Gateshead council is understood to have held a meeting with HBG last week to discuss the contract to convert Baltic Flour Mills into the Baltic Centre for Contemporary Art.
Laing and Sir Robert McAlpine were also shortlisted for the scheme, designed by architect Dominic Williams, but HBG is said to have pitched the lowest price for the job.
All three firms declined to comment, but it is understood that HBG is now in exclusive talks about the project.
Two weeks ago, the three shortlisted bidders were asked to reduce their original bids because the tender prices were all outside the council's budget.
The advert placed in the European Union's Official Journal estimated the main contract value at about £20m but the original tenders were nearer £28m. The resubmitted bids are understood to have come closer to the council's price.
Sources close to the project said: "It is a very attractive job but will take a lot of managing. The architect has a good-quality specification and he does not want to give that up.
It is one of those jobs where awards are won, so the architect will fight hard for the quality
Project Source
"It is one of those jobs where awards are won, so the architect will fight hard for the quality he wants," added the source.
Gateshead council is expected to announce the contract award at the end of July. Work is set to start on site in September and is due for completion by autumn 2001.
The project involves repairing the external brickwork on the 1950s building, as well as remodelling the interior to create five galleries and artists' work spaces, building an extension and creating a rooftop restaurant.
Demolition work to remove concrete silos from the interior was completed this spring.
The art centre project is part of a series of developments to transform Gateshead Quays into a cultural quarter. Other plans for the site include the £60m Gateshead Music Centre. The Foster and Partners-designed scheme has not yet gone out to tender, but is expected to interest contractors that lost out on the Baltic Centre contract.
