If our transportation, logistics and procurement supplier sourcing readers were not aware, the Spanish-led consortium of construction contractors led by Spain’s Sacyr S.A., and Italy’s Impregilo SpA, along with the Panama Canal Authority have been at a stalemate regarding a reported $1.6 billion of cost overruns involving the planned expansion of the Panama canal.

Talks to resolve this growing dispute broke-off in January and threaten to significantly delay the overall expansion.

The original 2009 contract called for $3.9 billion in construction costs but the contractors are now charging that geological studies performed by the government were faulty, forcing the current cost overruns. The canal authority has been taking a reported firm stance in ongoing negotiations, insisting that contractors finish the project on-time, and within the original cost agreement.

The concern is that a threat of a significant delay to the canal’s expansion plan would cause a significant delay for international commerce, including plans for newer mega container and bulk commodity ships to be able to traverse the 50 mile canal. Container vessels with capacity in excess of 12,600 TEU’s were expected to be able to take advantage of a widened Panama Canal, including faster direct transit times from both Asia based ports  Eastern United States ports.

The original milestone called for the expansion to be completed by 2015, and reports indicate that the expansion effort is upwards of 70 percent completed to-date. Complicating matters is that the panama Canal Authority is a semi-autonomous agency not directly affiliated with the government of Panama.  It derives revenues from fees charged to vessels that utilize the canal, but its cash balance is not large enough to fund such a level of cost overrun.

Besides placing many construction jobs at-risk, the current stalemate raises some additional political tensions among Spain, Italy and Panama.  During the recent severe financial crisis impacting Europe, construction firms looked to international projects such as the Panama Canal to keep their firms operating and profitable. The government of Panama also stands to benefit from increased revenues when the canal is expanded. A Bloomberg article published in early February reports the President of Panama indicating that the expansion would be finished, even if the current talks fail.

This is obviously and interesting development and bears continued monitoring in the coming weeks.