The award-winning architect was among 16 practices selected for a ground-breaking 'design pool' scheme set up by the south London borough council ( Latest wave of Elephant and Castle schemes revealed).
However, McLaughlin has decided to withdraw from the panel, which features a raft of up-and-coming practices including the likes of Panter Hudspith, because of concerns over the quality of the schemes to be delivered.
He has been replaced by FAT, which will now vie against other firms from the pool for social housing projects on one of the three remaining sites.
McLaughlin said: 'We received competition conditions and draft contracts earlier this year and, once we had seen the documents, we decided that the competition and contract conditions did not allow us adequate resources to carry out the work to a standard that we would be happy with.
'We therefore withdrew from the process.'
Jon Abbott, from Southwark regeneration team, responded: 'We are a bit disappointed in Niall McLaughlin - he pulled out quite late. The contracts were never set in stone, they were a basis for discussion.
'We want the architecture to be of the highest quality we can achieve, and the terms of appointments will be derived from that.'
He added: 'It's an ongoing discussion with the housing associations. It was never issued as a take-it-or-leave-it situation.
'When you are doing something a bit different it requires all the parties to work that through.
'But if you are working on a scheme of this scale there may be people falling along the way.'
A further analysis of Southwark's approach to social housing appears in this week's AJ.