Contracts for the Hurricane Katrina clean-up and rebuilding efforts are to be opened up for rebidding, the Federal Emergency Management Agency has said.
Some contracts awarded so far have been for rebuilding and equipment
Contracts worth at least $1.5bn (£843m) had been awarded without competition - drawing accusations of favouritism.
The acting head of Fema, David Paulison, announced the move to rebid all of the contracts in question to the US Homeland Security Committee.
He conceded that the step should have "maybe" been taken sooner.
Mr Paulison told the committee he had never been a fan of no-bid contracts and would strive to reduce dependence on them in future disasters.
Estimates suggest that cleaning up and rebuilding the devastated Gulf Coast region after Hurricanes Katrina and Rita could cost as much as $200bn, and more than $62bn in federal funding has been approved for the relief effort.
So far, 15 contracts worth more than $100m have been awarded for debris removal, construction of temporary housing and transport services. Five of them are worth more than $500m.
However, a report in the New York Times said it had seen government papers that showed that 80% of Fema contracts were awarded without bidding, or following limited competition.
Such revelations have drawn widespread criticism and allegations that local contractors in the affected area were pushed aside.
The Department of Homeland Security itself has voiced reservations about the process, with one ranking member claiming the process had become politicised.
Meanwhile, the US House of Representatives has launched an investigation into how the contracts were awarded.