The state’s Green Line extension project — long-heralded as key to development in Cambridge, Somerville and Medford — is facing a “fundamental budget shortfall” of up to $1 billion and state officials say scrapping the project is on the table.

Projections for the project, which is already underway and was expected to cost roughly $2 billion, are now pushing between $2.7 and $3 billion, state officials revealed today.

They say they’re now searching for ways to either cut costs, bridge the newfound gap with other funds or some combination of the two. The state will likely need new bond financing to ultimately meet all the costs.

The project, which was in the planning stages for years, was designed to extend existing MBTA Green Line service from a relocated Lechmere Station in East Cambridge to Union Square in Somerville and College Avenue in Medford.

Federal money is slated to cover about $1 billion of the project but MBTA general manager Frank DePaola admitted that if the state doesn’t come up with a “reasonable way to finance the budget shortfall, they could take it away.”

“Everything is on the table, and everything includes canceling the project. That’s not the way we want to go,” Secretary of Transportation Stephanie Pollack told reporters before the MBTA fiscal control board was scheduled to meet to hear options on how to keep the project alive.

“We have done the due diligence we have to do. We think the number we are presenting to the control board today represents a well-researched range of what we hope is the worst case (scenario),” she said. “The bottom line is, we are trying to get back to a project we can afford.”

State officials blamed the cost explosions partly on Boston’s “hot” construction market, which is pushing costs above estimates, which were based on recession-era pricing.

The state has already spent about $200 million on the project. But cost issues arose in May, when the price of next phase of the project jumped roughly $100 million after officials completed mapping its design.

Other cost hikes are tied to the procurement process the state took, which allowed it to pick a contractor before the company priced the project. The approach, which DePaola said the feds encouraged the state to take, allows the project to do design and construction at the same time, saving time.

But it also exposed the state to potential cost increases. In this case the contractor of the project, WSK, submitted its cost estimate at roughly $890 million — or $500 million above the initial estimate for that phase. The sides are now at the negotiating table, state officials said.

With no action, other estimates are also expected to rise in future phases of the project, DePaola said.

Pollack said she has already been in touch with key players in the Baker administration, the state legislature and the state’s federal delegation. The options the MBTA fiscal control board was expected to see include re-procuring the upcoming phase of the project, with the hopes of finding a better estimate.

But doing so could set the project back by a year and it wouldn’t guarantee a better price, Pollack said. “It runs a risk,” she said.

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