The multi-million-pound ‘cowboy’ trade in subcontracting

The multi-million-pound ‘cowboy’ trade in subcontracting

> ‘No win no fee’ brokers raking in up to five per  cent commission fees on seven figure contracts
> Government says the SFA will look at ways to ‘limit the use of brokers’ after seeing investigation

The government is reviewing the use of subcontracting brokers after an FE Week investigation found huge sums of public cash meant for frontline learning is being hived off in commission.

In what is the first exposé of this lucrative but little-known industry, we found brokers typically charge subcontractors up to 5 per cent of the government funding for matching them to a prime provider.

A number of the firms involved do not have official websites outside of social media and stick to advertising subcontracting opportunities through closed groups on LinkedIn.

FE Week has found evidence that they are widely used and potentially being paid millions of pounds in commission fees from the public funding pot.

After being shown the evidence and asked to respond, a government spokesperson said: “The Skills Funding Agency (SFA) is reviewing to strengthen their funding agreements to limit the use of brokers.”

She added: “Where the SFA has evidence that a lead provider has ineffective processes and controls for managing their subcontractors, or their subcontracting represents poor value for money which constitutes a breach in our funding rules, they will take action.”

FE Week found an advert, with Essex-based consultants EEVT Ltd, attributed to a company called The Funding Brokers Ltd, which could not comment before publication.

The advert said: “We have been providing this service for over three years, securing in excess of £100m in the process for our clients.”
At 5 per cent commission, for example, the firm could have earned up to £5m over this period.

The ad continues: “We work on a no-win no-fee basis whereby we will provide our support free of charge to the point of contracting.”
FE Week understands prime providers often turn to brokers out of desperation in order to avoid losing funding.

Ian Wood, managing director at Newcastle-based provider NCT Skills, said he worked as lead consultant for Hull-based Purple Hearts Limited from April 2013 to September 2014, which offered brokering services, before it went into liquidation last July.

He explained: “You get a situation where a prime college/provider gets towards the end of a funding window,” he said.

“They haven’t spent their allocation and know that the SFA or Education Funding Agency (EFA) will take it back off them unless it is used, so they need to find subcontractors to take on provision quickly.

“The primes will often put messages on LinkedIn, or other social media, themselves to find subcontractors.

“But a lot do it through brokers because they do all the hard work with due diligence checks on the subcontractors before some sort of agreement is signed.”

BIS warned the SFA about this sort of ‘short-term’ trading in contracts in its Skills Funding Letter last March, saying: “While we appreciate that you have worked with the sector to enhance the controls around subcontracting in the last two years, there continues to be levels of short term tactical subcontracting that are causing concern.”

In its most recent funding letter to the SFA in November, BIS went further stating: “For 2016/17 you will want to ensure that sub-contracting practices are consistent with the need to achieve value for money in the sector, and to continue to take action against providers who are either operating unacceptable practices, or failing to provide clear and timely information.

“I would like you to report to me the controls in place by the end of March 2016 to protect the interests of learners and employers.”

The government spokesperson, who was also representing the Department for Education and Department for Business and Skills (BIS), also told FE Week on April 14: “Providers must not subcontract to meet short-term funding objectives.

“The SFA’s funding rules are clear that providers who decide to use subcontractors should ensure their arrangements add value to the provision, that public funding is used to directly support learners and sub-contractors are selected fairly and have sufficient capacity, capability, quality and financial standing to deliver the services.”

This amounts to ‘Topslicing of topslicing’

Broker fees have been criticised as a further waste of skills funding — in addition to lead providers retaining millions in management fees through a process known as “topslicing”.

This practice, under investigation by the National Audit Office, has been the focus of an FE Week campaign since its launch in 2011, and was the subject of “recent compliance work” by the SFA.

It involves lead providers retaining government funding — usually called management fees — before finding a subcontractor to do the training for the remaining sum.

In one case, as reported by FE Week in November, Learndirect retained more than a third of its total government funding in management fees, pocketing nearly £50m.

Ian Wood, who according to LinkedIn worked for Hull-based brokering firm Purple Hearts Limited before it went into liquidation last July, was highly critical of large sums being diverted from frontline training.

He said that brokering amounted to “further topslicing of topslicing”.

“My main role wasn’t involved with sourcing brokered funding myself at Purple Hearts, they had a dedicated team for this, but I know how it works,” he added.

“You generally see brokers charging five per cent of monthly drawdown, which I personally think is too high, as the money should go directly to the learners training — especially bearing in mind that the prime will have already taken a cut of the funding through management fees.”

