Metronet, the company that collapsed while upgrading two thirds of the London Underground rail network, will have to absorb at least 1 billion pounds ($2 billion) of overspending, the government's arbiter said on Friday.
But it could be allowed to recover an equal amount, he added.
The Metronet consortium was forced into administration in July after running up 2 billion pounds ($4 billion) of unscheduled costs while renovating nine of London's 12 underground lines.
The renovations follow years of complaints by Londoners about delays, breakdowns, overcrowding and sweltering conditions.
London Mayor Ken Livingstone, whose Transport for London organization funds Metronet's work, wants to take control of the company and split up the remains of its 17 billion pounds contract. He expects to bid for Metronet by the end of this month.
But the administrator, Ernst & Young, is trying to value the company with a view to selling it to the highest bidder to pay off creditors.
"Of the overspend, about a quarter to a half is recoverable," arbiter Chris Bolt told Reuters. "They (Metronet) should be paid 370 million pounds to 1 billion more. But it needs to absorb 1 billion pounds to 1-1/2 billion of inefficient costs."
Bolt has been appointed by the government to settle any disagreements between London Underground and its contractors.
He said the biggest cost overruns had occurred on station upgrades, where rival maintenance firm Tube Lines had worked more efficiently.
"On stations, the gap between Tube Lines and Metronet was something of the order of a quarter or more of Metronet's costs," said Bolt. "I don't think Metronet was trying to fudge the figures. The cost increases came from inefficiency."
Metronet is owned by WS Atkins, Balfour Beatty, the rail equipment unit of Canada's Bombardier, EDF Energy and Thames Water.
Metronet's contract is now being managed by Ernst & Young, which has asked investment bank Rothschild to formally value it by the end of this month. Bolt's guidance on Friday is key to that valuation.
The administration of Metronet has not been smooth.
About 2,300 rail workers went on strike for 30 hours at the start of this month, saying Ernst & Young had not given them the assurances they needed over job cuts and pensions.
Prime Minister Gordon Brown criticized the industrial action, which crippled the network.
The collapse of Metronet has damaged the image of public-private partnerships (PPP), a formula that Brown, the former finance minister, has always favored for infrastructure projects.
Ken Livingstone previously battled to keep London's underground out of the hands of PPPs.
Bolt said Metronet BCV, which handles London's deepest Bakerloo, Central and Victoria lines, claimed extra payments of 992 million pounds over the first 7-1/2 years of the contract, but it should have only demanded between 140 million and 470 million.
Metronet SSL, which is upgrading the shallower Metropolitan, District, Circle, Hammersmith & City and East London lines reported 1.1 billion pounds of cost increases.
But it should have only asked for an extra 230 million pounds to 600 million, said Bolt.