Ministers want to know whether the industry can deliver the big programme of improvements to public services that are planned, using both PFI and conventional government funding.
The work is being led by the Office of Government Commerce, the specialist procurement unit at the Treasury. The review is in two parts. First, officials will tot up the cost of all projects over the next 10 years. Second, in conjunction with the industry, it will try to work out if the capacity is available.
The programme is ambitious: the Department for Education and Skills alone expects to spend £65bn over the next 10 years on new-build secondary schools. Rail spending could reach £30-40bn and health spending also runs into billions.
The study forms part of a wider survey of capacity and competition in key industries in which the government is a big client. It comes in the wake of an earlier Treasury report by former high-ranking civil servant Sir Christopher Kelly, published as part of the pre-Budget report in November.
This looked at the markets in which government was a key buyer, including construction, IT, outsourcing and social care. One of the 11 recommendations that it made was for the government to clarify its spending plans.
Possible solutions include finding resources from outside the UK
Treasury official Martin Sykes
"Construction is the first sector to be studied in detail as so much of what the government does depends on it," said Martin Sykes, director of the Supplier and Government Marketplace Directorate in the OGC.
The review, likely to be completed by November, is expected to identify questions of capacity and capability, including labour shortages.
Sykes, who will lead the OGC team, said: "We'll be looking at possible solutions including whether industry can find more resources from outside the UK, or even whether to advise ministers that their spending programmes have to be prioritised.
"So far we've held two workshops with clients from major spending departments and a limited number of people from the supply side."
Industry experts are being seconded to work on the report, including staff from construction cost consultant Currie & Brown. "We are keen to work with people in the sector," said Sykes.
Stephen Ratcliffe, chief executive of the Construction Confederation, said: "It is a very useful exercise, which we are participating in. The more certainty there is, the more contractors are able to deliver the best service."
This month, a survey by the CC and the Construction Products Association found that spare capacity still existed, though there was less than in the previous quarter.