Auditors found potential overcharges of up to $61 million for gasoline that a Halliburton subsidiary delivered as part of its no-bid contract to help rebuild Iraq's oil industry.
But the company apparently didn't profit from the discrepancy, according to officials who briefed reporters Thursday on condition of anonymity. The problem, the officials said, was that Halliburton may have paid a Kuwaiti subcontractor too much for the gasoline in the first place.
A Halliburton statement released Thursday said the Kuwaiti company was the only one that met the Army Corps of Engineers' specifications. "Halliburton only makes a few cents on the dollar when fuel is delivered from Kuwait to Iraq," the statement read.
The Pentagon officials said Halliburton's Kellogg, Brown & Root subsidiary also submitted a proposal for cafeteria services that was $67 million too high. The officials said the Pentagon rejected it.
The defense officials said they had no reason to believe the problems were anything other than "stupid mistakes" by Halliburton. They said the company and the Pentagon were negotiating a possible settlement of the matter, which could include repayment by Halliburton.
In the statement Thursday, Halliburton chairman, president and CEO Dave Lesar said, "We welcome a thorough review of any and all of our government contracts."
News of the problems came as President Bush worked to justify his decision to limit $18.6 billion in Iraq reconstruction contracts to companies from the United States or countries that supported the war. The move angered governments whose firms were cut out of the bidding process, including Canada, France, Germany and Russia.
Many Democrats also have criticized the Halliburton contracts, suggesting they were a political payoff for a company with strong ties to the Republican Party and whose executives gave generously to the Bush campaign.
Democratic Sen. Frank Lautenberg called Thursday for Senate hearings on the Pentagon's findings.
"I have long been troubled by the continued growth of the Pentagon's no-bid contract with Halliburton, and the delay in the Pentagon's promise to compete this contract competitively," Lautenberg wrote to Senate Government Affairs Committee Chairwoman Susan Collins, a Republiucan.
Cheney and Pentagon officials deny any political motive for awarding the no-bid contracts to KBR, which has a long-standing relationship with the military as a major Pentagon contractor.
Routine audits by the Defense Contract Audit Agency uncovered the problems.
Pentagon officials said they were concerned about problems with KBR's contracts, which were awarded without competitive bidding for up to $15.6 billion for rebuilding Iraq's oil infrastructure and assisting U.S. troops there. About $5 billion has been spent or is obligated to be spent on those contracts so far.
"Contractor improprieties and/or contract mischarging on department contracts will neither be condoned nor allowed to continue," said Dov Zakheim, the Pentagon's budget chief.
The defense officials, who are involved in the audit of the contracts, said the Pentagon was negotiating with KBR over how to resolve the fuel-pricing issue. They declined to name the Kuwaiti subcontractor that provided the fuel, saying that company may not have been notified of the inquiry's findings.
The possible overcharging involved 56.6 million gallons of gasoline KBR supplied in Iraq from the end of the war until Sept. 30, the Pentagon officials said. The officials said KBR was charging $2.27 a gallon for gasoline while another contract for gas delivered from Turkey was for $1.18 a gallon.
The United States subsidized the price of the gasoline, meaning Iraqis only paid the prewar price of 4 cents per gallon.
Democratic Reps. Henry Waxman of California and John Dingell of Michigan had accused KBR of price-gouging for gasoline used in Iraq.
The Army is to open its KBR contracts to competitive bidding next month. The contracts evolved from work to put out oilfield fires into overseeing reconstruction of Iraq's oil infrastructure and providing fuel for the country. KBR also provides support services to U.S. troops in Iraq, such as serving hot meals.
Halliburton has said it needs to charge a high price for fuel because it must be delivered in a combat zone. Several KBR workers have been killed or wounded in attacks by Iraqi insurgents.
The allegations of overcharging are not the first against KBR. Last year, the firm paid $2 million to settle charges that it inflated prices for repairs and maintenance at Fort Ord, Calif.
Congress' General Accounting Office found in 1997 and 2000 that KBR had billed the Army for questionable expenses on its support contracts for operations in the Balkans. Those reviews cited instances such as charging $85.98 per sheet of plywood that cost $14.06 and billing the Army for cleaning some offices up to four times per day.
Cheney, a former defense secretary, stepped down as chief executive officer of Halliburton when he became Mr. Bush's running mate in 2000 and has said he played no role in contracts for his former company. Cheney became head of the company in 1995.