Federal prison inmates used makeshift hatchets and a screw shoved through a piece of wood among other rudimentary tools to manufacture thousands of faulty Kevlar combat helmets designed to protect the lives of U.S. soldiers on the battlefield, according to a highly critical watchdog report that offered new details about the government boondoggle.

More than 126,000 helmets manufactured at a Texas prison under a government contract were recalled after inspectors found major defects, including serious ballistic failures, in 2010, according to a report issued Wednesday by the Justice Department’s Office of the Inspector General. Even though the government and taxpayers lost $19 million on the defective helmets, ArmorSource, the company responsible for the helmets, was awarded more government contracts even as the Justice IG probe was being conducted.

The helmets were being produced just as the George W. Bush administration was escalating the U.S. military mission in Iraq, the famous “surge” to turn back al Qaeda militants.

ArmorSource was awarded a $30 million contract to manufacture both lightweight and heavy-duty combat helmets for the Department of Defense in 2006 and subcontracted the work to Federal Prison Industries (FPI), a Bureau of Prisons program that uses inmate labor to manufacture a wide array of products for the federal government. A lack of oversight of the Beaumont, Texas, program, which has since been shut down, led to a host of problems, according to the inspector general’s investigative summary.

FPI officials “pre-selected” helmets for what were supposed to be random quality checks, the IG report found, and staff directed inmates to alter documents “to falsely indicate that helmets passed inspection and met contract specifications.”

Defense Contract Management Agency inspectors “did not perform proper inspections, lacked training, and submitted false inspection records wherein they attested that [helmet] lots were inspected when in fact they were not,” according to the report. “At least in one instance an inspector certified the lots as being inspected over a fax machine.”

The Justice Department report noted that the shoddy, makeshift tools used by the inmates were a security risk in themselves, as they could have been turned against prison guards.

But even as the government probe into the faulty helmets was ongoing, the federal government continued to award contracts to manufacture helmets to ArmorSource. In 2013 the company announced it was awarded a two-year, $92 million contract to make lightweight combat helmets for the military.

In January it was announced that ArmorSource would deliver 105,000 combat helmets this year to the U.S. Army, followed by a May statement that the company received another contract to supply 10,000 lightweight helmets to the U.S. Marine Corps. That contract was announced just two months after ArmorSource paid $3 million to the federal government to settle a lawsuit brought over the faulty helmets by two whistleblowers.

A spokeswoman from the Defense Logistics Agency was unable to confirm Wednesday whether the agency handled the most recent contract and, as a result, was unable to comment.

No military personnel are believed to have been injured as a result of the defective helmets, according to the IG’s report.

An attorney for ArmorSource said the blame for the faulty helmet rests with the FPI program. Using the prison production program was stipulated in the original contract, and said it no longer has any affiliation with the prison program.

“The minute they found out about the misconduct at Federal Prison Industries, they severed their ties,” said attorney Martin Brackett, who represented the Ohio-based ArmorSource in a civil suit brought by the Justice Department over the helmet debacle. “This was the first and last contract [with FPI].”

Paul Garcia, chief contracting officer for ArmorSource, declined to discuss the settlement but confirmed the company is not currently subcontracting any manufacturing work.

“All our current contracts are produced in our Hebron, Ohio, facility,” he said.

Mr. Brackett said the company opted to settle the lawsuit and pay the $3 million in order to move on.

“The company had been having to deal with it for years. They reached a point where they decided they simply wanted to pay and be done with it rather than spending that money and to continue the aggravation of the litigation on it,” Mr. Brackett said.

Nicole Navas, a spokeswoman from the Justice Department, said the $3 million payment required through the settlement “was based on ArmorSource’s demonstrated ability to pay.” A copy of the settlement agreement indicates ArmorSource will pay the $3 million over the course of five years.

Ms. Navas declined to comment on any stance the Justice Department might have on the awarding of additional contracts to ArmorSource, noting “the decision whether to award a contract lies with the particular contracting agency.”

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