The UK Border Agency's £385m Immigration Case Work (ICW) system is 12 months behind schedule and has exceeded its original budget by £28m, according to the National Audit Office (NAO).
In a report on the agency's progress in cutting costs and improving performance, the NAO says that the ICW is crucial to its efforts to improve casework.
The system is intended to create a single end-to-end caseworking process, leading to cost savings. It aims to improve the quality and accuracy of decisions, as well as providing a faster service to the public through online self-service applications.
Over five years starting in 2009, the ICW should roll-out 14 separate IT releases and save about £139m a year by 2014-15 in direct costs and indirect savings in estates and overheads.
The NAO found, however, that the ICW "suffered from a loss of focus, poor governance structures and optimism bias in planning and reporting."
"At the outset, there was a lack of strategic direction: the programme's board did not challenge the IT contractors about their use of resources," the document says.
This was particularly important as the contract was agreed on a "time and materials" basis, so that the agency carries the risk for any overruns.
Although the NAO acknowledges that the ICW has delivered some important successes, such as the i-Search function to enable caseworkers to access information held across 12 legacy systems more quickly, is says that it has run into problems.
Issues include implementation dates slipping by about a year, caused because problems with the 'i6' release delayed subsequent releases. There were also difficulties in the roll out to overseas visa operations.
The watchdog acknowledges that UK Border Agency has taken steps to address these issues, but it calls on the agency to follow "process management best practice", and set more stretching targets, ensuring that the ICW programme "supports rather than leads this work".
It urges the agency to "further strengthen control" over the ICW programme.
In March the home secretary Theresa May announced the separation of the Border Force from the rest of the UK Border Agency, a transition which is not expected to be completed until the autumn.
The NAO says that the Border Force is modernising its workforce and making greater use of e-borders technology, including electronic gates.
Amyas Morse, head of the NAO, said: "The UK Border Agency and the Border Force deserve credit for taking on an ambitious programme of change, but both organisations face a steep climb to ensure this work delivers both value for money and a good service.
"The real leadership test will be whether the agency can transform casework processing without relying solely on new IT, and whether the Border Force can improve its workforce practices and raise productivity."