more, redesign services or improve efficiency; and

e establish governance arrangements such as oversight boards or assurance processes to monitor progress, validate cost data usage, track system benefit realisation and provide accountability to senior leadership and relevant stakeholders.

13 Departmental finance functions should:

f use the techniques suggested in this report to understand the organisation’s cost drivers, and where to target cost savings, including where simple ‘quick wins’ could deliver results and maintain impetus;

g work with service owners and responsible directors to monitor and manage service costs towards relevant and agreed productivity targets; and

h identify where targeted capability building would help ensure that finance teams and service owners are equipped to deliver on these expectations.

Part One

Understanding of costs

1.1 This part of the report sets out the importance of gathering well-developed cost information to support government’s ambitions around public sector productivity. It also sets out the limitations of government’s current understanding of the costs of the services it provides, and the challenges it has faced in improving cost information. Within these we include the people and other costs of the underlying operations, business processes and activities. We refer to these as ‘service costs’ in this report.

The need to improve public sector productivity

1.2 Productivity improvement is central to the government’s aims for affordable public services. The 2025 Spending Review set out ambitious plans for “a step change in investment in digital and artificial intelligence across public services” and a commitment to “drive a major overhaul in government productivity and efficiency.” It emphasised the need for a more productive and agile state, aiming to create a “cost-conscious culture that relentlessly roots out waste, drives efficiency and protects taxpayers’ money.” It set ambitious targets of at least 5% efficiency savings by 2028-29 and 16% real terms decrease in administrative budgets by 2030.

1.3 Departmental services underpinned by inefficient legacy systems and processes are expensive to run and become increasingly costly as changes are layered on top. Despite bold ambitions, government’s own analysis of transformational efforts over the past decade or so has found that it has prioritised simpler, online citizen-facing transactions for transformation.1 More complex and costly services have been left behind. Identifying the costs of these services would highlight where the effort needs to be applied to have most impact.

1.4 In 2024-25, central government departments spent an estimated £450 billion on the day-to-day ‘current’ running costs of public services, grants and administration. This is approximately 35% of public spending. Simple cost reduction, through imposing headline budget reductions, does not address the underlying reasons for inefficiency of services or delivery processes in organisations, nor how effectively inputs and outputs deliver the right outcomes. Improving overall organisational efficiency requires better information to understand where the inefficiencies lie within thousands of public service delivery processes.

Current limitations in government’s understanding of costs

1.5 Most government organisations generally have a good understanding of their total costs. In some cases, determining an average cost can be a helpful indicator of cost pressures and the changing nature of demand. For example, HM Revenue & Customs estimates the average cost of collection for different taxes, to support its assessment of the administrative costs of taxes over time.

1.6 However, we have also found that departments often lack access to data at the appropriate level of detail to analyse the operational costs of specific business processes, or different stages of the customer journey. This limits their ability to identify inefficiencies in systems and prioritise areas for appropriate cost reduction. It also limits the ability to measure improvement.

1.7 Our previous reports have also raised similar issues:

In our 2019 report on Challenges in using data across government, we found that organisations do not monitor the time or costs involved in sorting poor-quality or disorganised data. In some cases, cleaning and merging data took between 60% and 80% of people’s time. We said that understanding the time and costs spent on working around discrepancies in systems could provide valuable information for government on how and where to focus resources.2

In our 2022 report on Modernising Defra’s ageing digital services, we recommended that departments and government bodies with legacy technology issues should develop a better understanding of the additional people and business costs of the continued use of unmodernised digital services.3

In our 2023 report on Civil service workforce: Recruitment, pay and performance management we said that organisations wishing to improve the efficiency of their processes need to have a clear understanding of their costs. We found that most departments underestimated costs because they could not provide full-time staff costs for activities, largely because some departments do not require staff to record time spent on different work activities.4

1.8 Our published insights on improving operational delivery in government show a whole-system approach is needed to achieve improvement in service quality and efficiency. A whole-system approach, built on better cost data, provides the basis for continuous improvement that focuses on overall efficiency and outcomes rather than what is good for one part of the system (Figure 1).

