The government was too slow to spot mounting financial problems at troubled public sector outsourcing company Carillion, according to a report that reveals the Cabinet Office decided the contractor was not “high risk” even as it neared insolvency.

The parliamentary public accounts committee, which produced the report, also warned that Carillion’s collapse indicates that too many public works contracts are concentrated in the hands of a few private firms.

The PAC said that a lack of transparency around outsourcing to such companies risked creating an environment in which “poor practice takes root”.

“The Carillion papers identify clear and compelling problems with the business in the months leading to its collapse,” said PAC committee chair and Labour MP Meg Hillier.

“Government had the opportunity to deal with them. Taxpayers, service users and people and businesses plunged into financial difficulty by Carillion’s demise deserve to know what happened.”

Cabinet Office documents released by the PAC show officials were slow to realise the extent of the financial difficulties at Carillion, which derived £377m in annual revenues from government contracts.

The Cabinet Office operates a traffic light scheme – with red as the most risky and green the least – assessing the finances of its “strategic suppliers”.

The red category is considered the last step before a company can be labelled “high risk”, at which point the government should stop awarding them new contracts and seek to reduce any existing work.

Carillion was not designated as red until July 2017, after it had issued its first profit warning to the market.

“It appears the government was not aware of Carillion’s financial distress until this point,” the PAC said.

Carillion continued to win lucrative government contracts after that.

But in late November, nine days after it won a schools building contract, the Cabinet Office’s commercial relationships board, which monitors strategic suppliers to government, recommended provisionally designating Carillion as high risk.

In an internal memo, an official cited the financial condition of the company, which had issued three profit warnings by that point, and “under-performance” on government contracts.

The company was given 10 days to respond and at a commercial relationships board meeting on 15 December, a decision was taken not to elevate the company’s risk status.

Documents released by the PAC showed that Cabinet Office staff found that “after considering Carillion’s representations on the matter we considered that it would not be beneficial to Her Majesty’s government to allocate a high risk rating at this time”.

In comments accompanying the report, members of the PAC said the collapse of Carillion demonstrated the need for an overhaul of how public services are parcelled out to private firms.

“Government has become dependent on large contracts to deliver public projects and services,” said Hiller.

“Great secrecy surrounds them. If a company providing a number of these contracts fails, this is bad news for service users and the taxpayer.”

The government has already set aside £150m to cover the cost of managing the fall-out from Carillion’s failure.

Hillier’s deputy on the committee, Conservative MP Sir Geoffrey Clifton-Brown, said the traffic light system used to flag up struggling government contracts was “too slow and clunky”.

“Profit warnings for Carillion were issued in July and September 2017 and yet a high-risk recommendation to ministers was not made until 29 November 2017,” he said.

“The City, in contrast, knew well before July 2017 that Carillion was in trouble.

“Too many government facilities contracts were concentrated in one large firm giving the impression that it was too big to fail, hence the perception that the government would bail them out when push came to shove.”

A Cabinet Office spokesperson said: “Our priority has been the continued, safe running of public services and to minimise the impact of Carillion’s insolvency. The plans we put in place have ensured this.

“We engaged closely with Carillion’s board members for a number of years and this remained the case after the profits warning in July 2017. But it is not right for taxpayers to bail out a private sector company.”

As the PAC issued its report, two other parliamentary committees investigating Carillion called on Andrew Tyrie, incoming head of the Competition and Markets Authority, to display his credentials as a “new broom” by considering a break up of the so-called “big four” auditors – KPMG, Deloitte, PwC and EY.

The work and pensions and business committees have previously criticised the role of auditors in Carillion’s demise in a separate report released last week.

The committees also wrote to the Financial Reporting Council and the Pensions Regulator asking for an update on their efforts to strengthen their culture and review their leadership in the light of the Carillion collapse.