The results of the audit, reported by The Wall Street Journal, were the latest financial headache for Halliburton subsidiary KBR, formerly known as Kellogg Brown & Root, which filed for bankruptcy protection last year to resolve billions of dollars in pending asbestos claims.
The $1.8 billion amounts to 40 percent of the $4.18 billion KBR has already billed the Pentagon for its work feeding and housing military troops. The Pentagon could begin withholding payments from KBR if it determines it is owed money - though it has yet to do so.
KBR officials told the newspaper the company has done nothing wrong, and expressed confidence the issue would be resolved without such action.
"The fact that we have negotiated and continue to negotiate proposals proves that our estimating system is valid," an unidentified KBR official was quoted as saying. "This is the same system that the company has used for more than 10 years."
The audit, part of a report dated Aug. 4 that has yet to be made public, found that KBR's "internal control policies" are "inadequate for providing verifiable, supportable, and documented cost estimates that are acceptable for negotiating a fair and reasonable price." Pentagon officials told the newspaper that that no defense contractor has had its estimating system ruled "inadequate" in years.
Halliburton spokeswoman Wendy Hall told The Associated Press on Wednesday that the company disagrees with the report.
"This audit has nothing to do with the amounts we have billed the government or which costs will ultimately be determined allowable for our work in Iraq," she said. "This report alleges that Halliburton does not have a system which is adequate to produce proposals upon which to negotiate final price and this allegation is simply not true."
Auditors' concerns included more than $900 million in payments for dozens of dining facilities; auditors say that more than a third of those costs may be unjustified, the newspaper said. Auditors also are examining $180 million in costs charged for fuel from Kuwait that was delivered to Iraq.
The dispute over the Iraq/Kuwait billing only intensifies the scrutiny on Halliburton.
Earlier this month, the company agreed to a $7.5 million settlement with the Securities and Exchange Commission to resolve an investigation into its accounting practices.
The company is also working to put its asbestos liabilities behind it. In late July, a federal judge in Pennsylvania affirmed approval of Halliburton Co.'s $4.17 billion plan to settle asbestos- and silica-related health claims.