Military sources said on Thursday that Kellogg Brown and Root, a Halliburton unit which got a no-bid US government contract to rebuild Iraq's oil industry, had been notified by the Pentagon's Defense Contract Audit Agency.
Senior defence officials said the company may have overcharged the army by as much as $61 million for fuel in Iraq.
So far the company has clocked up $2 billion in business from the March contract.
Halliburton spokeswoman Wendy Hall denied the company had overcharged and that the company was confident its responses would satisfy the agency.
“KBR is confident its processes will continue to stand against the rigorous audits conducted by the Defence Contract Audit Agency," said Hall.
She gave no other details.
One military source said KBR was seeking “voluntary refunds” from the Kuwait National Petroleum Company over the import of fuel into Iraq.
Halliburton apparently didn't profit from the possible overcharges, said defence officials, speaking on condition of anonymity. The problem, the officials said, was that Halliburton may have paid a subcontractor too much for the gasoline in the first place.
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 the KBR was charging $2.27 a gallon for fuel while another contract was for $1.18.
Halliburton has justified its pricing because of cost of security and a shortage of trucks, which had driven up prices.
The company has been bringing fuel into Iraq either from Turkey or via Kuwait and has justified its pricing because of the high cost of security and a shortage of trucks which had driven up prices.
KBR won a no-bid contract last March to help restore Iraq's oil industry. It also has another contract to provide logistical support to US troops there, from delivering mail to building barracks.
Democratic lawmakers had raised questions over KBR's pricing for fuel being trucked from Kuwait into Iraq, an oil-rich country that is suffering a fuel shortage until its oil refineries are working at full capacity.
Of the $2 billion allocated to KBR so far, about $1.2 billion has gone into paying for oil supplies for the Iraqi people. Of that amount, $90 million has been paid out of seized Iraqi assets and $825 million has come from the Development Fund for Iraq, which was established by the United Nations.
An Army Corps of Engineers spokesman said funds to pay for fuel had intentionally come from Iraqi coffers rather than paid for by appropriated funds from Congress, where criticism has been strongest over Halliburton's work in Iraq.
Several government agencies are closely monitoring Halliburton's performance in Iraq and the General Accounting Office, an investigative arm of Congress, is set to release a report next month on US government contracts in Iraq.
US armoured vehicles accompany
Turkish fuel tankers in Iraq
Earlier, the US military said it was trimming funds allocated to KBR for its work in Iraq but said this was not linked to price gouging claims.
US Army Corps of Engineers spokesman Bob Faletti said about $1 million would be cut from one of seven work orders given to KBR.
“This is not in response to criticism. It is just being fiscally responsible," said Faletti of the small reduction.
The allegations of overcharging are not the first against KBR. Last year, the firm paid $2 million in fines to settle charges it inflated prices for repairs and maintenance at Fort Ord, California.
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.