The Government admitted yesterday that it was likely to spend the entire £2.7 billion contingency fund for the 2012 Olympic Games because of construction inflation and the high-risk nature of the project.

Jonathan Stephens, Permanent Secretary at the Department for Culture, Media and Sport, told the Public Accounts Committee that he expected the bill for the Olympics to reach £9.3 billion.

Last March ministers suggested that this figure, including a 50 per cent contingency measure, was, at three times the original bid, an absolute maximum and unlikely to be reached.

Mr Stephens conceded yesterday that the full contingency sum would probably be used after all. He was accused by MPs of “grossly underestimating” the costs of the 2012 Games when the bid was finalised in 2005.

“The safe assumption is we would expect it [the contingency] all to be spent and that would comply with the £9.3 billion,” Mr Stephens said. “We will try to ensure that less is spent, but on a project of this size we would expect risks to materialise as they do and the contingency transferred to the Olympic Delivery Authority. It is realistic to expect that a significant amount, if not all, the contingency will be required.”

He said that it was now important to accelerate the timetable to reduce costs and stop expenses spiralling closer to the 2012 deadline.

Edward Leigh, the commmittee chairman, accused Mr Stephens of either “sheer incompetence” or “deceit” by coming up with such a low figure when the bid was won. So far the Olympic Delivery Authority has been allocated £500 million of the contingency fund, of which it has used £360 million.

The cost of building the Olympic stadium and the aquatic centre has doubled, contracts show. Part of the reason is increasing construction inflation, which has been revised from 5 per cent a year to 6 per cent a year. Mr Stephens revealed that every two-point rise would add a further £50 million to the bill.

The scarcity of construction companies interested in contracts may also have led to cost rises, with sole bidders being able to call the shots. As The Times revealed yesterday many companies have decided not to put in tenders for venues because of the high risk and low profits associated with a one-off project.

Mr Stephens conceded that, when the initial bid was made in 2005, there was great uncertainty over several aspects of the scheme. The team putting the bid together did not take into consideration VAT costs or any contingency measures, even though at that stage no public land was available and they had no idea who would be delivering the scheme, he admitted. As a result of greater scrutiny after London had won the bid, the bill had nearly trebled to £9 billion.

CLM, the management consultancy brought in last year to monitor costs, had carried out a further breakdown of the prices of individual venues, which would be published in the new year, David Higgins, chief executive of the Olympic Delivery Authority, said.

Alan Williams, Labour MP for Swansea West, pressed Mr Stephens and Mr Higgins on whether they had followed Treasury guidance over continency figures at the time of the bid. Mr Stephens said contingencies had been built into individual Olympic venues but not the overall programme.

Mr Williams said that this was naive and that the Treasury should have insisted on a larger emergency fund.