Spiralling costs deal fresh blow to Tony Blair's flagship initiative to deliver 200 city academies by 2010.

The government may scrap Taylor Woodrow's £20m Harefield City Academy project in west London after it emerged that costs on the scheme have gone over budget.

The academy, whose backers include Watford Football Club and Philip Green, the owner of retail chain BHS, is to be reviewed by officials at the Department for Education and Skills who will decide in the coming weeks whether the academy should be given more money, retendered or axed.

The setback is a fresh blow to Tony Blair's academies scheme as speculation intensified over the £5bn programme because of its association with the "cash for honours" scandal. It raises doubts over whether Blair's goal of creating 200 academies by 2010 will be achieved.

The delay means that students at Harefield will join those at the £20m St Paul's Academy in south-east London, which Building reported last week had gone over budget, in having no fixed date on which to move into fresh accommodation.

Harefield is one of 10 academies that opened last September, mainly in existing premises, with the promise that facilities would be soon revamped. The first 17 academies to open were new-build projects.

Lynn Gadd, principal of Harefield Academy, said the academy trust was waiting for the DfES to make a recommendation to academies minister Lord Adonis. She said: "The original design came in over budget and the DfES is looking at a list of possibilities including redesign and retendering. Whichever way it has to be quick as this building needs replacing quite urgently."

Harefield has been on hold since December after the original design by Aedas Architects came in over budget. Sources close to the project disagreed on the reasons for the overspend and its amount but it is believed to be about £4.5m.

Since the problem was identified, contractor Taylor Woodrow has been working with Capita Symonds to try to reduce the cost.

However, it is understood that the DfES has also brought back Aedas to advise it, and is now considering retendering the whole project. It is thought to have the copyright to the reworked design, which it could ask other contractors to bid for.

New funding has to be approved at ministerial level, which could prove difficult when public funds are needed elsewhere.

A source close to the process said: "The DfES has said to the trust that it can't [make a decision] until it sees the technical review of Taylor Woodrow's proposal. Everyone's surmising there'll be a retender."

One source close to the trust put the chances of the scheme succeeding at 25%. The source said: "It became apparent that the scheme was way over budget at the end of December. It was grossly over area. We now have a building that is over area and over-engineered."

The design is thought to have come in at 10,000 m2 but the school only needs 8950 m².

A DfES spokesperson said: "The DfES and the academy trust are in the second stage of the process for the academy building and are working with Taylor Woodrow on developing designs." Aedas was unavailable for comment.

A Taylor Woodrow spokesperson said: "We have completed phase one of the Harefield Academy and are in discussions with a view to starting phase two."