The nursery owner, who does not want to be identified, was allocated the funding from the council for a complete rebuild to one of her settings.
However, Essex County Council has since written to all providers who were due to receive money under the scheme, telling them not to sign any new contracts because the DfE plans to claw back any funding where there is no signed contract with a builder.
Work on the project, which has included obtaining planning permission, rebuilding a car park and hiring project managers and designers, has already started and has cost £200,000 to date, of which £100,000 has been received from the council.
The council letter, dated 25 August from Terry Reynolds, director of learning, said, 'Since allocating you the grant, we have been informed by the DfE that all awards for which there is not a signed contract with a builder they consider unallocated and, therefore, subject to clawback by central Government.
'We are vigorously contesting this interpretation on the grounds that we have always expected those awarded the grant to procure the contractor, and that our contract is with the organisation awarded the grant. However, we are still awaiting the DfE to respond to our argument.
'In the light of this, I must tell you that you should not, until this is resolved, sign any contracts following tenders. This is because, if the DfE maintains its position, ECC will not be able to claim grant and will be unable to pay you the grant awarded by the panel.'
The capital grant, also called the Quality and Access Grant, was set up by the previous Government to help settings improve buildings, outdoor areas, ICT and facilities for disabled children. However, local authorities have been told to put on hold any funding not 'fully committed' to settings (News, 21 July).
The nursery is based at a primary school, which has also recently lost out on a rebuilding grant after the Government scrapped the Building Schools for the Future scheme.
The nursery owner said, 'Regardless of the fact that we have a signed contract with the council, we are being told that if the DfE claws back the funding the council will not be in a position to give it to us. Under the guidelines for the grant, all money must be spent and all projects completed by next March. By stalling at this stage, they could potentially cause our projects to fall behind and not meet this deadline.
'If I do not receive this funding my setting will close. I have put a lot of money into this nursery, and this money is secured against my home.'
A council spokesperson said, 'We will be in contact with providers directly when we receive further information from the DfE. We would strongly reject any suggestion that the council would deliberately stall so that the projects missed their deadline for completion.'