The Department for Work and Pensions has spent hundreds of millions of pounds on software for its flagship welfare project that may not be fit for purpose, the Guardian has been told.

Hundreds of millions has been spent on software to support the government's flagship Universal Credit scheme, which may not be able to support administering the benefit. Sources close to the DWP's Universal Credit project, which seeks to streamline and automate benefit payments and tax credits for 12 million people, indicate that upwards of £270m has already been spent in government contracts with IBM, Hewlett Packard and BT. Accenture is understood to have received the lion's share of the work, winning more than £110m.

However on taking his post a little over three months ago, insiders say that UC's new project director Howard Shiplee has ordered a complete rethink and ordered a thorough redesign of current software. Senior staff have warned that even after two years systems to prevent fraud and breaches of very sensitive financial data, categorised as "incredibly critical" to the project, are yet to be completed.

Other essential pieces of software including a calculator for staff to advise clients whether millions of their claimants will be financially better off doing more work, have only been ordered from Accenture in the last few weeks. "Without that they can't calculate when someone does go into work, what their top up should be," one source said.

By December 2012 total spend on the project, which has been rolled out in a very limited fashion to just a handful of jobcentre offices in the Greater Manchester region, had topped £340m.

Writing in the Telegraph before the publication of a national audit office report on Thursday, Shiplee said the project had faced a series of problems. Staff have been told to be braced for heavy criticism.

"There is no doubt there have been missteps along the way. But we've put that right," Shiplee wrote on Monday. Admitting that old IT might have to be junked, he said: "We're planning to take the best of the existing system and make improvements using GDS [government digital service] support."

As part of his project overhaul, Shiplee wrote to staff in July to tell them that at least a third of his 600 staff would be moved off the project.

"As a result of the new ways of working we are introducing, particularly in the way we design and build processes and systems, I expect a managed reduction in the number of people we will need to deploy in the Universal Credit Programme by around 200-250," he wrote.

Staff have also warned that £350m in welfare savings will now be lost because the roll out of the pension credit plus programme has been delayed.

The cost saving is understood to have been part of the original business case that the work and pensions secretary, Iain Duncan Smith used to persuade the Treasury to fund his vision of 21st century welfare provision. Extra costs, internal auditors warned, will also be incurred because of the much reduced timetable for the national rollout.

In one assessment, a member of staff said that overall funding for the flagship project would be "very tight" by the time of the election. One source said the current software was useful for the current pilots but it couldn't be replicated at scale because "the current model requires lots of man-hours and micro-management of claims."

"Shiplee's come in and said 'look, lets start this with a blank sheet again' … [now] they're re-designing level zero, level one business processes – they're doing that all again. After two years we'd already built to level two."

The DWP said it was misleading to characterise money already spent as having gone to waste. "No one has said we're starting again … we're looking at enhancing not replacing [systems]," it said.

It said it did not recognise the £350m figure being lost in savings due to the slower roll out of the programme.

A DWP spokesperson later added: "The early roll-out of Universal Credit is allowing us to develop the new benefit in a safe and controlled way. This is the responsible approach.

"We have a plan in place that is safe and achievable along with the right leadership to ensure Universal Credit is delivered on time by 2017 and within budget."

The shadow welfare secretary of state, Liam Byrne said it was time his counterpart reached out for cross party rescue talks. "Iain Duncan Smith has sworn blind to parliament that universal credit is on time and on budget. Now we hear it is actually an IT disaster.

"Duncan Smith has an awful lot of explaining to do and it is time for him to reconsider our offer of cross-party rescue talks. We cannot and must not take risks with billions of pounds of working peoples' tax credits."