Hanover, one of Melbourne's best-known homelessness agencies, will be forced to close its employment services after its bid for funding to continue them was rejected.

It means there will be no specialist homelessness employment service in Victoria, Hanover chief executive officer Tony Keenan says.

A number of other Victorian welfare agencies are in a similar position, including Youth Projects, which has employment services for young people at risk of isolation and homelessness.

Youth Projects also runs a cafe, called Good2go, in the popular Melbourne graffiti (and tourism) hot-spot Hosier Lane, where young job seekers can get barista training to help them find work.

The future of this cafe is now uncertain.

Mr Keenan said the government's decision made no sense: "Policy rightly says the best way that people can get out and stay out of homelessness long term is through employment – why would you stop programs that are supporting people to do just that?"

In March the Federal government announced which organisations were successful in their bids to be part of its new national employment service, called "jobactive".

About 184 organisations applied and 44 were offered contracts to deliver employment services, in a move that critics say favoured a smaller number of large, multinational providers above more locally-based, not-for-profit providers.

Unlike previous rounds, it was not possible to tender as a specialist provider.

Hanover's service began six years ago and has a case load of almost 900 clients. About a third have a disability, about 200 are homeless and almost a third are from culturally and linguistically diverse backgrounds.

For the past six years these employment services have run from four sites across Melbourne. As well as helping job seekers find work, Hanover also helps with housing, mental health, alcohol and drug management and counselling.

The contract would have been worth about $4.2 million over five years to the agency, which is now trying to find other positions for its eight specialist employment staff.

Youth Projects head Melanie Raymond said the move to a more generalist model was unhelpful.

"When the problems are largest for a particular type of people, it makes sense to address them," she said.

Youth projects missed out on about $330,00 per year, over five years, she said.

The department said the tender process was conducted in accordance with the government's procurement rules and signed off by an external probity adviser.

"The government was conscious of the need to move the employment services sector to a more competitive and sustainable basis," minister for employment Senator Eric Abetz said, when the successful contracts were announced.