The National Audit Office (NAO) has concluded the Department for Work and Pensions (DWP) has not achieved value for money in implementing Universal Credit and has suffered a series of setbacks as a result.
The NAO warned the DWP had been "overly ambitious" in both the timetable and scope of the programme.
Universal Credit, bought in to replace existing welfare benefits including Jobseeker's Allowance, will be a single monthly payment for those out of work or on a low income.
A significant issue highlighted by the report was the fact the DWP has not yet assessed the value of the systems it spent over £300 million to develop and has been forced to delay the national roll-out of the programme to claimants.
The DWP "took risks" to try to meet the short timescale and used a new project management approach which it had never before used on a programme of this size and complexity. It was unable to explain how it originally decided on its ambitious plans or evaluated their feasibility, the watchdog added.
In early 2013, the Department was forced to stop work on its plans for national roll-out and reassess its options for the future. The programme "still has potential to create significant benefits for society, but the DWP must scale back its delivery ambition and set out realistic plans", the NAO urged.
The report highlighted that 70% of the £425 million ring-fenced for the implantation of Universal Credit has been spent on new IT systems.
However, the DWP has already written off £34 million of these systems and does not yet know if they will support national roll-out.
The existing systems offer limited functionality and lack a component to identify potentially fraudulent claims so the DWP has to rely on multiple manual checks on claims and payments. Such problems have delayed national roll-out of the programme, the report said.
The DWP has confirmed will not introduce Universal Credit for all new claims nationally in October 2013 as planned, and is now reconsidering its plans for full roll-out. Instead, it will extend the pilots to six more sites with these new sites taking on only the simplest claims.
Delays to the roll-out will reduce the expected benefits of reform and - if the Department maintains a 2017 completion date - increase risks by requiring the rapid migration of a large volume of claimants, the NAO said.
The spending watchdog concluded the Department took some action at the end of 2012 to resolve problems, but was unable to address the underlying issues effectively.
The source of many problems has been frequent management changes and the absence of a detailed view of how Universal Credit is meant to work. In addition, poor control and decision-making undermined confidence in the programme and contributed to a lack of progress, the watchdog concluded.
Iain Duncan Smith, work and pensions secretary and architect of the refoms, told BBC Radio 4's Today programme: "This is not an IT disaster. This will be delivered in time and on budget."
