A Skills Funding Agency clampdown on under-delivery next academic year has prompted concerns that providers could be hit by growing “financial instability”.

The agency is cutting its tolerance of under-delivery, meaning more providers could be hit with an in-year reduction to their allocation.

This academic year, providers who were 15 per cent below their SFA contract target at November 2013 faced an in-year reduction. At February this year the tolerance level was 8 per cent and at May it was 5 per cent.

However, next academic year the levels are falling to 12 per cent, 6 per cent and 3 per cent, respectively.

Both the Association of Colleges (AoC) and the Association of Employment and Learning Providers (AELP) warned against the move.

An AoC spokesperson told FE Week: “Despite rising demands to fund apprentices, adult learners and people who are out of work, the agency has less money available in its budget.

“There’s naturally pressure on the agency to redistribute funds during the year, but there is also a risk that such decreasing of tolerance with regard to in-year reductions will add to financial instability within the sector and institutions.”

The levels, which apply to contracts worth more than £10,000, were laid out in the agency’s Operational Performance Management Rules 2014 to 2015 published on Wednesday (June 25).

Stewart Segal, AELP chief executive, said: “The current system was developed when there was more flexibility in the Adult Skills Budget. We now have restrictions on the opportunity to vire funds so it is very difficult for providers to manage delivery to four quarterly measurement points as well as managing to a financial year and an contract year.

“The reduction of the thresholds will make this management even more difficult, so the agency has to be very clear as to what the priority delivery programmes are and their decision-making must be more transparent and timely to enable providers to respond to the contract changes.

“We have had several instances where contract increases come far too late to deliver the increased volume and reductions are made in the following quarter.

“With these reduced thresholds and the new contract management system within the agency, we need a full review of how the system will work in 2014-15.

“We also believe that any system of in-year contract reviews should apply to all providers.

“Providers will have to deliver Trailblazer pilots from within their existing allocations but we hope any changes to volumes will be taken into account in the quarterly reviews.

“Those quarterly reviews must also be open and transparent and must allow providers to make a case for retaining volumes where specific circumstances affect their delivery profile.”

An agency spokesperson said: “We are seeing improved performance by providers against contract values, and have therefore adjusted the tolerances to reflect more closely the actual pattern of performance.

“As now, providers will be able to make a case for retaining contract values where they can demonstrate that their profile of delivery will differ from the performance profile.”