Work had already started on the 14 two-bedroomed flats in Sea Road, East Preston, when workers were ordered to down tools after the mistake was spotted.
The flats are supposed to be 31ft from Sea Road, but are only 18ft away.
Now Arun Council says if the developer wants to build the flats, they will have to be in the right place.
Senior enforcement officer Lesley Wells said it was possible builders on the site were working to original plans not agreed by the council.
The earlier plan had the Edwardian-style flats closer to the road and was rejected.
The council then approved developer Berkeley Homes' new plan, with the flats further from the road.
Workmen built the foundations and started exterior walls up to damp course level before the error was revealed.
The developer now faces the costly process of moving everything several feet back.
The flats are being built on the site of the Three Crowns pub, demolished last year.
The parish council and nearby residents insist Berkeley Homes should be made to start again in the right place.
Dorothy Lee, chairman of East Preston Parish Council, said: "They will have to fill in the hole and start again.
"I'm cross about this. A big company like Berkeley should not make mistakes like this."
Parish councillor Barbara Parnell, whose late husband Harry was landlord of the Three Crowns for 22 years, said: "Everybody in the village wants the flats to be put in the right place, whatever it costs Berkeley Homes to do it."
Aspokesman for Berkeley Homes said: "An error crept in but it will be corrected. It was completely unintentional."
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