The dispute could lead to more delays and higher costs for the trams project
Edinburgh City Council is to take legal action against the consortium contracted to build the city's £545m tram system.
A report prepared for the local authority said the contractor was demanding more money, in a repeat of a row that erupted earlier this year.
It also warned of a potential cash shortfall in the project, which is already late and over budget.
The Conservatives accused the council of mishandling the project.
City council transport convenor Gordon Mackenzie said the organisation running the project, TIE, was trying to get the best value for money for the public.
He said: "We have lodged formal dispute papers with the consortium. We are unhappy with the progress of the tram project. We need to contain the costs. We need to improve the programme delivery.
"Our position is clear. We have a contract and we intend to hold the contractor to that contract."
An earlier dispute in February led to a three-week delay in starting work to lay tram tracks in Princes Street.
The contractor claimed delays in diverting utilities meant it had incurred extra costs and would need more money, although the row was eventually resolved.
Edinburgh Conservative MSP David McLetchie said the costs of the tram system were in danger of spiralling out of control.
He said: "This project has been mishandled right from the start by this Lib Dem/SNP council.
"Reassurances must be given that work will continue and no more taxpayers' money will be spent on the trams project. The trams saga is bearing all the hallmarks of the Scottish Parliament building fiasco. Over budget and over time."
Edinburgh's Liberal Democrat City Council leader, Jenny Dawe, acknowledged that the project was unlikely to be completed on time and within the £545m budget.
She added: "We have a particular situation at the moment where, having tried through informal means to sort out the differences between one part of the consortium and TIE, we've now reached the stage where we're having to go to a formal contract resolution procedure and that is likely to take some time to sort out.
"In any sort of dispute like this you go through every possible informal means of sorting everything out.
"There is a way laid out that we've followed and it would've been totally premature and unhelpful if we had gone to formal procedure before we had exhausted every other means."
Sarah Boyack, the Labour MSP for Edinburgh Central, urged the council to "get a grip".
However, Ms Boyack said there was "a massive and growing political conflict at the heart of the council" on the trams project.
The Labour politician claimed the SNP were "reluctant to make it work" while the Lib Dems were "incapable of running anything, let alone a world-scale and serious project like this one".
Shirley-Anne Sommerville, SNP MSP for the Lothian region, said TIE had "finally confirmed what the whole city has known for a long time - this project is running late and over budget".
But she added: "TIE have admitted the problems but not given us any solutions. Edinburgh's taxpayers still have no idea how much of a tram line we're going to get or how much it will cost, yet TIE are holding the city to ransom."
Ms Sommerville called for a clear funding plan and timescale for the project.
In a statement, the Scottish Government said it would not provide "a penny more" than the £500m already agreed for the project despite budget pressures.
It also said the current legal difficulties would not interfere with other transport projects where the same contractors were involved.
The statement said: "The delivery of the Edinburgh trams project is entirely a matter for Edinburgh City Council and TIE. It has no bearing on any Transport Scotland contracts."