The Association of Learning Providers (ALP) said bidders for the welfare- to-work programme, which offers training and support to help people get back into work, would break even only if they helped record numbers of unemployed people find work.
ALP delivery director Paul Warner said: "What we are looking at is a minimum performance level up to around 10 per cent higher than the best- performing New Deal employment programmes, when we had an economic boom. They are basically picking figures from the air. It's way beyond anything that's been achieved before.
"The performance levels that they are asking for, tied to the upfront investment and the structure of payments over five years, could be just too much. We could be approaching that tipping point."
Starting this summer, the work programme is intended to provide a single package of support for all jobseeker's allowance claimants and people on employment and support allowance or incapacity benefit. It will replace five other programmes, including the New Deal, Labour's flagship welfare- to-work programme.
The new contracts require a minimum pound;20 million turnover from providers because they demand an upfront investment in training and support for unemployed people, with the Government beginning to pay out only after they have found long-term employment.
If the contracts fail to break even they put a whole supply chain at risk, with many of the main providers using a network of subcontractors - including voluntary and community organisations - which could also be placed in financial jeopardy.
Providers which go bust may put the delivery of the work programme at risk unless others are able to take up the contracts at short notice.
While the Government argues that the number of bids for contracts provides a market endorsement that the terms are fair, Mr Warner said many companies are dependent on welfare-to-work programmes and that the Department for Work and Pensions was the only customer. "It isn't a real market," he added.
A Department spokesman said the contracts were designed to achieve value for money for taxpayers and to allow providers to get results however they saw fit. "We are giving providers the freedom to innovate and design programmes that really work, abandoning the old fashioned `Whitehall- knows-best' approach, which failed," he said.
"In return for this freedom we will pay providers by results - if they get people into work and keep them there, they get the full payment. The fact that we have received 170 tenders from 30 organisations suggests a real appetite to deliver these contracts."
- Original headline: New jobs targets could bankrupt us, warn providers