Coventry City Council is the latest in a long line of local authorities to report problems with its housing benefits computer systems.
The council, which installed software from supplier Sanderson in January 1999, faced unforeseen costs of £310,000 in implementing the system. It also has extra ongoing costs of £125,000 a year to keep it on track.
Other councils that have faced difficulty in implementing and running new benefits systems include Sheffield, Manchester and Hackney.
Coventry City councillor John Mutton, acting chairman of the social affairs committee, said, "We've had enormous backlogs of housing benefit claims, which meant our staff had to work overtime to clear.
"Now the computer is paying the wrong amount of benefits, which is causing problems for landlords and creating fear among tenants."
A council spokesman said, "The council has been unable to increase the Housing Benefit and Council Tax benefit following Government changes in October 1999.
"The computer system was upgraded on 25 January. The council has a very positive relationship with Sanderson but, on this occasion, it has not provided the quality of service we require.
"Ongoing talks are being held by the council to seek compensation from Sanderson," the spokesman said.
Sanderson marketing director Sean Hampsey was bemused by the situation. He told Computer Weekly Sanderson had supplied the software, but not installed it.
"We've not heard anything from Coventry, let alone been asked for compensation," Hampsey said.
"This is not bespoke software. We have 21 local authorities running Sanderson benefit systems. We issued them all with update files and 20 installed them and are running with no problem. "We are trying to find out why Coventry didn't," Hampsey added.
Problems with housing benefit IT systems have contributed to a £60m nationwide backlog of payments to housing associations, according to the National Housing Federation.
Jim Coulter, chief executive of the National Housing Federation, which represents UK housing associations said, "Poor administration of housing benefit is now critical in too many areas and housing associations and tenants across the country are suffering."