More than 70,000 school places in Northern Ireland are surplus to requirements, the audit office warned.
The number of schools has reduced since 2006 and performance has improved but there are still significant problems with underachievement and the quality of leadership and management is not good enough in a significant minority of post-primary schools, comptroller and auditor general Kieran Donnelly said.
He added: "There are 71,000 surplus school places (20% of capacity), a reduction of 12,000 since 2009.
"However, this is still double the 10% recommended in the Bain Review."
The report evaluated progress made by the Department of Education in delivering sustainable schools since a review by Professor Sir George Bain in December 2006.
He concluded that because of falling pupil numbers and the many teaching sectors, there were too many schools and some would become educationally unsustainable.
The department introduced a Sustainable Schools Policy in January 2009 and area planning in September 2011 to develop a network of viable and sustainable schools.
Key findings from the audit office report included:
:: Schools performance has improved but there are still significant problems with underachievement and the quality of leadership while management is not good enough in a significant minority of post-primary schools.
:: The fepartment's approach to area planning could have been better. Guidance was limited and there was a lack of clarity on the measurement of the criteria for sustainable schools. However, revised area planning governance structures are being implemented and an area planning cycle has been agreed.
:: Assessing the wider delivery of the Sustainable Schools Policy has been hampered because of difficulties with the quality of management information.
:: The department has not estimated the financial costs of surplus school places and believes that some costs are inescapable
:: Around £36 million (just over 3%) of 2014/15 school budgets are allocated to schools because they are small.
Overall there has been some progress in implementing the Sustainable Schools Policy through area planning. By 2015 schools' approved enrolments had reduced by 24,000 since 2006 (a 6% decrease) and the school estate had been reduced by 89 schools (an 8% decrease), auditors said.
There were 71,000 surplus school places, a reduction of 12,000 (14%) since 2009. However, this is still double the 10% recommended in the Bain Review.
Almost three quarters of the surplus places are in primary schools. Over a third of all primary schools had less than the Bain-recommended minimum number of pupils.
The audit office said creating sustainable schools was difficult because education is delivered by a number of sectors: controlled; Catholic maintained; voluntary maintained; voluntary grammar; Irish-medium and integrated.
Area planning was implemented in a more fragmented way than envisaged in the Bain Review because the Education and Skills Authority was not established.
The audit office said area planning was highly contested and politicians, church leaders and local communities had close attachments to schools. This has increasingly led to litigation and scrutiny by the courts.
It said the open enrolment policy - where parents can apply to have their children enrolled in schools outside their area - made it very difficult to predict demand for places in schools.