The Department of Health has finally given the go-ahead for the £1bn PFI redevelopment of St Bartholomew's and the Royal London Hospital.

The department and the Treasury gave the green light after agreeing measures with the Barts and the London NHS Trust and Skanska that will cut the contractor's annual fee from £117m to £97m.

Approval comes more than two months after Patricia Hewitt, the health secretary, put it on hold.

As part of the agreement Skanska has agreed to manage the buildings for 35 years, not 30 as initially planned. It has also negotiated a lower cost of borrowing.

The trust will defer a decision on whether to fit out a floor at Bart's and two floors at the Royal London until the scheme is more advanced.

A grant will also be made towards state-of-the-art medical equipment from St Bartholomew's and the Royal London Charitable Foundation.