A decision by the Skills Funding Agency (SFA) to only deal directly with FE contracts worth at least #163;500,000 was supposed to make life easier and save the government money. But it appears the move has backfired, with Ofsted claiming that the new process may have "diluted" the quality of apprenticeships.
While some kinds of FE providers - including general FE, specialist and sixth-form colleges - are exempt from the rules, smaller training organisations have been forced to club together with their rivals to keep hold of government funding.
But the watchdog has warned that some of the best-performing smaller providers may have thrown in their lot with larger, less successful organisations - with the quality of the training on offer deteriorating as a result.
Matthew Coffey, Ofsted's national director of learning and skills, told TES that a number of subcontractors were charging small providers management fees as high as 45 per cent. This means that some of the best-performing small providers have had to join up with the partners that would take the smallest cut of their profits. But some of these larger institutions failed to offer a good experience for learners, and many organisations have been forced to axe staff to balance the books as a result of the SFA's contract changes, Mr Coffey added.
"It seems to be a very mixed bag," he said. "It's very difficult with large institutions to have that level of consistency. Is that the right policy, to grow these huge providers out there?"
As a result of concerns raised by the sector, the watchdog is to produce a "rapid response" report on the issue later this summer. Giving Ofsted's inaugural annual learning and skills lecture at City and Islington College last week, Mr Coffey spoke of the need to test the water in order to ensure the quality of provision was maintained before it was "too late".
"Through the introduction of a minimum-contract-levels policy, significant numbers of smaller providers, often good or outstanding providers, were forced to form a relationship with other groups of smaller providers or with a larger provider," he said. "There are examples where the lead contractor is not a particularly strong performer, but their size, and contracting weight, sealed the deal."
Mr Coffey said that the quality of some apprenticeships "can be diluted as a result".
"The key issue here is that quality has not always been treated as a critical factor in the decision-making process," he said.
He described the current situation as "a sea change in accountability" for the sector, in which "the burden of responsibility for determining priorities and getting it right has been most emphatically passed to providers themselves".
"Some providers are clearly ready for this challenge; others will find it very difficult and some will fail," he said. "The monitoring of contracting decisions requires careful scrutiny if the integrity of the sector is to be maintained and value for money assured."
It also emerged that Ofsted is planning to review careers provision when the duty to provide objective, impartial advice falls to schools in September. This follows a number of complaints by colleges and other FE providers in recent months that many schools with their own sixth forms are failing to inform students about other options available. Ofsted will call for evidence in January, with the report expected next April.
An SFA spokeswoman said that minimum contract levels had not led to fewer providers engaging with the process. "A high-quality offer to learners and employers has not been made smaller and the growth in apprenticeships is still at the heart of our ambitions for helping and shaping the offer available to local communities," she said.
45% - Highest management fee charged by an FE subcontractor (including teaching costs).
5% - Lowest management fee charged.
#163;430m - Amount of SFA funding disseminated through subcontractors (as of January 2012).