Navigating the new Subcontracting Standard and rules of engagement

Subcontracting plays an important role in supporting lead providers in expanding the range of training provision offered and in engaging with a broader range of diverse groups.

However, subcontracting provision is not without it risks. Education and Skills Funding Agency (ESFA) reforms aimed at strengthening the ESFA’s oversight of the use of subcontracting came into force through the revisions in the subcontracting funding rules for post-16 funding and the introduction of the subcontracting standard which was formally introduced in August 2022.

The subcontracting standard represents a radical change from the old subcontracting rules across all funding streams, with the standard providing a single source of information for how the ESFA expects providers to manage subcontracting across all ESFA funded funding streams.

The standard sets out the expectations of the ESFA across a number of themes, including new topics. The evidencing of compliance may prove challenging for some providers. It is, therefore, an ideal time to consider key areas for improvement identified in reviews of subcontracting controls in 2021/22 and implications for meeting the new subcontracting standard.

We detail below common themes arising from our work and consider the impact when compared to the subcontracting standard which may help providers to navigate the new rules of engagement.

1. Contract terms and signatures

The ‘Risk management’ section of the standard outlines that the ESFA expects contract managers to have a good understanding of terms included within the contracts in relation to existing areas, but also new areas such as termination, warranties, indemnities and insurance, which have not previously been covered.

The ‘Administration’ section of the standard requires that contracts are stored consistently after being signed and that a record of key contractual information is kept up to date, including any important dates, which could include the deadline for the first enrolment.

The most common issue we found was that contracts did not contain all of the required clauses as outlined in the funding rules. Providers had carried forward older templates or had not specifically factored in the funding rules to their contract, using standard templates that are used in other areas of the organisation instead.

In addition to this, many providers have not ensured that contracts are signed in a timely manner, with signature often happening many months after the commencement of learning delivery.

2. Subcontracting policy content and approval

The ‘Pre-award activities’ section of the standard requires the rationale for subcontracting to be clearly outlined and approved, with this policy statement forming part of a wider business case that should be approved by the executive/board on an annual basis.

This section of the standard also makes explicit reference to the management fees being fully outlined, agreed at executive level and published on the website. Providers wishing to charge management fees over 20% of the funding are only permitted to do so with ESFA approval and must make the rationale for this clear.

Many providers have failed to include in their policy how fees are determined and the specific activities for which they will charge the subcontractor. Most commonly this was completely omitted from the policy, but we also observed instances where the information provided in the policy was not sufficiently comprehensive to meet the requirements of the funding rules.

Providers also, particularly in the case of local authorities and independent training providers, did not, in many instances, demonstrate that the board had considered and reviewed the subcontracting policy on an annual basis.

3. Documenting the roles and responsibilities of the parties

The ‘Managing relationships’ section of the standard requires providers to develop a document that clearly outlines the roles of the contract manager and the subcontractor in a ‘joint statement of intent’ or similar document.

For study programmes and adult education budget (AEB) provision, the common issue was that providers used a standard enrolment form that made no reference to the subcontractor or only noted their name. This is not sufficient as the learner has not been clearly notified regarding what elements of the programme are delivered by which party and who is ultimately responsible for key items such as health and safety and the delivery of training.

For apprenticeships the compliance in this area was better because the commitment statement requires the roles and responsibilities of other parties to be documented and so often providers incorporated subcontractors into their standard templates. However, we noted in some instances, particularly where the proportion of apprenticeship provision subcontracted was low, that the subcontractor’s responsibilities were omitted.

4. Quality of monitoring documentation and content of monitoring visits

The ‘Managing performance’ element of the standard makes specific reference to further work that will be required in terms of outlining the performance levels expected by the subcontractor and providing incentives for them to exceed targets.

This section also requires that there are clear performance measures in place that subcontractors are assessed against, which are aligned to the ESFA’s rules. The documenting of issues and provision of regular feedback have also been carried through to the standard, with a requirement for performance reviews to be formally documented.

The quality of monitoring paperwork was poorer in 2021/22 and has been on a decline since the pandemic. Many providers failed to complete effective in-person monitoring visits with limited checks on existence of learners performed during this time and have not returned to completing a mix of in-person and desktop exercises.

The main area that was poor was the documentation of matters arising in monitoring visits, with it often being unclear what had been covered and the outcome of the visit. Similarly, providers had not documented well how issues arising from these reports had been followed up with the subcontractor and rectified.

Safeguarding and Prevent were not included in the discussion points or visits for many providers as working practices had not kept up with changes in the funding rules.

5. Employer agreements

Employer Agreements provided for 2021/22 missed out many of the key details, with providers often relying on a matter being included in the contract with the subcontractor as being sufficient. The key items that were not included were the following:

• A breakdown of the fees and charges to the subcontractor, including the rationale for why the fees were retained by the provider;
• Clear reference to the contingency arrangements in place should one or more parties be unable to continue; and
• The roles and responsibilities of the provider and the subcontractor for delivering the apprenticeship programme.

6. Payment terms

There is a section in the standard covering ‘Payments and Incentives’ making it clear that payment mechanisms must be documented and well understood by both parties. Whilst the 30-day requirement is not documented in the standard, this will continue to be documented within the funding rules for each funding stream.

Many providers failed to consistently pay their subcontractors within 30 days across all invoices raised in the year. Many had payment terms in excess of 30 days in place, either recorded in the contract or as part of working practice, based on wider organisational policies.

Something to consider – combined authorities

The ESFA’s changing approach to subcontracting and the development of new rules and now the subcontracting standard mean that for the first time since devolution we are starting to see significant differences between the requirements of the different funding bodies.

The various authorities have not all fully announced their intentions going forwards in terms of whether they will align with the ESFA’s new standard, develop their own or go down another path.

Providers with both ESFA funded and combined authority funded learners will need to pay close attention going forwards to ensure that they are complying with both sets of funding rules. This may require further administrative activity and potentially the creation of documents aimed at serving multiple purposes.

Final thoughts

All lead providers subcontracting ESFA monies totalling £100,000 or more within any funding year, are required to obtain a report by a reporting accountant considering each of the ten components of the subcontracting standard, with reports due to the ESFA by 31 July 2023. The ESFA will then consider the report, alongside other information, and determine whether or not the lead provider has achieved the subcontracting standard.

It is important to remember that the report from the reporting accountant will not be considered in isolation, with the ESFA also accessing other sources of information and local intelligence held to inform its assessment.

Whilst the ESFA has yet to publish details on the impact of the external validation on a provider’s current year and future plans it is important that management and the audit committee of providers are aware of the ESFA’s large shift in tone and approach in this area. Failure to implement recommendations is now likely to result in much swifter and more decisive action being taken by the ESFA.

All providers considering entering into subcontracting arrangements for ESFA funded provision, whether as lead provider or subcontractor, should be aware of the subcontracting standard and undertake a self-assessment against the subcontracting standard criteria to ensure that measures are in place and work towards those areas requiring further work.

Boards and senior management teams should formally consider all proposed subcontracting arrangements and subcontracting strategies to ensure that the changes through the subcontracting standard have been considered throughout the organisation.

Finally, all providers must declare their subcontracting arrangements for the period 1 August 2022 to 31 July 2023 to the ESFA. The deadline for submitting the declaration is Monday 24 October 2022 by 5pm including nil returns if appropriate.