The firm issued a statement which said: “Having undertaken several months of detailed due diligence, it does not believe that it would be in the best interests of shareholders for Costain to amend the terms of its proposed merger with May Gurney Integrated Services.

“Accordingly, Costain will not be making a revised offer for May Gurney and intends to lapse the proposed merger at the earliest opportunity.”

The decision to throw in the towel after its initial £178m merger bid is blow for the group which suffered another failed bid for Mouchel in 2011.

Costain’s management team is now faced with the prospect of finding another good merger target to create a business that weighs in at the right size to bid major schemes.

Kier’s bid is now set to sail through next month creating a new enlarged business, turning over around £2.6bn.

It said it expected to make around 200 job cuts as it implemented plans to generate annual savings of over £20m from streamlining back-office services.

Phil White, chairman of Kier, said: “The combined businesses will offer more services to more clients and accelerates Kier’s planned growth in the sector.”

The enlarged group will boast a combined order book of around £5.7bn.