THE construction firm blamed for the cost overruns that have beset Edinburgh's tram project were given assurances at the outset that these would be met from the public purse, sources have told The Herald.

Willie Gallagher, whose departure as executive chairman of council-owned tram firm Tie in November 2008 precipitated the first of a series of major crises, is said to have told the consortium headed by construction giant Bilfinger Berger that increased funding was “something for him to sort out”.

His relationship with the contractor contrasted sharply with the stance taken by David Mackay, his successor as Tie chairman, who vowed not to be “held to ransom” when a dispute over costs led to Bilfinger downing tools on Princes Street three months later.

Though work resumed, the ensuing contractual dispute is widely credited with ensuring that costs ballooned from £545m to nearly £1 billion, including interest payments, to complete a truncated route to St Andrew Square, an option that was rejected by councillors on Thursday in favour of an even shorter route that terminates west of the city centre at Haymarket.

However, with a public inquiry into the debacle now a near certainty, attention has turned to the early days of the project and the lead up to signing the main construction contract with the BSC consortium – comprising Bilfinger, Siemens and tram builder CAF – in May 2008 as a critical period in what went wrong.

Sources within Tie and the consortium say that Mr Gallagher played a pivotal role in overseeing negotiations between the two and establishing the relationship which was subsequently jettisoned after he left.

“He acknowledged there were gaps in the funding. Privately, probably there was an acknowledgement there was probably not enough money to complete the whole line at this time,” a source close to Mr Gallagher said.

“His position was that, if there was more money needed, it was something that he would take on rather than the contractor. After he left, there was no-one to ask for more money; that’s when the project entered into the dispute. That’s when there was a difference in interpretation of the contract. Willie’s departure was a crucial turning point.”

That view was backed by sources within the BSC consortium. “Willie Gallagher said ‘you worry about the project, I’ll worry about the funding’. He pretty much said to the consortium, don’t worry, we’ll sort it out,” one source said.

The source claimed senior officials within Tie and consultants who were advising them were made aware that there were large areas of the project where costs were uncertain. These related to a lack of knowledge about ground conditions and underground utilities as well as gaps in the project’s design, which was supposed to be completed by May 2008 but was handed to Bilfinger and remains incomplete.

As a result, BSC ensured that between October 2007, when it was named as preferred bidder, and May 2008, when it signed the construction contract with the council, it ensured clauses were inserted that allowed it to reclaim the cost of any additional work it undertook.

But this understanding was at odds with subsequent claims by the council that it had signed a fixed-price contract. Nine months after the contract was signed, Dave Anderson, the council’s director of city planning, claimed 95% of the prices were fixed and the risk had been passed to the contractor.

The Herald made attempts to contact Mr Gallagher, who declined to be interviewed.

The revelations over his role will pose fresh questions over why Mr Mackay and Richard Jeffrey, who was appointed Tie chief executive in May 2009, pursued a contractual dispute with BSC which was rejected by City of Edinburgh Council after a series of independent adjudications found in favour of the contractor. Both have quit Tie, which is due to be wound up.

But a source close to Mr Mackay said he would be “very angry” at the suggestion of assurances that Mr Gallagher is alleged to have made.