The Phoenix pay disaster that has already cost $1.1 billion could require up to another $2.5 billion over the next five years to fix the system that has botched public servants’ pay for more than two years.

That’s the estimate provided in the first comprehensive cost review of the fiasco. The government quietly released it on Friday. It was conducted by the government’s chief financial officer following Auditor-General Michael Ferguson’s first damning report into the pay system, which is regarded as one of the biggest public management failures in history.

The report found that, if all had gone according to plan, the pay system would have cost about $160 million a year to operate.

Instead operating costs could soar to nearly $500 million a year because of $326 million in ‘unplanned’ costs being incurred annually. That’s on top of more than $120 million in future one-time costs to stabilize the error-prone system.

The report said Public Services and Procurement Canada, the federal pay master and the department responsible for fixing Phoenix, could take five years to stabilize the system so public servants are reliably paid correctly and on time.

The review, however, didn’t factor in some other big bills the government could face as consequence of Phoenix foul-ups including: the cost of building a new system to replace Phoenix; the impact on pension administration; unreported claims and the settling of outstanding lawsuits and grievances for damages. None of these have been factored into the latest tally.

The 18 federal unions and government have been negotiating for months on damages to compensate thousands of public servants for the personal and financial hardship they have faced because of botched pay cheques.

“The value of these damages was not estimated because they could not be quantified, and attempting to do so could be seen to prejudice ongoing negotiations and court proceedings. However, it is acknowledged that there is a possibility of significant additional costs,” said the report.

But Public Services Minister Carla Qualtrough said she believes her department will reduce those projected costs with fixes that will improve productivity and speed up processing so Phoenix won’t take five years to fix.

“It’s not going to take five years,” said Qualtrough in an interview.

”I’m not prepared to say this will be done tomorrow. … It will take time and cost money.”

She said the actual costs tracked by the report are in line with what the government had previously estimated. She does, however, differ with the projected costs. She said the study was based on assumptions built on a snapshot up to March 2018.

She said the current backlog of unresolved pay issues has been declining and the new pod system being rolled out across departments that rely on the Miramichi pay centre will reduce the backlog further and speed up processing.

“We are now in June, we have hired more compensation staff and reduced the queue and are transitioning more departments to pods. It’s changing so quickly that assumptions may not be valid for any significant amount of time…”

She said the pods lay the groundwork for more and faster efficiencies which she said could be the tipping point where Phoenix begins to stabilize.

The pods are teams of compensation advisors working directly with departments. They will become experts in the collective agreements and the unique pay rules of a department. The first pilot with three departments last year reduced their backlog by 33 per cent. At that rate, she expects the three departments will be “stable” within 18 months.

The government has since created five pods covering 15 departments, which Qualtrough hopes will also help them conquer backlogs and stabilize pay operations within a similar time period.

The report acknowledges that it is unclear how the ‘unplanned’ operating costs would be affected by the department’s efforts to fix Phoenix and will be “better estimated in the future as the impact of system stabilization activities are better understood.”

It’s been more than two years since the rollout of the Phoenix pay system, built by IBM using PeopleSoft software.

Today, half of Canada’s public service faces some kind of pay problem. And the 46 departments forced to lay off 1,200 pay advisers and move pay operations to a central pay centre in Miramichi, N.B. are saddled with a backlog of 607,000 cases.

The pay project that the previous Harper government approved at a cost of $309 million was divided into two parts. The first was moving pay operations out of 101 departments and consolidating them at a central pay centre in Miramichi, N.B. The second phase was building Phoenix to replace a creaky 40-year-old pay system.

The report focused on three categories of costs: the ‘historical’ costs of implementing the system; projected costs to stabilize Phoenix and ongoing operating costs.

The one-time costs include a new testing system and all the development costs needed to install the missing functionality Phoenix needs to navigate the morass of pay rules, allowances and hundreds of job classifications that make the federal pay regime the most complex in the world.

The government has also resolved to review all pay files of employees once Phoenix is stabilized to restore the trust of Canadians and employees in the system. That is earmarked to cost nearly $50 million.

PSPC expects to spend another $37 million in unplanned, one-time costs on new tools and system upgrades. Treasury Board requires another $25 million to help departmetns pay for the increases staff they need to help employees with pay problems.

The review was recommended in a report by Auditor General Michael Ferguson. It urged the government to track and report on the cost of resolving pay problems, as well as the implementation cost of a “sustainable solution.”

Last month, Ferguson issued his second report calling the Phoenix pay system an “incomprehensible failure” of project management and oversight that signaled a broken culture in Canada’s public service.