College funding should be linked to inspection results, the Further Education Funding Council has agreed.
The move, "to reward excellence and encourage improvements", forms part of a Quality Improvement Strategyput forward by the FEFC's quality assessment committee.
The strategy, approved by the council before Easter, will also include more comprehensive inspections, and benchmarks for student retention and achievement.
The college inspectorate's resources will be "reviewed" to focus on poorly performing colleges.
The measures come as the quality assessment committee prepares to publish its fourth report in May.
The report will praise the sector, "particularly for its success in gaining greater recognition of the national importance of further education".
Based on national inspections, it will state:"Colleges have made exemplary progress in improving the quality of teaching, becoming more responsive to the needs of their communities and obtaining better resources for their students."
However, funding difficulties could subsequently undo their good work.
The report will confirm that more than a quarter of colleges are experiencing "acute financial difficulties, raising concerns for the future viability of provision".