1.9 This situation contrasts with most organisations outside central government, such as private sector firms, where access to detailed cost information is standard practice and the incentives to use it are clear. In the private sector, the profit motive drives a strong focus on cost control and operational efficiency.

1.10 Departments having better cost data would mean better data flowing through to HM Treasury, and ultimately better challenge and future decisions being made available by spending teams for departmental budgets. As part of the 2025 Spending Review, the government conducted a ‘zero-based’ review by examining every line of public expenditure. To support similar exercises in the future, senior decision-makers, including departmental permanent secretaries, chief executives of delivery organisations, and their boards, will require improved cost data to meet heightened expectations within limited resources. Enhanced data will also empower them to clearly justify the choices they make.

Government’s attempts to address this area

1.11 Government attempted to address the problem of lack of data on services via its ‘Top 75’ services programme as part of the 2022 to 2025 roadmap for digital and data. This programme, set up by the Central Digital & Data Office (CDDO), now part of the Government Digital Service, identified that one ingredient of a ‘great’ service is that it minimises wasted time, effort and money for the organisation providing it.

1.12 CDDO worked with departments and identified the following issues with government services:

simple online journeys had been prioritised for transformation, with the more complicated ones left behind;

digital front ends were masking significant opportunities for streamlining the way an overall service operates; in particular, many services did not have ‘straight-through processing’ within a digital system;

there were significant levels of ‘failure demand’, namely the extra costs of dealing with customers who could not accomplish what they wanted the first time around;

it was difficult to integrate new services into a legacy environment; and

there were wide variations in how performance is measured, even within departments.

1.13 Under the ‘Top 75’ programme CDDO undertook ‘deep dives’ and worked with departments to gain information to:

break down the end-to-end service process to cover the front-end interactions with the user, the back-end underpinning processes, and the ‘pain points’ throughout the process;

identify the total cost of a service; and

highlight the biggest opportunities for service improvement and cost reduction, as well as blockers.

1.14 Working with departments in this way highlighted attempts to provide the cost for some aspects of services, such as budgeted unit cost with allocation of general overheads for some components of some services. However:

there was little data on actual end-to end service costs at a level that would identify drivers of cost in those services;

there were widespread inconsistencies, and attempts at quantifying cost per transaction were often calculated without including all operational costs; and

departments also found it difficult to break out more granular information on cost drivers from their wider cost models.

1.15 CDDO found examples of services where the cost per transaction did highlight inefficiencies arising from system limitations. For example, Pension Credit had a relatively high cost per transaction because, despite having an online application process, it required caseworkers to re-enter information into multiple separate legacy systems. This level of granularity allows for improvements to be quantified. More typically, costing models were based on a top-down allocation of overheads based on assumptions, rather than detailed, bottom-up analysis. Good practice involves using more granular, activity-based costing approaches that can reveal duplications, bottlenecks and other specific drivers of cost and inefficiency. This is important to enable more targeted and effective interventions and to help shape and inform strategic decisions about service design and resource allocation.

1.16 The State of digital government review published by the Department for Science, Innovation & Technology in January 2025 identified that CDDO has driven a focus on the ‘Top 75’ from the centre.5 But a lack of sustained senior sponsorship and relatively little focus on data infrastructure in departments have limited the impact of their work.

1.17 The ‘Top 75’ work has formally closed, but this exercise illustrated how acquiring elements of cost data at working level was too difficult. Service costs could not be provided easily without established operational systems and processes to routinely collect this data.

Lessons from financial management of fees and charges

1.18 The NAO’s 2025 report Financial management of fees and charges also identified that government needs to better understand its cost drivers and revenue streams.6 Poor cost data means that government bodies often fail to set fees correctly, either not recovering costs or inaccurately reflecting them, resulting in instances of under- and overcharging. Our report found that organisations find it difficult to maintain data quality, frequently relying on outdated cost models that lead to inaccurate costing (Case Study 1).

1.19 Our report mirrored the findings from CDDO’s work on the ‘Top 75’ as we found significant variation in approaches across government. Similarly, while the organisations we examined in our work on fees and charges generally had a good understanding of the total costs of providing services they charge for, most did not have more granular cost data, such as detailed costs associated with different stages of their processes or the customer journey. We reported that having detailed data would allow them to better understand their activities and identify opportunities to address any inefficiencies and related costs.

