The National Audit Office has said the Work Programme’s demanding performance targets may force prime contractors to put disproportionate pressure on subcontractors, many of which are charities.
The Introduction of the Work Programme, a report published by the spending watchdog today, also says that organisations dealing with the hardest-to-reach people on the payment-by-results scheme are frustrated at the low rate of referrals so far.
The report recommends the Department for Work and Pensions, which established the programme in June last year, should carry out spot checks to "make sure that its own standards for prime contractor management of subcontractors are implemented".
It also urges the DWP to survey subcontractors to see if its standards have been applied.
The report says it was a significant administrative achievement to launch the programme in just 12 months but the speed had led to risks.
The DWP, the report says, had to pay £63m to terminate existing welfare-to-work contracts, IT was not fully functional when the programme started and there was an increased risk of fraud and error going undetected.
According to the report, the DWP had made assumptions that were likely to be overoptimistic about the number of people the programme will get back into work, and this could lead to financial problems for programme providers. It says 26 per cent of the largest group of job-seekers in the programme will get jobs, compared with the DWP estimate of 40 per cent.
Amyas Morse, head of the National Audit Office, said: "The DWP has set providers stretching performance targets and it needs to ensure that they do not cut corners to stay in profit, such as targeting easy-to-reach people, reducing service levels or treating subcontractors unfairly."
Margaret Hodge, Labour chair of the Public Accounts Committee, which will scrutinise the report, said there was "a real danger that providers would try to renegotiate contracts if targets proved too optimistic, or cherry-pick clients who were easier to help.
"Referrals to subcontractors are already lower than projected by the DWP, and this might have a devastating impact on small charities providing specialist support," said Hodge.
"It will be troubling if these cases have just been ‘parked’ while contractors are paid for helping claimants that are easier to help back into work. We will want assurance that the DWP has oversight of its prime contractors and that subcontractors are not squeezed out of business."
Sir Stuart Etherington, chief executive of the National Council for Voluntary Organisations, said the report showed the NAO "shares many of the concerns that we have raised before around over-optimistic performance expectations and delays in subcontractors receiving referrals.
"The recommendations for monitoring performance assumptions both for this and future initiatives are particularly timely given the disappointing value and number of contracts that have gone to voluntary sector subcontractors."
Employment minister Chris Grayling said: "Payment by results is a totally new approach for government and its success simply cannot be assessed in the same old ways.
"I’m really disappointed that the NAO is producing a report that is based partially on guesswork, when it’s private companies and not taxpayers who are carrying the risks.
"Unlike the last government's welfare-to-work schemes, we pay only when companies succeed in getting the long-term unemployed into sustained employment."