The government has stripped private consortium Nuclear Management Partners (NMP) of a £9bn contract to clean up the nuclear waste site at Sellafield.
It follows recommendations from the Nuclear Decommissioning Authority (NDA) to change the way the site was managed.
The Public Accounts Committee and the National Audit Office have both accused NMP of cost overruns and delays.
Energy and Climate Change Secretary Ed Davey said Sellafield Ltd would now become a subsidiary of the NDA.
He said Sellafield "will continue to be led by a world class team, who will be appointed and governed by a newly-constituted board of the site licence company".
"The new model will, in due course, see a strategic partner appointed by Sellafield Ltd, to strengthen the programme management and commercial capability at the site, as well as playing a key role in managing capital projects and contracts," he added.
"This approach is recognised as best practice in other major projects, such as Crossrail and the Olympics."
NMP, which includes British and French energy firms Amec and Areva as well as US engineer URS, has run the site for more than six years.
Mr Davey said transition to the new arrangements would take 15 months.
Despite criticism of the way the site was managed, NMP's contract was extended for a further five years in 2013.
'Held to account'
Shadow energy minister Tom Greatrex said: "After serious criticism from the National Audit Office and Public Accounts Committee, the sudden cancellation of this contract leaves Tory ministers with serious questions about the decision making process and use of taxpayers' money."
NMP was originally granted the decommissioning job in 2008, and employs 10,000 workers on the site.
The GMB union welcomed the news. Its national secretary for energy, Gary Smith, said: "We said the contract should not have been extended in 2013. The government needs to be held to account. Hundreds of millions of pounds of taxpayers money has been squandered."
The Nuclear Decommissioning Authority (NDA), which awarded the contract, last year increased its estimate for cleaning up the UK's nuclear sites by 7% to £110bn over the next 120 years, with Sellafield accounting for the vast bulk of that.
But NMP general manager Iain Irving said since the contract was extended in 2013 "the site has enjoyed one of its best ever periods of performance and progress".
"Importantly, over the last two years, we have consecutively achieved the site's best overall safety records," he added.