1.20 Fee charging bodies often face individualised, context-specific cost drivers. However, existing central guidance is principles-based and lacks detail. The departments we spoke to were all interested in learning from others and sharing good practice. However, they lacked a clearly identifiable place to turn to for support in addressing the challenges they faced, including on getting reliable data. We looked at the guidance provided to spending departments by the central finance function in other countries, and found scope for HM Treasury to learn from other countries in how it could add more value. For example, case study organisations said they would like guidance to include practical examples at the operational level.

1.21 We also found little consideration of large-scale efficiency savings programmes. HM Treasury’s fees and charges arrangements lack sufficient incentives to deliver significant efficiency savings and improve services. Government is missing out on opportunities to deliver efficiencies and share good practice.

1 Comptroller and Auditor General, Digital transformation in government: addressing the barriers to efficiency, Session 2022-23, HC 1171, National Audit Office, March 2023, available at: https://www.nao.org.uk/reports/digitaltransformation-in-government-addressing-the-barriers

2 Comptroller and Auditor General, Challenges in using data across government, Session 2017–2019, HC 2220, National Audit Office, June 2019, available at: https://www.nao.org.uk/insights/challenges-in-using-data-across-government

3 Comptroller and Auditor General, Modernising Defra’s ageing digital services, Session 2022-23, HC 948, National Audit Office, December 2022, available at: https://www.nao.org.uk/reports/modernising-ageing-digital-services-defra

4 Comptroller and Auditor General, Civil service workforce: Recruitment, pay and performance management, Session 2023-24, HC 192, National Audit Office, November 2023, available at: https://www.nao.org.uk/reports/civil-service-workforce

5 Department for Science, Innovation & Technology, State of digital government review, January 2025, CP 1251, available at: https://www.gov.uk/government/publications/state-of-digital-government-review

6 Comptroller and Auditor General, Financial management of fees and charges, Session 2024-25, HC 947, National Audit Office, June 2025, available at: https://www.nao.org.uk/reports/financial-management-of-fees-and-charges

Part Two

Benefits and way forward

2.1 This part of the report sets out the benefits of establishing the costs of services. We set out a way forward, including the role of the finance function and senior leaders, techniques for establishing costs and indicators of maturity.

The benefits of establishing costs of services

2.2 Having a good understanding of costs of services will equip departments with better information on which areas to prioritise, where they need to change or invest to improve services through digital transformation, and the deployment of artificial intelligence. It will also help quantify the benefits they will reap in doing so.

2.3 Knowing the areas that drive the cost of a service is fundamental. ‘Cost drivers’ are those events or forces that significantly determine the cost of an activity. A key element of financial management is the ability to identify such cost drivers and how they can be controlled. Two broad approaches are set out in Figure 2.

2.4 By employing basic cost analysis techniques, departments can gain a clearer view of the costs involved in various service activities and identify potential savings. Identifying the actual drivers of cost in current activities provides a basis for understanding the full costs of current services, including those passed on elsewhere.

2.5 Even small steps could provide significant benefits for government by:

helping to identify which activities involved in providing a service use the most people/resources and take the most time;

helping to uncover where hidden subsidies mask the true costs of operational services;

identifying potentially duplicative activity that could be removed or consolidated;

supporting better-informed decision-making, helping departments avoid choices that may subsequently turn out to be false economies;

establishing more easily the business case for investment in service improvement based on clear cost information; and

providing senior leaders with a reliable baseline against which efficiency improvements can be measured and tracked.

2.6 This will help secure the efficiencies being sought in departmental delivery plans.

2.7 Effective finance professionals in departments should be able to pinpoint and explain what is driving an organisation’s costs and the value being delivered from inputs (Figure 3). This ranges from understanding the basic drivers of current costs, to estimating the costs of delivering services differently, as well as the tougher challenges of understanding and quantifying the value of outputs and outcomes, both now and in the future.

2.8 A finance-led approach supports finance professionals’ aim of working with departments to identify opportunities to drive better productivity, make smarter decisions and improve value for money. This approach helps the finance community and departments to work together on service cost reduction.

