Creating about 200 free parking spaces on the Douglas Promenade walkway "too early" led to a loss in revenue, the town's council leader has said.
Temporary parking was provided by the Department of Infrastructure (DOI) to compensate for a loss of spaces during a £25m revamp of the carriageway.
David Christian said it started "about four months" early and "emptied out" a nearby council-run multi-storey site.
The DOI said its efforts to replace spaces were "reasonable and proper".
Parking on the walkway has been available since January but roadside spaces were not lost entirely until June.
Douglas Council pay a licence fee of £1m annually to the DOI to manage the nearby Chester Street and Drumgold Street car parks.
Mr Christian said the policy "came in about four months before it needed to and it basically emptied out Chester Street car park".
"Until Loch Promenade was lost [and] those spaces had gone along that road, there was actually an over-capacity of car parking within lower Douglas."
He added that the council would "still be expected to pay the same licence fee" for the year, but the loss of revenue from the facility would make next year's budget "very difficult".
A spokesman for the DOI said it had "made reasonable and proper efforts to replace spaces lost" during the promenade works.
"The measures that have been introduced underline a commitment to help people access local businesses while the refurbishment project takes place."
The project, which is 10 months behind schedule, is due to be completed in August 2020.