The powerful National Audit Office said better controls were needed to predict the financial effects of college growth. Conservative ministers axed budgets for recruitment in January after prolific expansion exceeded the last Government's spending limits.
A NAO report on growth in FE colleges, published this week, says delays in collecting information about student numbers contributed to the crisis over so-called demand-led funding, which left the Treasury facing an unexpected #163;86 million bill from colleges which exceeded recruitment targets.
But watchdogs say the crisis was also fuelled by officials within the Department for Education and Employment, who argued that colleges' strategic plans were over-ambitious, and therefore budgeted too little cash to pay for the expansion which materialised in the past academic year.
Interim estimates of growth were also inadequate
The report sheds new light on the bitter row surrounding the January cash crisis. James Paice, the then education minister, said the Further Education Funding Council had failed to provide enough warnings of the potential cost of fast college growth. But funding council officials in turn insisted that the DFEE was aware of the size of the bill.
The report says: "The projections were also based on the assumption, derived from experience in academic years 1993-94 and 1994-95, that college strategic plans which underpinned their applications for funding, were overambitious.
"In these years college strategic plans indicated high levels of growth which were not delivered.
"It now appears that in the academic year 1995-96 colleges did, in aggregate, overestimate growth in both full-time and traditional part-time student numbers, but that this was offset by rapid growth in part-time student numbers on provision at a minority of colleges delivered through franchising."
And the report warns that the cuts imposed this year may cause colleges' financial position to deteriorate.
The report says: "The funding council considered in July 1997 that 93 colleges - 21 per cent - were in poor financial health. This figure may increase as colleges unable to deliver the required efficiency gains are likely to suffer deteriorating financial health."
Colleges are facing cuts of around #163;75 million this year because of the withdrawal of growth funding.
But the report argued that many colleges do too little to find the true cost of their work and should tighten up financial monitoring to improve decisions about running courses.
National Audit Office researchers also warned that college marketing efforts should be targeted more effectively.
The report shows a huge expansion in basic education - a key recommendation of the recent Kennedy report on widening participation in FE.
There was also major expansion in science, reflecting a boom in demand for computer courses, as well as very large growth in health and community care work.
But the NAO report expressed concern over variable course completion rates - which can range from 99 per cent to a mere 27 per cent. Achievement rates in national vocational qualifications and GNVQs were particularly low.
And researchers recommended a review of support for students. Their report said: "Colleges need to review how they could improve the consistency of student support services, especially for part-time students.They need to consider how they could translate strong student support into formal retention and achievement strategies with operational targets."