An HS2 subcontractor has been terminated from its role supplying labour to build a £100m “bat tunnel” following an investigation into allegations of overinflating rates for staff.

BAM Nuttall (BAM), part of a consortium that is the main works contractor for the much-delayed £80bn-plus high-speed rail line between London and Birmingham, said it had ended the involvement of Danny Sullivan Group (DSG) on projects where “compliance issues have been identified”.

It is understood that BAM sent a letter to DSG this week stating it is to terminate its contract on the 1km (0.6-mile) mesh structure to shield bats in Buckinghamshire ancient woodland, so that it can proceed with another labour supplier.

HS2 Ltd launched a separate investigation in May into DSG’s role providing workers to build the West Midlands section of the line amid allegations about its billing practices.

That investigation related to the provision of workers to HS2’s other main contractor, Balfour Beatty Vinci (BBV), which has subsequently implemented “additional monitoring and controls”. It was based on whistleblower claims that self-employed staff were being wrongly billed as salaried employees, leading to overpayments.

HS2 said at the time that DSG remained suspended from new contracts across the project while the investigation continued.

BAM – a member of the high-speed rail project’s main works contractor, EKFB, alongside Eiffage, Kier and Ferrovial – said it had suspended DSG from working on the bat tunnel after carrying out its own inquiry.

“BAM UK & Ireland has taken the decision to end Danny Sullivan Group’s involvement on projects where compliance issues have been identified,” BAM said in a statement to the Guardian. “This follows an internal review of our labour supply arrangements, which remains ongoing.”

A BAM spokesperson added: “This measured approach reflects our focus on responsible supply chain management. We remain fully committed to the highest standards of ethics, legal compliance, and workforce welfare, and are working closely with our clients and partners as we continue to monitor and review the situation.”

BAM added that it continued to work with DSG on “other contracts while further investigations are carried out”. DSG continues to work with EKFB via BAM on the southern section of the HS2 project, which is understood to involve 400 to 500 workers in total.

An HS2 Ltd spokesperson said it took its responsibility for managing public money seriously, adding: “We have been very clear with our supply chain partners that unethical behaviour cannot be tolerated, and we fully support them in taking decisive action.”

The Department for Transport (DfT) has previously said it would ensure that any claims of wrongdoing in HS2’s supply chain were thoroughly investigated.

HS2 has been beset with delays and cost overruns since it was announced in 2009 and given the go-ahead in 2012, even as the ambitions for the high-speed network have been scaled back.

It was originally intended to include a second phase of two rail branches to Leeds and Manchester, but the former leg was dropped in 2021; the Conservative government axed the latter in 2023, announcing that the rail line would terminate at Birmingham.

Revised estimates of the costs of HS2, adjusted for inflation, were submitted to parliament on Thursday. The transport secretary, Heidi Alexander, said expenditure to date had reached £40.5bn at nominal (current) prices, with another £32.5bn committed for the next five years from April 2026.

She said that until a full reset and accounting was completed, she was “not in a position to say with confidence how much HS2 will cost or when it will be delivered. That is a deeply unsatisfactory position, but it is necessary to complete the hard work we have embarked upon.”

Parliament’s spending watchdog, the public accounts committee (PAC), said in February that HS2 was a “casebook example of how not to run a major project”. The total bill is approaching £80bn, according to the PAC, but there have been reports that the total cost could end up at £100bn.

The government ended speculation over the eventual southern terminus by confirming that the service would indeed reach central London, rather than stopping at Old Oak Common in the capital’s north-western suburbs, but the PAC said the DfT still did not have a plan for the work at Euston.

According to HS2 Ltd, 75% of the tunnelling on the London to Birmingham line has been completed.

A DSG spokesperson said: “Danny Sullivan & Sons Ltd recently undertook a review into the erroneous engagement of a number of Construction Industry Scheme workforce operatives.

“The findings and recommendations of this review were shared with BAM, with any discrepancies being immediately addressed. This includes a small number of individuals having their employment transferred to BAM. Our labour supply to BAM continues across all other UK infrastructure projects.

”This review took place in conjunction with a transformation programme to support ongoing and future partnerships across UK infrastructure projects. Our trusted clients will now benefit from this significant investment and operational improvements undertaken as part of this process, with rigorous controls in place to ensure such mistakes do not reoccur.”