They accuse college managers of spending too much time on college finances, staffing and buildings, to the detriment of students' basic education and training needs.
The warnings from the three most senior members of the Further Education Funding Council have dismayed college principals who say they had to focus on personnel and buildings under the independent regime created by the last Government.
But it became clear at the annual conference of the Association for College Management last week in Harrogate that the problems of self-governance have left many unprepared for the demands of the new Labour Government.
The FEFC has been concerned over the excessively bureaucratic demands on individual colleges for some time. Chief executive David Melville has pledged to curb them.
At the conference he said that there was room for a massive rerouting of cash from buildings to students. He said: "It costs a college Pounds 25 to Pounds 50 a year to maintain each square metre of floor space. That's money which could usefully be spent elsewhere." He also urged colleges to pay more attention to local needs.
The FEFC will study in greater depth how well the sector is meeting the needs of local communities and will focus a greater proportion of inspection time on measuring student achievements.
Jim Donaldson, chief inspector for the FEFC, said: "Corporations have concentrated too much on finances, personnel and estates management issues. As a result, the quality of students and performance of colleges in terms of achievement has not got the attention it merits."
His remarks followed latest FEFC data on student success rates which showed that only 56 per cent of college students on A-level courses passed the exams. Figures for general national vocational qualifications are only marginally better. Part-time students continue to compare poorly with full-timers.
The scale of drop-outs and failures would worsen as colleges follow Government policy to widen participation and bring in minority and other excluded groups. "These new students are likely to find the demands of systematic study very difficult. Many will already have failed once," said Mr Donaldson.
Concerns that the emphasis on estate management is hampering teaching and learning, have been expressed within the FEFC for some time. The new-style inspection regime, with its stress on self-assessment, has heightened the issue.
Under the new regime, FEFC inspectors give a lighter touch as the colleges take on the burdens of self-assessment - a practice increasingly common in industry.
Mr Donaldson said there were "very encouraging signs" of a self-critical sector developing. Grades that colleges award themselves under self-assessment correspond closely with those suggested by inspectors in most areas.
But there are serious shortcomings on "governance", where colleges agreed with inspectors on only 40 per cent of cases, and on "quality assurance" where there was 50 per cent agreement.
However, only 18 colleges have so far been assessed in the new four-year inspection cycle and he said that the burdens of estate management were inevitable post- incorporation. "But the agenda should now change to embrace these aspects of quality and achievement."
FEFC assistant director Geoff Hall said that the extra Pounds 83 million from Government would help meet student expansion targets while improving quality. "A small part of that money will be used to prevent the further erosion of unit costs." The FEFC would also take a tough line with ministers and insist that extra cash matched colleges' expected growth.