Constraints and lack of incentive

2.9 Legacy systems that support complex services contribute to inefficiency because they impede the data collection and analysis needed to provide insights into where productivity gains could be made. A lack of incentives to invest in sizing the scale of the problem, and an absence of specific accountability for doing so, compounds the problem. Figure 4 sets out an overview of the barriers and enablers.

The way forward

2.10 In other sectors, measuring and managing individual service cost is normal practice and part of the culture. We recognise the difficulties in addressing this situation from the current position in government but there are several approaches that departments can use.

2.11 It is crucial to define the scope of each service and what constitutes its entirety. For example applying for or renewing a passport has defined aspects from beginning to end, such as the initial application (either online or other), the customer query or help desk online function, the physical face-to-face service, the back-office function focusing on complex citizen applications, the physical output function, the systems running and support. Each government service should have a senior service owner who understands all the points of human interaction, the routes taken and the time involved. The service owner should be able to answer basic questions like where are the people spending their time, what are they doing, what is the associated cost and where can it be improved? Commercial organisations commonly organise around different product lines and services to make answering these questions easier. However, the main point is about effective accountability rather than organisational structure.

Role of the finance function and senior leaders

2.12 The finance function wants to play a critical role in supporting success but needs co-operation and desire for change from senior leaders. Interviewees have emphasised the importance of cross-government co-operation led from the centre of government (for example, Cabinet Office or HM Treasury) to maintain productivity focus and traction.

2.13 For a finance-led approach to succeed, it needs the support of senior leaders, the operational delivery profession and other areas that can influence costs. An important first step is for permanent secretaries and departmental senior leadership teams to acknowledge the importance of this area and commit to acquiring costing data. Permanent secretaries have an important part to play in ensuring that this happens and that early progress can be sustained. Effective sponsorship is crucial to lasting success. This means creating the right culture and capabilities, showing active interest and engagement and setting the appropriate tone to foster a stronger demand for better-quality cost information. It also means unblocking resourcing difficulties and maintaining a sufficiently visible focus and commitment to cost optimisation in the face of many other competing priorities. Departments could achieve this by enhancing permanent secretaries’ objectives for sound operational resource management to include a more explicit focus on arrangements to ensure robust cost data.

2.14 In the long term, and to achieve these aims, it is vital to build on early momentum by keeping the focus on costs, and to adopt and especially maintain more formal approaches to cost management.

Techniques for establishing costs

2.15 Various techniques can be used to calculate the cost of service, including activity-based costing, job costing, process costing, and standard costing. Some organisations benefit from time recording systems or system analytics that track time and resources against processes and activities. High-level techniques like benchmarking can also be valuable, providing an overall indicator of relative cost and highlighting areas for further inquiry (Case Study 2).

2.16 In the short term it may not be practical for departments to adapt their structures or reporting lines around services. Organisations need to realistically consider the time and effort required to maintain an ongoing focus on data collection and maintenance.

2.17 Nevertheless, departments could define the scope and boundaries for all major services and designate a responsible service owner at a high level of seniority. The service owner should have accountability for the full end-to-end service, decision-making authority to deliver all aspects and responsibility for developing, operating and continually improving the service. This was a key recommendation of our 2023 report Digital transformation in government: addressing the barriers to efficiency.

2.18 Staff operating multiple processes caused by for example, extracting and merging data to respond to queries are an important way to target those services where complexity and inefficient workarounds of old systems create cost. In our 2025 report on Financial management of fees and charges, the staff cost element of the total costs of operating the 7 case study services we examined ranged from 17% to 77%.

2.19 Some organisations routinely record staff costs of different activities through time recording mechanisms like timesheets or automated data capture. These provide granular data, but simpler solutions may offer a starting point. Attributing costs at a higher level, perhaps on a sample basis, could be valuable (Case Study 3).

2.20 In the future, developments in artificial intelligence may facilitate easier collection and analysis of cost data for monitoring and reporting actual costs and productivity measures. If this happens, a single government approach and consistent tool would likely be the best use of resources.

2.21 In the longer term, departments may wish to consider the following to establish and embed more formalised arrangements:

setting objectives for all in service operations and finance to monitor and report on costs;

requiring services to map out their processes;

incentivising the improvement of service processes and cost reduction while maintaining quality of service, as assessed by the citizen or their proxies; and

adopting a proven costing technique like activity-based management, which aims to generate management information on an organisation’s productivity for its core services. Inputs are attributed to activities based on the direct costs plus allocated overheads and capital costs.

