Bristol City Council is set to pay out £800,000 to settle a dispute with a company that wanted to build the new £21-million leisure centre at Hengrove Park.

Surrey-based D C Leisure Management (DCLM) did not succeed in winning the contract to build the complex.

But the company has threatened to sue the council over the way the tendering process was handled. And rather than face a drawn out and potentially costly legal battle the city council are expected next week to offer the £800,000 settlement.

The centre, which is due to open in two years, will include an Olympic- size swimming pool, sports hall, gym, creche and other facilities.

It is part of a £100m development including the new South Bristol hospital and skills academy.

A company called Bristol Active Ltd, which has won the multi-million pound contract, has agreed to build a 10-lane pool.

A report to next week's cabinet states the DCLM version for a 10-lane pool had been rejected.

It is understood that DCLM spent about £1.3m on its bid and might have claimed for loss of profit.

But Tory leader Richard Eddy said: "I am absolutely appalled that once again, it seems that the long-suffering taxpayer is going to have to foot the bill for another council construction cock-up.

"While I appreciate that the process is incredibly complex and expensive, the risk of failure must lie with the contractors. It clearly cannot be in the taxpayers' best interests to fork out cash to a company if it is unsuccessful in its tender."

Lib Dem deputy council leader Simon Cook insisted the payout was not the result of a council cock-up.

He said: "We are avidly of the opinion there has been no slip-up in the procurement process.

"We want to avoid the project being delayed which might ultimately lead to its collapse."

Cook said DCLM had alleged there were sufficient changes in the contract eventually awarded to Bristol Active to launch a challenge in the courts.

He said the company had warned if the tendering process was not started again, they would issue a legal claim seeking an order to stop any work on the scheme going ahead before the wrangle was sorted out.

Mr Cook said the council took top legal advice and was told they would have a strong case if they went to court.

But the legal wrangle could take years to sort out in which time the political and economic landscape could change and there was a risk the leisure centre would end up being scrapped.

He said: "We vigorously deny there has been any fault in the procurement process. Nevetheless, DCLM believe they have grounds to sue.

"If this went to court, then the chances would be that the PFI Private Funding Initiative) funding would fall through and we would lose the whole project."

The city council is putting up £7.5m of the cost towards the leisure centre. The rest is being provided by the Government, the South West Regional Development Agency and the sale of council-owned land to the developers of the South Bristol hospital and academy.

Mr Cook said the leisure centre was still cheap at the price despite the £800,000 payout.

He said the council would have to pay between £600-£700,000 a year to Bristol Active for 25 years to build and run the centre.

This compares with about £300,000 a year which it currently costs the council to run both the ageing Jubilee and Bishopsworth swimming pools.

The council hopes to finalise the leisure centre contract in October with work starting before Christmas and to be opened in the autumn of 2011.

Mr Cook said: "We don't like this, it sticks in the craw.

"But it was waiting on my desk when the Lib Dems won office and it was something we had to deal with.

"We feel, on balance, that paying them off is the best solution to make sure we go ahead with this scheme without delay."

DCLM runs about 100 leisure centres throughout Britain, employs about 7,000 people and has an annual turnover of about £73m.

Its chief executive, Steve Philpott, said: "We are not in a position to comment at this time because discussions with the city council are still ongoing."

The leisure complex is being developed as a PFI.

This is a funding arrangement in which a private firm is contracted to design, build, finance and run facilities in partnership with a local authority.

Bristol Active Limited is a consortium of companies and a wholly owned subsidiary of Parkwood Project Management Ltd, now trading as Parkwood Consultancy Services.

The consortium is led by Parkwood Consultancy Services and supported by sister company Parkwood Leisure (leisure operator), Carillion Regional Building (builders), LA architects (lead designer) and nabCapital (funder).

No one from Parkwood Consultancy Services, which is based in Warwickshire, was available for comment.