New subcontracting rule slammed as ‘immensely bureaucratic’ and ‘shockingly late in the day’

The Education and Skills Funding Agency has “shocked” hundreds of providers by requiring thousands of subcontracting contracts to be rewritten just four weeks before the new academic year.

The agency is demanding that all subcontracting contracts, for both adult education budget and apprenticeship funding, include for the first time a “list of individually itemised, specific costs for managing the subcontractor”.

In addition to listing the services, the contract must include “how each cost contributes to delivering high-quality training” and “how each specific cost is reasonable and proportionate to delivery of the subcontracted teaching or learning”.

These costs are typically referred to as a management fee or “top-slice” and have proven controversial for many years.

Nearly all providers currently charge their subcontractor a percentage of the funding, with some colleges still charging in excess of 30 per cent.

The ESFA committed to considering a per cent cap last year, but this new rule, requiring costs to be listed, appears to be a different solution and could force providers into a very different pricing model.

Training providers have reacted angrily to the requirement, which appeared this afternoon (July 4) in a new version of the funding rules for 2019-20.

Mark Dawe, chief executive of the Association of Employment and Learning Providers, said: “We proposed a 20 per cent cap solution to end extortionate subcontracting management fees. But once again, a simple solution has been ignored and instead, this immensely bureaucratic process appears both out of the blue and shockingly late in the day.

“The ESFA should implement a percentage cap and bin this complicated rule of listing and justifying management services immediately, before thousands of providers spend even more scarce resources with lawyers and accountants rewriting contacts or worse, start looking for obvious loopholes.”

And a spokesperson for Learning Curve Group, a provider that operates as both a prime and subcontractor, told FE Week: “We would always support additional scrutiny on management fees as there have been a series of examples which would not be regarded as beneficial either to the subcontractor or the learner.

“However, the administration connected to these updated requirements seems overly onerous and ambiguous from an audit perspective.  

“The investment needed to monitor subcontracted activity tends to be fairly standard across Primes, so a capped percentage rate would be something we support. It is also hugely unhelpful that the publication of the rules is so late.”

According to ESFA figures for 2017-18, there were over 3,292 subcontracting contracts involving 516 main contractors and 1,032 subcontractors.

The new rule reads, in full: “You must include in your contract with each delivery subcontractor a list of all services you will provide to them and the associated costs for doing so. This must include a list of individually itemised, specific costs for managing the subcontractor, specific costs for quality-monitoring activities and specific costs for any other support activities offered by you to the subcontractor.

“You must include in your contract with each delivery subcontractor a description of how each specific cost is reasonable and proportionate to delivery of the subcontracted teaching or learning and how each cost contributes to delivering high quality learning.”

The Department for Education was approached for comment.

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  1. Sarah Dumfries

    I fundamentally fail to see what the issue is here – surely this is the right approach and nowhere near as cumbersome as it’s being portrayed?

    Firstly, ask why this is being done. For years, some ITPs/colleges haven’t been just charging for the costs of managing a subcontractor, they’ve been top-slicing as an easy way to make profit. Now I’m not saying that learning providers shouldn’t make a profit, but it should be reasonable, and those charging 30-50% “management fees” have been raking it in. And to quote the old mantra, every pound of profit is a pound less spent on the learner.

    If this system requires a breakdown of costs, plus allows for a reasonable margin to be added on top, I don’t think that many could argue with profit being made. Sadly, some providers have taken this beyond anyone’s definition of reasonable.

    And while I write of profit, what’s wrong with asking ALL providers to break down their costs? Some funders require that on an ongoing basis, to ensure that funds are being used to actually deliver a service, rather than line the pockets of the directors. One only has to look at a recent TES article on a provider paying millions to its director for proof of how open the system is to abuse (and believe me, that particular provider has FAR more skeletons in its cupboard! There’s a reason that they had all that spare cash…..). Again, ethically there can be no wrong in asking providers to show their costs against income, whilst allowing a certain percentage to be used for profits (and non-essential spend such as enhanced pension contributions, nice company cars, staff away days, etc.). The skills sector isn’t not-for-profit, but it does need to get a grip on how many pence to the pound is actually being spent on the learner.

    As for an “immensely bureaucratic” system, this really isn’t the case. Anyone who’s written a decent, fully-costed proposal will be able to lay out a fee formula. As long as you know your costs, and can define a ratio of cost per subcontractor and cost per learner, this is a straightforward, one-off exercise from which an ITP/college can then calculate the factual management costs and therefore fees (including the aforementioned dedicated profit line) per subcontractor.

    Ultimately, the sector should ask why the ESFA have gone down this route. It’s because too many organisations have taken the mickey for too long. Have a look at the published data on subcontractors and fees, and then properly consider how much in “management fees” the contract holder has retained. This is a situation created by providers, not Government (and no, I don’t work for them!)

    • steve beaumont

      I think you have made some very valid points and in essence I agree. You quite rightly mention the top slicing for the bottom line is often all that occurs and that needs to be rectified, however what if those contract holders deem it not worth the cost or effort? The challenge here is its typical of how the funding as a whole is being managed. It starts with statements of structure and timelines, neither of which are reliable or in most cases met. Then a late in the day requirement is added, which it would seem to me will further reduce the ability to have or use funding. As someone responsible for the training in an ILP, this does not help our challenges of accessing funding. Getting Levy payers onboard is a major distraction,to the core business and often a waste of energy. 16-18 funding via contract with only sub contracting as a route just how messy is too messy? Bearing in mind that funding for 16-18 is actually a requirement by statute.

  2. Marion Marsland

    For good providers like TICA this will make a near impossible situation for our smaller non levy employers now totally fatal. Even though we are a robust high quality provider, the bureaucracy involved with a prime dealing with us on a National level will be impossible even though our current Prime have had an excellent relationship with us, total transparency, and reciprocal benefits from the management fee.
    Where do bespoke providers go for their non levy employers (who are the main provider of specialist construction apprenticeships) now?

  3. Ian Pryce

    The timing suggests incompetence. I have no problem with government keeping of list of subcontractors we should not use. After that it is a matter between contractor and subcontractor. Nearly all recent scandals have been concerned with subcontractors getting too much funding and rewarding owners lavishly. This doesn’t address that risk, even increases it. How many apprentices have failed because a college didn’t pass on enough of their funding? (genuine question).
    Having said all that this could be a big opportunity for contractors to demonstrate why they need to keep a high proportion of the funding to manage risk, quality, data. Clearly this new rule brings additional cost of its own too that will have to be recovered.

  4. At the moment the “top slice” percentage is generally applied across qualifications of all levels and all sizes. If the Primes are required to itemise their costs this is likely to result in lower charges (as a percentage of total funding) for the more expensive courses and higher charges for the courses with less funding. There is likely to be a massive impact on short courses and lower level courses. Many level 2 apprenticeships that are already financially unattractive will be no longer viable.