"They basically installed less than required and then overbilled PGW for $1.7 million," said Inspector General Amy L. Kurland. Danella also agreed to repay the cost of the core samples, as well as a $525,000 penalty to the city.
The contracts with Danella were valued at more than $22 million and involved work between 2010 and 2013.
The agreement included no admission of fault and noted that Danella cooperated with investigators. Danella's "good standing" to do business with the city is unaffected.
Danella agreed to guarantee the work for three years against any problems as a result of the shortages.
Kurland said PGW is the only city agency that has worked with Danella in recent years.
A voice mail left with John P. Bass, the Danella vice president who signed the agreement, got no response Tuesday. The company, which began as a small utility contractor in 1972, operates in 11 states and has 1,800 employees.
"This agreement sends a clear message to contractors that the City of Philadelphia will not tolerate being overcharged," Mayor Nutter said in a statement.
The agreement raises questions about PGW's supervision of its contracts to ensure compliance, since the discrepancies went undiscovered for several years.
Pennsylvania Public Utility Commission spokeswoman Jennifer Kocher said the allegations do not directly involve gas-main construction and do not raise safety issues. But she said PGW's supervisory practices may be addressed in the PUC's next management audit of the utility, which is scheduled for this year.