Inspectors have criticised the decision to subcontract more than pound;430 million of skills funding, saying that it has led to providers taking fees of up to 35 per cent for "little work".
Following the decision of the Skills Funding Agency (SFA) to limit direct funding to providers with contracts worth more than pound;500,000, and a subsequent boom in subcontracting to smaller providers, Ofsted visited 17 subcontractors and carried out surveys of 45 lead contractors and the companies they worked with.
It found that, while some subcontracting was legitimate in meeting the needs of employers or providing different expertise, "others clearly saw it as a way of generating income for doing little work". Ofsted said that three of the lead contractors interviewed could not explain why they had chosen their subcontractors.
About half of the lead providers charged more than the 15 per cent fee the SFA anticipated for 2011-12, with some charging up to 35 per cent. Often, they did little to earn their money: one subcontractor, based 100 miles from its lead contractor, had its training observed only once in 15 months. Some of those who charged the most did the least.
Monitoring by lead providers was criticised as insufficiently rigorous and tended to focus on the audit paperwork rather than on quality assurance. A high proportion of training seen by inspectors was inadequate or only just satisfactory.
Ofsted said that many lead contractors also had a "barely satisfactory" track record in their own provision. Rather than allocating contracts simply to the largest providers, Ofsted recommended that the SFA base new guidance about who can operate as a lead provider on their previous levels of performance.
The decision to only work with larger providers has damaged the prospects of many effective small providers, Ofsted concluded, and the SFA should reconsider allowing small but outstanding providers to hold their own contracts.
"This report has found the introduction of the minimum contract value has forced often very good smaller providers to either work together or become a subcontractor of a larger provider. In several cases this has diluted accountability and has placed a greater distance between the learner and those responsible for learning," said Matthew Coffey, director of learning and skills at Ofsted.
Although apprentices were mostly positive about their learning, the highest levels of satisfaction were among those who received regular off- the-job teaching, which only amounted to about half of the apprentices taught by subcontractors.
Ofsted also found that between a quarter and a third of these apprentices did not have real and sustained employment. "There were examples of apprentices, particularly younger ones, being used as inexpensive labour during their training and then being discarded as employees to be replaced by new apprentices," inspectors said.
They also found that much of the training was too short, especially in IT, retail, leisure, customer services and business administration apprenticeships. Ofsted's research took place before new rules came into effect ensuring that apprenticeships last at least 12 months.
An SFA spokeswoman said that the agency holds lead providers accountable for the provision they subcontract. "The agency has very clear rules and expectations on how lead providers must assure themselves that they use subcontracting appropriately. And we intervene through the lead provider - who the agency has the contractual relationship with - where it identifies that public funds andor learners are at risk," she said.
FE minister Matthew Hancock said that the government has taken action by introducing measures to guarantee the length of apprenticeships and to ensure apprenticeships are real jobs. "The changes we've made will take time to have effect," he said.
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Original headline: Lead providers make 35% profit for `little work', inspectors warn