Dozens of colleges have been left with unfinished building projects and bills for millions of pounds after a government agency promised them more money than it had.

Further education colleges were actively encouraged by the Learning and Skills Council (LSC) to apply for funding to create world-class facilities.

Many applications were approved by the council, which allocated £2.7 billion towards projects at 79 colleges. Over the past 18 months many took out loans, employed architects or even brought in builders to start the work. Another £3 billion had been earmarked for 65 colleges that had completed costly feasibility studies.

But now the council says that it cannot honour its pledges in the current round of spending allocations.

More than £2 million will have to be written off at 42 colleges if the money is not found, and some could go bankrupt. Others threatened to seek a judicial review to force the Government to give them financial help.

Colleges affected include those in Bradford, Brighton, Barnsley and Oxfordshire.

Michele Sutton, principal of Bradford College, said: “Colleges were encouraged by the LSC to enhance and improve their sites. We were given approval for a state-of-the art new building costing £120 million, which would contain a learning mall, classrooms, a theatre, labs and rehearsal rooms.

“We spent £2 million on project managers and architects and had to rehouse 23,000 students. Our project had been approved in principle, and we were waiting for final approval at a meeting in December. We haven't had a single communication from the LSC to explain what is happening. We can't understand how this level of mismanagement has gone unnoticed.”

A survey by the Association of Colleges found that almost half of colleges would face extra costs of more than £2 million each if their projects were delayed over five years.

David Collins, the association's president and principal of South Cheshire College, said recently: “Originally, we were going to build around an existing tower block and that would have been £35 million. And the LSC said, ‘Be bold.' I think that's the pattern around the country.”

Siôn Simon, the Further Education Minister, said: “I really do understand and I sympathise with the frustrations of colleges in this kind of position. There will be colleges who have invested money, who have borrowed money, even some who have started doing building works. It is right to say that the LSC has given in principal approval to 79 colleges which would total nearly £3 billion of government money and it is clear that that level of expenditure cannot be funded in the current spending round.

“We are quite clear as ministers that that's not acceptable. We shouldn't be in that position. This programme has not been managed properly.”

The Department for Innovation, Universities and Skills has appointed Sir Andrew Foster, the former head of the Audit Commission, to investigate.

In a previous inquiry, he suggested that the LSC had inflicted “too many initiatives without intellectual clarity and coherence”.

David Willetts, the Shadow Skills Secretary, indicated that the problems could be more widespread, with 144 colleges expecting to proceed with capital projects. He said: “They are supposed to be providing training for people during the recession, but now they are all at a standstill because of this mismanagement. It is a quite extraordinary catalogue of incompetence. They were being actively encouraged by ministers and by the Learning and Skills Council to go ahead with these programmes.”

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