Lead providers who subcontract will need to provide a report next year that proves they are not taking too much in management fees, according to the Skills Funding Agency (SFA).

“(Each provider) must provide a report from its external auditors at the end of the contract year that provides assurance that the funding that it has retained is no more than is required to cover the actual costs directly incurred in managing its subcontractors,” the SFA website said.

The clause forms part of the main terms and conditions for provider agreements in 2012/13.

Geoff Russell, chief executive of the SFA, told FE Week: “I’m asking the prime contractor to do two things. Demonstrate to me you have the processes and the controls to be able to properly oversee a subcontract – which is going to discourage people from doing it quickly – and that the only fee you’re charging is what you incur by way of direct costs.”

Mr Russell said the SFA was still working on the details of the new clause, and would be considering small providers who either used reporting accountants or were not audited.

“There’s no sense going crazy over someone who’s subcontracting £10,000,” he said.

RSM Tenon, a leading audit firm, said they had a meeting with the SFA to discuss the changes two weeks ago.

Chris Mantel, director for audit and advisory services at RSM Tenon, told FE Week: “I believe there are more questions than answers at present.

“Clear guidance will be required by the SFA to ensure a consistent approach is adopted across the sector and, given the topic, I don’t believe that there is a simple solution, especially in an environment of freedom and flexibility.”

One subcontractor told FE Week in June that the management fees used by some lead providers were a “rip off”.

Sally Garbett, an independent consultant and trainer for Read On Publications said: “One of my local FE colleges has nearly £5 million for 16 to 18 apprentices.

“They hiked their management fees from 20 to 30 per cent this year and will now retain £1.9 million of the 16 to 18 apprenticeship funding for a management fee.

“I find it hard to think that any admin operation can cost £1.9 million and I know that the advice and support they provide amounts to little more than quarterly visits and administrative monitoring.”