Response from provider associations

Association of Employment and Learning Providers (AELP) chief executive Mark Dawe blamed an “imperfect or restrictive funding system” for providing an opportunity for “intermediaries” to thrive.

He expressed concern after being shown adverts by FE Week indicating that millions of pounds allocated for learning was potentially going to brokers and called for an SFA crackdown.

Mr Dawe said: “In cases like these, where intermediaries appear, it is often reflects an imperfect or restrictive funding system.
“It suggests the SFA need to review their allocation system and the need to have a more flexible system of in-year reallocation.”

The Association of Colleges was less prepared to pass judgement.

When asked for its views on brokering, a spokesperson told FE Week: “Colleges have used subcontracting arrangements for many years to ‎ensure they offer high quality education and training.

“The apprenticeship subcontracting rules have become increasingly stringent and it is for individual colleges to decide how they comply with these rules.”

Easy money for ‘cowboys’

A broker contacted by FE Week complained about rival “cowboys” out to earn easy money.

Birkenhead-based funding4training was one of the few brokers FE Week came across that has an official website.

Its services were also publicised by Essex-based consultants EEVT Ltd, which regularly promotes brokering firms through its online newsletters.

One such newsletter advertisement for funding4training stated its 5 per cent broker fee was “negotiable depending on the provider”.

The firm’s director of sales and business development, Benn Carson told FE Week his firm was different to other, more disreputable competitors.

He said: “There are a lot of cowboys doing this work and it’s easy to be tarnished with the same brush, which is why I set myself high standards and make sure the presentation is right, by running a professional looking website.

“A lot of people are running around thinking they can make a quick buck, but that is not how it works if you do it properly.”

He added: “I offer a bespoke service to the client, where there is a lot of time and due diligence that needs to be put in.

“I don’t like to be called a broker. The service I offer is outsourced business development. Clients favour this set-up as they pay on results only.”

A testimonial on the funding4training website — allegedly from Westminster Kingsway College — said it could “confirm Benn has referred two really good providers to us both of which we have contracted with”.

When asked by FE Week why it used a broker, a spokesperson for the college said it was unable even to confirm if the testimonial was legitimate.

She added: “This kind of contract would be commercially sensitive information, so we would be unable to provide details in time for your deadline [before FE Week went to press on April 14].”

FE Week also asked EEVT Ltd why it advertises brokers.

Its managing director Steve Lawrence said: “Brokering is not something that I personally agree with and we don’t do it — but it’s something the market has created and readers of my newsletters want to know about.

“I don’t necessarily trust all brokers, which is why I try to publicise a selection of them, rather than just one, to give providers a choice.

“Lead providers used to do all the due diligence checks on potential subcontractors, such as checking their track record and turnover, but what happens with this now is the broker will often do that for them as part of the service, but the charge goes onto the subcontractor. It works for the prime contractor’s benefit and I wish it was not there.”

Putting our reputation on the line

The director of a firm that provides brokering highlighted the care it takes with recommending the right subcontractors to primes because its “reputation is on the line”.

The website for The Leadership Team, in Yorkshire, offers its services to large training providers.

It states: “We may be able to help you access funding from the SFA either directly or via one of our many ‘prime provider’ clients that already have an SFA contract”.

When asked about its brokering services, company director Tracy Myles told FE Week: “We are not just a funding broker, although we do sometimes introduce some of our smaller clients to larger ones for their mutual benefit.

“We do conduct financial and quality due diligence on any providers we recommend to our prime clients as it is our reputation on the line.

She added: “Our funding brokerage fee varies between 2 per cent and 5 per cent, depending on what other services we are providing.
“The fee is from the sub-contractor but in our case none [of it has to be paid] upfront and only as and when funds are drawn.”

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Editorial – Call the sheriff

Subcontracting brokers are not doing anything illegal.

But with commission percentages on million pound public sector contracts that would make estate agents blush, can it be justified?

What our investigation found was a growing and unregulated multi-million pound largely hidden market, with one broker labelling others as ‘cowboys’.

This is nothing short of shocking, so why hasn’t the SFA stepped in before now?

I first raised the issue of people touting SFA subcontracts on LinkedIn with then-chief executive of the Skills Funding Agency (SFA) Geoff Russell in 2012.

He responded on email saying he was “not sure what the issue is” and went on to add the SFA had “intentionally created a system motivated by market forces.”

It’s a relief, therefore, that the government has in the last two skills funding grant letters told the agency to root out this tactical subcontracting and get its house in order.

And it seems after seeing some pretty startling evidence from our investigation, they have rightly added limiting the use of brokers to the list of SFA tasks.

Nick Linford