The National Audit Office said it told the government that Seaborne Freight – which does not have any ships – was not able to satisfactorily meet the criteria set out in the Department for Transport’s tender.
But the department decided to go ahead with the contract after inserting further protections to reflect the risk that the firm might not be ready in time.
At the weekend, Seaborne was stripped of its £13.8m contract to run cross-Channel services in the event of disruption caused by a no-deal Brexit.
The company had attracted criticism after it emerged it had never operated a Channel service, and was also accused of copying parts of its website from a takeaway company.
Seaborne’s agreement was terminated after Irish company Arklow Shipping withdrew its support in what Transport Secretary Chris Grayling called a “sudden and unexpected” move.
Labour said Mr Grayling was “rewriting the textbook for ministerial incompetence in office” and should resign.
Downing Street insisted the prime minister continues to have full confidence in him.
But the NAO report – published by the influential Commons public accounts committee – is likely to keep up the pressure on the embattled minister.
Meg Hillier, chairwoman of that committee, said the report raised “serious issues”.
In a memorandum on the case, the spending watchdog said the government only identified last autumn that there was the possibility of “significant” disruption to cross-Channel freight lasting six months, as opposed to the original estimate of six weeks.
Given a sharp reduction in the flow of goods could cost the economy up to £5.25bn, the DfT began approaching firms about the possibility of laying on extra capacity.
Because of the “extreme urgency” of the situation, the department said it was necessary to bypass the normal transparency requirements, including publishing invitations to tender.
The NAO said the government approached nine operators and received three bids, which resulted in contracts worth £108m.
Seaborne was “non-compliant with the requirements set out in the invitation to tender”, the watchdog said.
It added: “As a new business without significant financial history, Seaborne were unable to satisfactorily meet the requirements of the economic and financial standing assessment.
“The department, considering the information it held on the bidders and the due diligence it had undertaken, decided to award contracts to all three bidders.”
A review of the decision was then carried out by the DfT’s accounting officer.
This found that failure to act would mean losing “the ability to secure ferry capacity that could protect critical goods under a no-deal exit” and “reasonable measures” had been taken to make sure the contract represented value for money.
The deal – which would have seen Seaborne run services from Ramsgate in Kent to Ostend in Belgium – was subsequently approved by the Treasury.
Risks identified included:
:: The chance of “teething troubles” because of Seaborne Freight being a new operation
:: The fact that the company did not have contracts to use either of the ports it would be sailing between
:: The fact that it had no ships chartered
:: The work required to get Ramsgate ready for services
:: The recruitment of Border Force officers.
As a result, the DfT insisted on a number of conditions being inserted into Seaborne’s contract, including requiring the firm to meet milestones in its preparations by specific dates.
The department was also required to give £3m to Thanet Council to enable work on the port to be finished.
Reacting to the contents of the memorandum, Ms Hillier said: “The Department for Transport waited until September 2018 to start thinking about the risks to freight transport across these important routes and entered into a £13.8m contract with Seaborne Freight despite it being a new operation, owning no ferries, and not having binding contracts to use the specified ports.
“We will be pressing the department for answers on how it awarded its three new ferry contracts, what it is doing to manage risks and exactly what it intends to do now it has axed the contract with Seaborne.”
Officials from the department will be questioned by the committee on Wednesday.
Meanwhile, Eurotunnel is challenging the decision to award the contracts at the High Court.
The firm, which operates in the Channel Tunnel, claimed the deals were awarded through a “secretive and flawed procurement process”.
But the DfT argued the “extreme urgency” of the situation justified the process.
A four-day trial will commence on 1 March.