Scale of overcharging for electronic tagging of offenders who were not monitored is at least three times higher than thought

The outsourcing firm Serco has agreed to repay £68.5m plus VAT after overcharging on its contract to provide electronic tagging of offenders, the justice secretary, Chris Grayling, hasdisclosed .

The scale of overcharging – which included invoicing for the tagging of offenders who were not being monitored, some of whom were already back in prison or had died – is several times larger than previously thought. The original figure was believed to be £15m-£20m for the contracts held by both Serco and the security company G4S; the latter has yet to reach agreement on how much it will repay.

Both contracts are now the subject of criminal investigation by the Serious Fraud Office (SFO).

Serco has also agreed to repay £2m in past profits on a separate prisoner escort contract after it was found that its staff had been recording prisoners as delivered "ready for court" when they were not.

In a move that will deepen concerns over the privatisation of justice contracts, Grayling announced that he had referred two more G4S contracts, involving facilities management for the courts, to the SFO to establish whether any dishonesty had taken place.

The justice secretary told MPs that both Serco and G4S, two of the government's largest private-sector suppliers, had withdrawn their bids to be lead providers in the privatisation of the probation service.

A wider Cabinet Office review of the contracts held by Serco and G4S, published on Thursday, found "potentially significant" errors or irregularities in three payment-by-results contracts for the Department of Work and Pensions work programme to support the long-term unemployed.

The announcement by Grayling of further investigations is a blow to both companies, which hoped to draw a line under the tagging scandal . Serco told the stock market yesterday that the cost of its external reviews and audits since the overcharging was disclosed in July had reached £17m.

The justice secretary Grayling told MPs: "From the outset I made clear that I intended to take robust action to deal with evidence of unacceptable conduct by suppliers under my department's contracts, and to recover any monies overpaid as a result of these practices."

Grayling said the £68.5m would reimburse the government for money owed on the tagging contract and for other costs incurred, such as the cost of the investigation, which included a forensic audit undertaken by the external auditors PwC.

He claimed it was a good deal for the taxpayer, adding: "With all full and final settlements, in the event of criminality being established with material impact, we would look again at our contractual position."

G4S said it continued to "engage constructively" with the Ministry of Justice over the tagging contracts. It said that an extensive review since July of its major contracts had not identified any other significant issues and it did not anticipate that the financial exposure of the two court contracts would affect the company's overall finances. G4S added that it had been advised by the ministry that it did not have any evidence of dishonesty in relation to the court contracts, and nor did G4S.

The decision by Serco and G4S to withdraw as "lead providers" from the competition to privatise 70% of the work of the probation service is a setback to the government's plans to introduce its rehabilitation reforms by the next election. Both companies are regarded as the biggest players in the criminal justice market and would have been expected to play a significant role in the reforms.

Grayling, who has said he wants to see a greater diversity of private and voluntary sector providers, told MPs he would leave open the possibility that in future both companies might play a supporting role, working with smaller businesses or voluntary sector providers. This would depend on their progress in "achieving corporate renewal".

Frances Crook, of the Howard League for Penal Reform, said the withdrawal of the companies as prime contractors for probation "must be the death-knell for the government's dangerous gamble with justice privatisation".

She said: "The coalition's plan to sell off probation has succeeded only in destabilising the public probation service, which has served the public well for more than 100 years. We hope that at the eleventh hour, this excellent service can now be saved."

The shadow justice secretary, Sadiq Khan, said the firms should have been barred from any more justice contracts in July when the scandal came to light.

"Outrageously, instead of ministers grasping the nettle, it has been left to G4S and Serco to rule themselves out of contracts, a decision neither company should ever have been left to take," he said. "David Cameron's probation privatisation gamble risks turning into a disaster. It is disgraceful they are going ahead and still allowing both companies to play a supporting role."

Alastair Lyons, Serco's chairman, "The contract issues that were identified should never have happened and we apologise unreservedly for them. We are doing everything in our power to make sure that such issues cannot reoccur anywhere in our business around the world. Our objective is to deliver excellent public services with openness and transparency, and I believe the actions we are taking will support this now more than ever."