Last week's resolution of the Baltimore subway contract controversy appeared to be falling apart today as state transportation officials said that it could cost an extra $9 million and might not even work.

The state Board of Public Works had announced last week that it would use state employees to oversee construction of the subway rather than hire outside consultants. That action was designed to defuse allegations of impropriety in the selection of a private firm.

Today Acting Gov. Blair Lee III and State Treasurer William S. James - two of the three board members - backed off from their announcement of last week, saying that it was not a firm decision.

And State Department of Transportation officials, ho were said last week to have approved the proposal, testified about it before a legislative committee today in highly critical terms.

Acting Transportation Secretary James. J. O'Donnell told a subway watchdog committee that he did not like the idea of doing the construction oversight work in-house any more than did his former boss, Harry R. Hughes.

Huhes set off the controversy last month when he resigned as secretary of transportation in protest over the board's handling of subway contracts. He charged that the process had been "tainted" and "tampered with" by one of the competing contractors, Victor F. Frenkil, who is friends with both Gov. Marvin Mandel and Comptroller Louis L. Goldstein.

Today's events were a continuation of the unusual, zig-zag course the board appears to have taken on the subway contract.

Using procedures designed to prevent scandal, the Departent of Transportation had selected the Ralph M. Parsons Co. last year to receive the $25 million contract. The Board of Public Works consistently refused to approve that selection, after hearing from Frenkil's firm that it could do the work cheaper.

As recently as two weeks ago the board reportedly had decided to begin the consultant selection process all over again using different standards.

Then, after Hughes' resignation, it came up with the proposal to have the Department of Transportation do the work itself.

Acting Gov. Lee, in announcing that proposal and in a later press conference, had indicated that it was a firm decision. Lee's statement last Friday said that O'Donnell, Mass Transit Administrator Walter J. Addison and the board "agree that, in light of the present circumstances, the best course of action would be to develop" the special unit to do the oversight work within the department.

Today there appeared to be yet another version of what the board had decided. "The acting governor's understanding is that the decision to go in-house is subject to it being determined feasible and practical," a spokesman for Lee said.

James, the state treasurer, told the committee that he thought the board's decision was not a decision at all, but an order to study the feasibility.

The original decision to hire an outside consultant to manage the $721 million project, the most expensive public works job in Maryland history, was made in April, 1975, only after DOT officials determined that the work could not be done in-house, O'Donnell said today.

O'Donnell said his department "would almost need carte blanche powers that I doubt are possible under existing state law" to carry out the works board directive to perform the work with state employees.

Mass transit administrator Addison agreed that it would be possible to find and hire the needed experts "only if we are not held to various laws, rules and regulations" that govern the number of highly skilled workers the department can employ and how much they can be paid.

Addison estimated the state would need to hire 150 to 200 new employees over the next five years, including 20 to 30 within the next few months. The state would have to offer salaries between $35,000 and $50,000 if it hopes to lure the engineers it needs away from private employers.

Because subway construction, and tunneling work in particular, is a skill possessed by a relatively few engineers, they are much sought after by various firms and public agencies.

Finding those experts and molding them into an effective team could take "two to nine months," O'Donnell said various aides have estimated.

The construction time lost in putting together an in-house team could cost "easily $1 million a month," Addison said, or up to $9 million with the delays it might entail.

Addison noted that while the federal government will pay 80 per cent of the construction costs of the 8.3-mile first phase of the subway, federal officials have "made it clear" that they will no rare in any costs that result from delays brought on by the change in plans.

The federal Urban Mass Transportation Administration earlier had approved of naming the Persons firm as the construction manager, and as recently as April 21 told the state it did not understand why it was delaying in awarding the contract.

O'Donnell said that while he still favors awarding the job to Parsons, he agreed to study the feasibility of MTA doing the work only after it became clear that the works board would not swaro the contract to Parsons.

If the works board changes its mind again, O'Donnell said, it would be possible to go back to Parsons and negotiate a contract within three weeks. The board will meet with O'Donnell and other DOT officials Friday to determine whether the job can be done by the state.

"The whole damn thing stinks," concluded Sen. John C. Coolahan (D-Baltimore County). After listening to three hours of testimony by Treasurer James and transportation officials, Coolahan said he visualized "a scandal a year or two off."

Sen. Jack Lapides (D-Baltimore) found "every appearance of collusion" in the works board's rejection of the proposal by the Parsons company to perform the consulting work at a cost of about $24 million over the next five years.

Lapides said there had been "a tremendous bottling up of the contract, caused by one firm trying to get a piece of the business."

The person mentioned by Coolahan, Lapides and others as being at the heart of the controversy was Frenkil who has refused substantive comment.