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.
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