The cabinet office has set a limit of £100 million for government IT contracts.
The Cabinet Office said ‘no IT contract will be allowed over £100m in value’ unless there was an ‘exceptional reason’.
"Big IT and big failure have stalked government for too long," said Francis Maude, Cabinet Office minister.
"We are creating a more competitive and open market for technology that opens up opportunity for big and small firms."
Work and pensions secretary Iain Duncan Smith has admitted that IT failures have cost the universal credit programme £40 millions, on top of a further £91 million that will be written off over the next five years.
The Cabinet Office reforms limit new hosting contracts to two years, and will end automatic contract extensions.
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The move by the Cabinet Office is hoped to attract more small businesses to work with it as contractors. Last year, a new digital services framework showed that 84% of its 183 suppliers were small and medium sized businesses.
Maude said: "We are creating a more competitive and open market for technology that opens up opportunity for big and small firms. These red lines will ensure the government gets the best technology at the best price and we will be unashamedly militant about enforcing them to provide value for hard-working taxpayers."
Savings of £3.8 billion in 2012 and 2013 have been made from ‘smart purchasing’ of IT services, and a drive to digitise services has also saved a further £500 million.
UK government CTO, Liam Maxwell, said: "To create the efficient and responsive services that the public demands, government must have access to the most innovative, most cost-effective digital solutions.
"That means going to the widest range of suppliers, and giving ourselves every opportunity to renegotiate and reassess contacts. It rarely makes sense to simply extend a contract based on yesterday’s technology and prices and these red lines make clear that we are doing business in a different way."
