Tens of millions of pounds of taxpayers' money could be paid out in bonuses to under-performing contractors responsible for delivering the Government's flagship welfare-to-work scheme, the Whitehall spending watchdog has warned.
The National Audit Office (NAO) said "flaws" in the contracts for the Work Programme drawn up by the Department for Work and Pensions (DWP) meant they they were obliged to make incentive payments to even the worst performing providers.
The incentive payments were supposed to reward high performance, however the NAO said that the performance measure chosen by the DWP meant that all 40 prime contractors involved in the scheme are expected to qualify for them.
"Flawed contractual performance measures mean the department will have to make incentive payments to even the worst performing contractors," the NAO said.
The bill to the taxpayer is likely to be around £31 million in 2014-15, whereas a more accurate measure of performance would have triggered payments of just £6 million.
Overall, the DWP's total exposure in the period to 2017-18 could reach £61 million, while the NAO said that it should have cost around £17 million.
The NAO said that the way the contracts were drawn up also made it more expensive to sack under-performing providers.
When the DWP decided it wanted to drop the Newcastle College Group, it was unable to argue it had breached its contract by failing to meet minimum performance levels and instead had to use a voluntary break clause to negotiate the termination costs.
Despite claims by ministers that the Work Programme - which is intended to get the long-term unemployed into jobs - would be an improvement on previous schemes, the NAO said that the actual performance levels were very similar.
Figures for the most recent monthly cohort to have gone through the scheme showed that just 32% of the participants found jobs - still below the DWP's minimum performance level of 33% and well below its original forecast of 39% and the 42% predicted by the contractors themselves.
Performance for the harder-to-help groups was also below expectations with only 11% of claimants of employment and support allowance (ESA) - paid to those with disability or long-term illness - finding work compared to a forecast of 22%.
The contractors' own estimates showed they were now planning to spend 54% less on the harder-to-help groups than they were when they originally submitted their bids.
Margaret Hodge, the chairman of the Commons Public Accounts Committee which oversees the work of the NAO, said she was "angry" at the failure of the DWP to help those who needed it the most.
"The Work Programme is absolutely critical to getting people, especially some of the most vulnerable in society, into work and helping to keep them there in the longer term," she said.
"The DWP has not delivered the much needed improved performance on the Work Programme since my committee last examined it in late 2012 and it is very clear to me that it still has a mountain to climb if it is to help those most in need."
The Employment Related Services Association (ERSA), representing Work Programme providers, insisted the scheme was working well.
"It's quite an achievement that performance is the same level as predecessor programmes despite there being less cash in the scheme and a more challenging economic backdrop," said ERSA chief executive Kirsty McHugh .
She said the providers were investing, on average, 60% more on ESA claimants than the NAO report suggested.
Unusually, the report was not signed off by the DWP prior to publication on the grounds that it did not reflect its view of "the relevant facts".
The department said that no incentive payments had been made so far, and that any future payments would be included in ongoing contract negotiations.
"The Work Programme is helping more people than any previous employment programme and has already helped half a million people start a job and 300,000 into lasting work," a DWP spokesman said.
"The NAO says that we've already saved more than £40 million over and above any previous employment programme, and that we'll save £450 million on benefits compared with any scheme that has gone before.
"Even starting in the recession, the Work Programme performed as well as previous schemes, and with performance improving rapidly it's on track to deliver significantly more jobs than previous schemes."
Shadow work and pensions secretary Rachel Reeves said the report showed "the Work Programme is not working".
She said: "This damning report confirms the Government's failure to meet its own targets, with only 27% of those aged 25 and over getting jobs lasting for more than six months, and performance for harder to help groups, including those with disabilities, falling even further behind.
"The failure of the Work Programme isn't just letting down hundreds of thousands of jobseekers, but threatens to land taxpayers with a huge bill, with the NAO warning that £11 million has already been spent on payments in error, and a further £25 million is at risk.
"The Government should introduce Labour's Compulsory Jobs Guarantee to get young people off benefits and into work."