A leaked internal memo, seen by The Australian Financial Review, estimates the cuts will save$632 million over four years as part of a government-wide crackdown on the use of consultants.

Defence’s reliance on outside contractors has also come under the microscope after revelations the department was embattled consultancy firm PwC’s largest federal government client.

Senate estimates heard last month PwC had 54 contracts worth $223 million with the Defence Department, but the consultancy firm has effectively been hit with a shadow ban on new federal government work until the tax leaks scandal is resolved.

The Defence Department memo, issued by Associate Secretary Matt Yannopoulos on June 16 to uniformed personnel and bureaucrats, describes the cuts as “reinvesting in the APS [Australian Public Service]”.

Mr Yannopoulos said the department had told the government it aimed to reduce its contractor workforce by 2000 people, or about 20 per cent, by the end of 2024.

This would contribute $632 million towards the government’s goal of saving $3 billion in consulting, travel, advertising and legal expenses over four years across the public service.

The memo said the three military services and each of the groups within the Defence bureaucracy would immediately begin to reduce consultants while a “contractor hub” would be created with a dual approval system implemented for issuing or renewing contracts after July 1.

“This reduction will be achieved using a proactive, enterprise-wide approach that ensures any risks to capability are managed,” the memo said.

“The reduction will be in ‘above the line’ contractors who are engaged under a labour-hire contract for skills that would normally be maintained within the APS. It does not include consultants with specialist skills or major service providers.”

A new contractor strategy with 27 initiatives would be introduced to manage the cuts, grow public service employee numbers and “improve controls and accountability for procurement and workforce decisions”, the memo said.

‘Appropriate mix’

“[The strategy] will establish effective controls to govern and manage the contractor workforce and ensure Defence has the appropriate mix to deliver on government priorities including the Defence Strategic Review,” the memo said.

“Defence continues to value our industry partnerships and recognises the importance of these relationships in providing skills and expertise we need to meet our strategic priorities.”

Australian Industry and Defence Network chief executive Brent Clark said while he recognised the need for spending restraint, consultant numbers had grown due to departmental hiring freezes.

“The Defence Department needs to be mindful that abrupt change can lead to unintended consequences and potentially shortcuts or deferrals in work being undertaken, the simple reality is that you cannot just replace these individuals unless the department has the ability to undertake these activities themselves,” he said.

“The SME consultancy area provide high-end technical services to Defence, what needs to be cut is the low-end administrative activities that have been contracted out due to hiring freezes, these types of activities must be the focus of these cuts rather than the valuable technical, engineering and programmatic activities that AIDNs members provide to Defence as these activities directly influence capability.”

The Defence Department said in a statement the reduction would be “focussed on contractors who are engaged for skills that would normally be maintained within the APS. It does not include consultants with specialist skills or outsourced service providers”.

“Contractors will continue to play a role in an integrated workforce, particularly when engaging specialist skill sets not available within the APS,” the statement said.

As well as cutting contractors, The Australian Financial Review revealed in April that Defence was squeezing maintenance and operating budgets to extract savings of up to 15 percent, as it focused on acquiring new weapons recommended by the Defence Strategic Review.

Despite the review emphasising the need for urgency given the rapidly deteriorating strategic environment, the government did not increase defence spending over the forward estimates beyond what had earlier been committed.

While the government cuts consultants, it plans to increase the size of the Defence workforce – uniformed personnel and bureaucrats – to about 101,000 by 2040, a 30 per cent increase.

Andrew Tillett writes on politics, foreign affairs,defence and security from the Canberra press gallery. Connectwith Andrew on Facebook and Twitter. Email Andrew at andrew.tillett@afr.com