An Australian National Audit Office report last month revealed ministers overruled department advice and approved nearly $80 million worth of grants through the Regional Jobs and Investment Packages, including to one project that was technically ineligible.
The program also doled out money to a South Coast caravan company believed to be trading insolvent, and a Sydney factory that went bust less than a year after receiving the grant.
The administration of the program was outsourced to a company originally hired to run a call centre for the Commonwealth.
Now the Joint Committee of Public Accounts and Audit is set to examine the grants program.
Labor's infrastructure spokeswoman Catherine King wrote to the committee chair, Liberal MP Lucy Wicks, to request an inquiry in the days after the audit was released.
Ms King said Deputy Prime Minister Michael McCormack had failed to explain the reasons why ministers had overruled departmental advice on so many occasions.
Mr McCormack had also refused to comply with Senate orders to produce documents relating to ministerial decisions, Ms King said.
"Michael McCormack must stop acting like the rules don't apply to him and start being honest with the Australian people," she said.
Mr McCormack has previously defended his role in handing out grants against departmental advice.
"Australians wouldn't want the public service running the nation. They want the people they elect running the nation," Mr McCormack said.
He has also said that despite the "cherry-picking" going on, the audit found no evidence of bias or pork barrelling. Labor MP Mike Kelly had asked Auditor-General Grant Hehir to look into the program over concerns projects in the then-Liberal-held seat of Gilmore were favoured over those in his own seat of Eden-Monaro.
The inquiry will also look at the Australian Research Council's $1.99 billion National Competitive Grants Program. An audit of that program found some shortcomings in its key performance indicators.
The committee will accept submissions until January 20, 2020, and will hold public hearings in the new year.