The Housing and Urban Development Department said it is canceling a Washington consulting firm's proposed $500,000 contract that agency investigators had criticized as "inflated."

June Q. Koch, HUD's assistant secretary for policy development and research, said that she has decided not to hire the Match Institution and that her office would take over the job of designing a program to train minority youths at public housing projects.

"We decided that we could really handle that in-house," Koch said. "It became clear I did not need any outside contractor . . . . It turned out I really didn't need that kind of heavy technical assistance."

The decision followed a report by HUD Inspector General Charles L. Dempsey that raised new questions about the proposed contract.

The $500,000 contract would have been Match's second noncompetitive award for the minority training plan in two years. The first award last year was controversial because it came after Match Chairman Timothy L. Jenkins, along with 40 other leading black Republicans, was called in by HUD Secretary Samuel R. Pierce Jr. to discuss how the Reagan administration could channel more contracts to minorities.

Koch confirmed to investigators that Pierce had suggested Jenkins' firm for the earlier contract after Match submitted a proposal, according to the report.

Jenkins said he had "no complaints" about HUD's decision and is pleased that the program he helped develop "is up and running." He said investigators had found "not one impropriety" in his firm's work.

"There's no question about the quality of what we did," Jenkins said.

Deborah Greenstein, a HUD official who supervised Match's work, told investigators that she opposed the follow-up award because Match had done "a lousy job" on the first contract, according to the report.

Greenstein told investigators she found it "very irregular" that, shortly after HUD made an internal estimate of $500,000 for the contract, Match submitted a proposal for $499,839. According to the report, Greenstein said she believed that the $500,000 estimate might have been leaked to Match.

Maggie H. Taylor, HUD's director of community services, questioned why HUD never received a proposal from Match for the second award, according to the report. Although HUD claimed to have such a proposal, investigators found that HUD officials had drawn up a draft contract and treated it as Match's proposal.

"This bothers me . . . . I don't understand how the responsible program office could have submitted a request for services without a proposal from the contractor," the report quoted Taylor as saying.

Jenkins said that no one ever asked him for a proposal and that HUD outlined the work because the agency had initiated the second contract. He said $500,000 was his best initial estimate of the cost and "I had no knowledge of what the government's figure was."

Jenkins said Greenstein, who had opposed the original Match contract, was critical of the firm's work because "she's been resentful from day one."

Koch held up the Match award last spring after Dempsey criticized Match for overstating its costs and devoting an "unreasonably high percentage," more than half its budget, to administrative tasks. Dempsey also said that most of the 17 cities Match proposed to help with the minority training program reported that they needed little or no outside assistance.

Koch said she doesn't know if it is cheaper for HUD to do the work in-house, but she said the Match contract probably would have been scaled down from $500,000. The earlier criticism was unfair because the figures were preliminary, Jenkins said.