Writing in his annual report, Mr Donaldson called on the Government's new exams superbody, the Qualifications and Curriculum Authority, to make reform of Britain's 17,000 qualifications a top priority.
He said: "College managers continue to face significant barriers to making the most effective use of the funding available to them.
"The many qualifications available are not always valued and understood by students and employers, and are a serious impediment to effective and efficient management of the curriculum."
His call comes as officials look at ways to increase class sizes in further education to make colleges more efficient. Attention has focused on the possibility of rationalising further education in urban areas, but officials are also thought to be looking at increasing class sizes.
Mr Donaldson's comments raise the prospect of modular qualifications saving money by allowing colleges to pool teaching in areas such as computer skills or book-keeping, which are relevant to many different subjects.
He said: "Colleges have it in their hands to effect further rationalisation of the curriculum . . . However, a national initiative to extend modularisation would enable colleges to make the most of their resources."
Mr Donaldson praised colleges for the way they have coped with this year's budget crisis.
But he issued a warning about controversial franchised courses, saying that "considerable effort is required to ensure that quality assurance procedures are rigorously applied".
The report said: "Colleges need to improve the accuracy of the data they collect about franchised provision. They also need to pay more attention to evaluating the teaching and learning on franchised courses, and ensure that individual students on franchised courses receive the support they need."
He pointed out that college visits to franchised courses rarely included direct inspection of classes.
Mr Donaldson upheld the principle of franchising, however, arguing that there were no inherent weaknesses in the practice. He said: "There is both good and poor practice in franchising, as with all provision. "
His comments come as members of the Commons Education Select Committee put workplace and other franchised courses under intense scrutiny. Mr Donaldson is due to give evidence to the committee next week.
Also in the report, Mr Donaldson proposed developing Sir Ron Dearing's recommendation to create an Institute of Learning and Teaching for higher education as a body to regulate all post-16 education.
He said: "Such an arrangement would encourage continuity in the experience of learning for all students, regardless of the type of institution attended. "
Overall teaching standards in FE were good, said Mr Donaldson, with weaknesses outweighing strengths in only 8 per cent of lessons.
But he repeated warnings about part-time staff, and said many lecturers had out-of-date experience. He said: "The industrial or professional experience of many staff is outdated and few colleges have schemes to rectify this. New courses in areas such as media studies have been launched where professional practice and technology are fast-moving, and existing teachers lack the necessary expertise."
Availability of high-tech equipment such as computers was good, but the report revealed problems with heavy machinery and library standards, described as the Achilles heel of colleges.