Edinburgh's trams chiefs have revealed they could issue massive fines to contractors if the project is not completed in 2012.

Developer TIE and the consortium charged with building the trams system have been involved in a major dispute over delays and costs which resulted in workers downing tools on some sections nearly a year ago. At crisis talks held last week, The main contractor Bilmfinger Berger told officials work could still be going on into 2014.

However, on Tuesday, it emerged that the contract between the two sides gives TIE the right to issue major fines for every month that construction runs beyond schedule.

The clause is in place to protect the city from loss of revenue and was originally due to come into force in February 2012. That date has now been shifted back to June 2012 to take into account delays on completing utility works, which TIE admits have not been the fault of the contract consortium.

A spokeswoman for Edinburgh Trams said: “Penalty clauses for late completion of works are standard for construction contracts. Their purpose being to incentivise contractors to recover any delays that are their responsibility.”

However, privately TIE admits that work is likely to continue past the new deadline date. Officials say there will be some flexibility, but insist external auditors have reassured them that completion is possible at some point in 2012.

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Last Wednesday, Bilfinger Berger warned completion of the project could be delayed by a further 30 months, causing the budget to rise significantly. While the figures discussed at the meeting have not been confirmed, it has been suggested the £545 million initial budget could be exceeded by at least £100 million.

The contractor's submission to the Trams Board prompted a furious reaction from officials, who inist they see no reason for such a lengthy delay.

Following the meeting, Board chairman David Mackay said: "While the board will continue to seek a reasonable negotiated outcome to all matters in dispute, the clients’ rights will be strenuously safeguarded. Our stakeholders are entirely unified in the resolution to apply the full terms of the contract."

Legal proceedings are still ongoing, but officials have not ruled out axeing Bilfinger Berger from the project if an agreement cannot be reached.

Mr Mackay added: "Our priority, and that of our partners, remains the delivery of a 21st Century integrated public transport system, that represents good value and which Scotland’s Capital City deserves. This we will do.”