(CNN) -- Maj. Gen. Robert Harding said Friday that, "with deep regret," he has withdrawn his name from nomination to lead the Transportation Security Administration.
"This was a great honor, and I felt that I could bring some leadership, vision and intelligence expertise to that position," he said in a statement. "Ultimately, my goal was to improve the security of our nation's transportation systems. However, I feel that the distractions caused by my work as a defense contractor would not be good for this administration nor for the Department of Homeland Security."
The TSA is part of the Department of Homeland Security.
White House Spokesman Nicholas Shapiro noted that Harding has more than 35 years of military and intelligence experience, and added, "The President is disappointed in this outcome but remains confident in the solid team of professionals at TSA."
At a hearing on Wednesday, Harding acknowledged "making mistakes" when a company he formed overbilled the government in 2004.
At issue is a contract that Harding's company, Harding Security Associates, signed with the Defense Department in early 2004 to provide 40 interrogators and debriefers rapidly in Iraq.
Within four months of his firm starting work on the contract, Harding said, the government decided to end the contract.
"I then faced 40 individuals who were now without work," the nominee said, adding that some of them he had lured away from other jobs, including the CIA.
Harding said he told his employees "that I would take care of them, and that I would negotiate and work with the government to provide severance payments." The total severance payments came to about $800,000, Harding said.
"When I went to claim it from the DIA [Defense Intelligence Agency]," government auditors "recognized that I did not have a policy on that, that I had not negotiated with the government for severance, I had not provided the government my plan for severance ... and therefore it was not allowed, that $800,000."
Harding said that government auditors subsequently admitted "there were mistakes on both sides."
The White House said it was "disappointed" at Harding's withdrawal.
"By nominating General Harding, the president tapped an individual with more than 35 years of military and intelligence experience who is dedicated to improving the security of our nation," Shapiro said.
Sen. Susan Collins, R-Maine, said she felt misled by a White House explanation of the events. The White House compared $2.4 million in disputed charges that included the $800,000 in severance payments to the $53 million potential value of the contract, instead of the $6 million value of the work.
"Of the $6 million that HSA was paid, $2.4 million was [in] question. That's a pretty high percentage. The White House, in talking to me about this issue, compared it to $53 million, but that's not what was at stake here at all, and I thought the White House's comparison was pretty misleading," Collins said.
An independent investigation concluded that no fraud was involved. Ultimately, HSA reached a settlement with the government, with HSA paying back $1.8 million of the disputed $2.4 million.
Harding said he learned from his mistake. He said the mistake caused him to add an accounting operation and otherwise professionalize the business, eventually increasing it in size from 60 people in 2004 to about 400 people when he sold the business last year.
Following the hearing, Collins said that Harding "adequately addressed my concerns regarding" the contracts. "Before making a final determination, however, I want to review additional information in order to ensure that all relevant data regarding the nominee have been thoroughly examined," she said.
Harding was Obama's second nominee to head the agency. Sen. James DeMint, R-South Carolina, put a hold on the first nominee, Erroll Southers, after Southers declined to say whether he supported unionization of screeners.
Southers eventually withdrew his name from consideration after another controversy erupted involving a decades-old personnel matter.