Wrongly releasing prisoners is just one of many failures highlighted in a report into the running of Mt Eden Corrections Facility.
A Corrections Department report on the first eight months of Serco's management of the prison said as well as two prisoners being wrongfully released, the British firm had failed to meet 40% of its performance targets and was fined $150,000 after a prisoner escaped.
Targets for random drug testing and prisoner management plans were also not reached.
Annually, Serco can earn up to approximately $3 million in incentive payments, but instead it is having to pay for under-performing.
On top of the $150,000 fine it got after prisoner Aaron Forden escaped, it was fined $25,000 for accidently releasing an inmate early and $50,000 for failing to file progress reports.
Another $25,000 fine is pending for releasing another prisoner early.
Corrections Minister Anne Tolley told ONE News that there needs to be some improvementm, but she also described it as a "bedding in" period for Serco.
The Corrections Department has served Serco with 12 notices to lift performance. It has four months to do so or faces further financial penalties.
Corrections Department Chief Executive Ray Smith said the fines for failing to meet those standards would likely result in more fines "in the tens to hundreds of thousands of dollars".
Serco's Asia Pacific managing director Paul Mahoney told Radio New Zealand the company was not concerned with the results of the report
Mahoney said Serco should be meeting its targets within the next four months.
The Public Service Association (PSA) said the failures were "further proof" the Government's privatisation of prisons was ideologically motivated.
"The department may be trying to write these off as 'teething
problems' but they are no such thing - these are core procedures
that should be right from the start," said PSA National Secretary
"This report shows Serco is failing in its number one priority - to keep the public safe."
Labour's justice spokesperson Charles Chauvel said the Government needs to rethink its plans for the new Serco-run prison at Wiri, south Auckland, in light of today's report.
"If Serco can't meet those targets while it runs new institutions with more operational flexibility than the state system, then that should send a strong signal that plans to expand its role significantly via the new Wiri prison need a rethink," said Chauvel.
"The public has a right to expect Serco's performance targets to be met."
Chauvel said Labour's preference was that the money being spent on Wiri Prison be instead spent on refurbishing existing prisons.
Serco also runs Australia's controversial detention centres along with prisons around the world.
The publicly listed company is involved in military weapons contracts, schools and transport.