The Australian Defence Department is set to remove 2000 contractors, equivalent to one-fifth of its private workforce.

Reports say the planned move has raised concerns within the defence industry regarding the military's ability to operate and maintain weapons and vehicles effectively.

An internal memo, leaked to The Australian Financial Review, allegedly reveals that the contractor cuts are estimated to save $632 million over four years. 

The Defence Department aims to reclaim savings from its maintenance budgets after failing to secure additional funds for Australia's military build-up in the short term.

The department's heavy reliance on external contractors has come under scrutiny following revelations that it was consultancy firm PwC's largest federal government client.

PwC, which had 54 contracts worth $223 million with the Defence Department, has been effectively banned from engaging in new federal government work until the resolution of the tax leaks scandal.

The memo, issued by Associate Secretary Matt Yannopoulos, reportedly explains that the reduction in contractors is part of a reinvestment in the Australian Public Service (APS). 

The Defence Department plans to decrease its contractor workforce by 2000 people, or approximately 20 per cent, by the end of 2024, contributing to the government's goal of saving $3 billion in various expenses across the public service.

The memo states that the military services and Defence bureaucracy groups will immediately begin reducing consultants. 

Additionally, a “contractor hub” will be established, implementing a dual approval system for issuing or renewing contracts from July 1.

The reduction is alleged to primarily target contractors engaged under labour-hire contracts for skills that are typically maintained within the APS, rather than consultants with specialised expertise or major service providers.

To manage the cuts, a new contractor strategy comprising 27 initiatives will be introduced. 

The strategy aims to control and govern the contractor workforce effectively, ensure an appropriate mix of personnel, support government priorities, and improve procurement and workforce decision-making accountability.

While acknowledging the need for spending restraint, Australian Industry and Defence Network CEO Brent Clark has warned against abrupt changes, which could lead to unintended consequences and hinder essential work. 

Clark suggests focusing on cutting low-end administrative activities that were contracted out due to hiring freezes, rather than valuable technical, engineering, and programmatic activities crucial for Defence capability.

In addition to the contractor cuts, Defence has been squeezing maintenance and operating budgets to achieve savings of up to 15 per cent. 

This cost reduction aims to prioritise the acquisition of new weapons recommended by the Defence Strategic Review. 

Despite the review emphasising the urgent need for increased defence spending due to the deteriorating strategic environment, the government has not committed to further defence expenditure beyond what was previously planned.

While consultants face cuts, the government intends to expand the size of the Defence workforce, including uniformed personnel and bureaucrats, by about 30 per cent, reaching approximately 101,000 individuals by 2040.