The local authority, which drafted in specialist consultancy firm Impower in November 2012 in a bid to improve services, is the fifth authority to be graded inadequate in the space of a month.
Inspectors, who visited the authority between January and February this year, found that leaders had failed to ensure that vulnerable children at risk are protected.
"The application of thresholds is inconsistently, and at times, inappropriately, applied," the report states.
"Managers do not always recognise risk.
"This results in some children’s needs not being assessed or supported at the appropriate level."
Meanwhile arrangements for the management of children who are missing and at risk of child sexual exploitation was found to be "poor".
"This has resulted in children for whom there is known high risk of child sexual exploitation not receiving a social work assessment or service and not always being protected," the report states.
"The local authority and its partners do not fully understand the scale and prevalence of child sexual exploitation in Sandwell."
Simon Hackett, lead member for children's services at Sandwell Council said the authority believes there is "absolutely no doubt" children in Sandwell are much safer following improvements made to the service since Ofsted's last inspection of services in 2013.
“This is not only our view. It is also that of Professor Ray Jones, the social work expert appointed by the government to oversee our work with children, and other specialists," Hackett said.
“Given the improvements we have made, we are deeply disappointed that Ofsted continues to rate our children’s services as inadequate. We struggle to see how it can come to this conclusion.
“This is why we are puzzled by Ofsted’s overall verdict that we are inadequate – and why we challenged their findings.
"We are currently thinking about whether it would be in the best interests of Sandwell’s children and young people to pursue a challenge to Ofsted’s judgment.
“We fully recognise that the work we are doing to keep children safe should be open to scrutiny and inspection.
“We know we still have more to do. But we firmly believe that we are on the right road and will continue to improve."
Sandwell is the fifth authority to be rated inadequate in the space of a month after Surrey earlier this week, and Cumbria, Lambeth and West Berkshire last month.