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updated 3/11/2004 4:29:13 PM ET 2004-03-11T21:29:13

Halliburton, the oil services company formerly headed by U.S. Vice-President Dick Cheney, was awarded a $1.2 billion contract in Iraq just three days after Pentagon auditors warned about "systemic" problems in its cost controls.

The warning was contained in a memo the Pentagon's defence contract audit agency sent on January 13 to the U.S. Army Corps of Engineers, citing deficiencies in Halliburton's contracting proposals and questioning the company's ability to supply "fair and reasonable prices". 

"We recommend that you contact us to ascertain the status of [Halliburton's] estimating system prior to entering into future negotiations," the memo said. 

The company informed the Pentagon on January 15 that its Kellogg Brown & Root division had overcharged the U.S. government by $6 million on a separate contract to supply U.S. troops. Despite the admission, the following day the Corps of Engineers gave KBR a $1.2 billion contract to rebuild oilfields in southern Iraq. 

The January 16 contract followed more than $2 billion of oil-related work KBR had performed in Iraq under a previous Corps of Engineers contract. 

The Corps of Engineers acknowledged on Wednesday that it was aware of the warning, but said it went ahead with Halliburton because of the urgency of the task, and because the results of the investigation could be months away. Halliburton was not immediately able to respond to the DCAA findings, which were cited in a memo prepared by Henry Waxman, a Congressional Democrat, ahead of hearings in Washington today on Iraq reconstruction contracts. 

Halliburton has become one of the largest contractors for the Pentagon as the military pushes to outsource non-combat tasks. But it has also found itself at the center of controversy. The Pentagon launched a criminal probe in January into $61 million in possible overcharges passed on to the U.S. government for fuel the company imported from Kuwait to Iraq. 

Halliburton warned investors this week that its liquidity could be hurt if it was forced to offer large refunds of its government work. 

Mr. Waxman and other Democrats plan to escalate their attacks on the company and its performance in Iraq as U.S. presidential elections draw near. 

His memo pointed to other instances where Pentagon auditors had found irregularities in Halliburton's cost estimates.

© The Financial Times Ltd 2013. "FT" and "Financial Times" are trademarks of the Financial Times.

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