Last year, 36 local authorities lost money on 52 contracts won through compulsory competitive tendering.
These authorities now have four weeks to explain the cause of the losses and to set out the steps they will take to rectify them, environment minister Paul Beresford said today.
Councils which have taken swift action to prevent future losses by putting their Direct Service Organisations (DSOs) financial affairs in order, or have closed them down, will escape sanctions.
'Where authorities carry out work in-house it is important that they keep to their financial targets. Any losses they incur will have to be borne by council tax payers in the form of higher charges or poor services.
'The vast majority of local authority direct service organisations were able to meet their statutory financial objectives in 1995/96.
'However, of almost 2,200 accounts received, some 260 failed to meet their targets. The notices being served today address these failures and require authorities to describe the steps being taken to deal with these problems.
'We will decide whether further action is needed in the light of these responses.
'Statutory financial objectives ensure fair competition and value for money for local taxpayers. A DSO which fails to meet its statutory objectives is not providing services as efficiently as it should.
'Authorities must act quickly to address losses incurred by their DSOs. The secretary of state will not hesitate to use his statutory powers against authorities whose DSOs do not offer value for money.'
Written responses are required from the local authorities by 11 February.