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Officials say Houston's Metropolitan Transit Authority violated federal laws when it created its new light-rail lines.
The Federal Transit Administration says Metro must resolve the issue to qualify for a $900 million grant to continue the project.
Metro got in trouble for awarding two light rail contracts to Spanish rail car manufacturer CAF. In a letter released Wednesday, the FTA said Metro violated both federal procurement laws and "Buy America" provisions intended to protect the national economy.
The FTA says Metro must rebid the contract for the project to continue receiving federal funding.
Houston officials were to comment on the FTA's findings at a news conference later Wednesday.
Metro plans to add five new rail lines to its six-year-old Main Street line by 2014.