2.22 Figure 5 sets out a maturity matrix that departments can use to help them identify how mature they currently are and how much they need to address.

2.23 We set out a list of questions that an organisation can ask to assess its own ability to identify cost information at a more granular activity level. We emphasise that this is not about understanding the overall quantum of costs, but about having a more granular understanding of where they arise in individual activities that collectively make up an overall end-to-end service.

2.24 We would expect these questions to be most useful to the finance function working in conjunction with those responsible for operational delivery. They will also help those charged with governance to probe how well organisations have a detailed understanding of their cost drivers and are using it to seize opportunities to identify and realise efficiencies.

2.25 It is important to understand the purpose of costing activities and what is to be costed:

Purpose of the costing activities

Is the purpose of the costing activities clear, understood and agreed?

Will the costs obtained be usable in decision-making (for example, investment, performance management)?

What costs should you identify?

Can the organisation identify the cost drivers?

Can the organisation identify and define the resources to be costed?

Can the organisation identify the outputs?

Does the organisation fully understand the activities, processes, outputs or outcomes to be costed, and their complexity?

Does this include wider intangible costs?

2.26 The following issues relating to data should also be considered:

Data collection

How will the data be collected? What problems could be encountered in collecting or collating costs?

Is the department’s accounting system structured in such a way that data can easily be extracted?

Have the strengths and drawbacks of different data collection methods been considered? (Figure 6).

Data quality

What is the impact of inconsistent, inaccurate or poor-quality data on performance measurement?

Data classification

Will the organisation be able to classify costs by category?

Does the organisation know how it will apportion fixed cost?

Measurement

How will resources be measured to be reliable and valid?

Has the organisation ensured all relevant costs can be identified, including those arising outside the process itself?

How will the organisation assign monetary value to resource utilisation?

What level of precision is required?

Data validation

Will the organisation be able to test the robustness of the cost data?

Can the cost data be validated, for example by reference to audited data?

Appendix One

Our scope and evidence base

Our scope

1 We prepared this report to highlight the need for government to get better information on the costs of managing and running departmental services in central government, and to suggest a way forward.

2 Our reports on Challenges in using data across government (2019), Modernising Defra’s ageing digital services (2022), Digital transformation in government: addressing the barriers to efficiency (2023) and Financial management of fees and charges (2025) all identified the systematic and long-standing difficulties in obtaining granular cost data at a level of detail that would identify cost drivers. We therefore chose to focus on how this might be addressed, rather than undertake a more specific first-hand analysis of individual services, as we do not believe this would have added significant value to our overall conclusion.

Our evidence base

3 We reached the conclusions contained within this report based on work undertaken between January and August 2025.

Document review

4 We reviewed a range of published and unpublished documents to inform our study. We reviewed the documents between January and July 2025. These included the approach to the ‘Top 75’ programme and the Digital and data roadmap 2022–2025 closure report.

Interviews

5 We conducted fieldwork in the form of internal meetings with NAO experts and external discussions including:

Central Digital & Data Office (now part of the Government Digital Service);

HM Treasury and the Government Finance Function;

HM Revenue & Customs;

Home Office and Driver & Vehicle Licensing Agency; and

Representatives from the private sector.

6 The topics we covered included the main issues with a lack of costing data and its implications for higher aims in terms of effective use of resources and what could be done to resolve the situation.

Analysis

7 The costing approaches and maturity model are based on internal and external sources, including:

National Audit Office, Demonstrating Value for Money: A guide to costing in VFM audit;

National Audit Office and Chartered Institute of Management Accountants, Delivering value and accountability: How finance can help; and

Department for Communities and Local Government, Delivering Efficiency: Understanding the Cost of Local Government Services.

Case studies

Case study selection

8 There are very few publicly available examples of good practice in costing. The case example of court and tribunal fees is based on the example in our report Financial management of fees and charges. The case examples on use of costing data in an acute hospital and on time diaries to estimate time spent on activities are based on a search for relevant published literature.

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