‘Looming iceberg’: Defence warned spending on contractors could explode

Australia’s Defence Department has been warned its spending on contractors is a “looming iceberg” that risks eating into its acquisition budget and demoralising its own workforce.

The number of Defence contractors has grown from 4669 two years ago to 6810 as the federal government has poured billions of dollars into acquisitions amid escalating tensions in the Indo-Pacific. Defence’s total “external workforce”, which also includes outsourced service providers and consultants, increased from 23,324 to 32,487 over the same period.

Defence’s acquisition and sustainment budgets are planned to double over the decade and local acquisition spending alone could grow from $2.6 billion to about $10 billion, the reports says.

The Australian Strategic Policy Institute’s The Cost of Defence, to be released on Wednesday, says the cost of contractors could “explode” as more acquisitions will require more people, and Defence’s own workforce is capped at 77,873 this year.

“Defence’s external workforce is now its biggest ‘service’, ahead of the Army,” the report says. “Defence needs to fully understand the value-for-money case for using contractors – and it needs to share that with the Australian Parliament.”

According to Defence figures, the average contractor is costing about $280,000, more than twice the $120,000 paid to the average Defence public servant.

The report says Defence’s top-level budget breakdown showing the cost of its workforce is declining as a share of the overall pie is potentially misleading as contractors are included in its acquisition and sustainment budgets, not the money allocated for personnel.

“It’s hard to tell, but it’s possible that over 10 per cent of Defence’s acquisition [budget] is going to contractors helping to run projects,” the report says. “Collectively, it could cost $1 billion more than an equivalent number of public servants today.”

Defence’s acquisition and sustainment budgets are planned to double over the decade and local acquisition spending alone could grow from $2.6 billion to about $10 billion, it says.

“There’s a looming iceberg in there,” the report warns. “Overall, the cost of contractors could explode and eat deeply into Defence’s acquisition budget.”

The report’s author, defence budget expert Marcus Hellyer, said there were certain instances when specialised contractors were needed but Defence was now using them on a permanent basis.

“Aside from value for money, it has to be demoralising for Defence’s own workforce,” he told this masthead.

Amid growing tensions between the United States and China, the federal government last year unveiled a major update to Defence strategy that warned the country no longer has a 10-year window to defend itself from an attack.

Total defence funding last year hit $42.7 billion, or 2.04 per cent of gross domestic product, meeting the government’s commitment to restore the defence budget to at least 2 per cent of GDP. The report says it is difficult to work out the total cost of contractors but Defence officials told a Senate estimates hearing in October it was $1.52 billion in 2019-20.

Mr Hellyer said the government’s policy to boost the local defence industry was starting to pay off, but it was increasing the demand for workers and pushing up the cost of Defence’s workforce.

The report welcomes increased funding for major acquisitions such as 12 new attack-class submarines and nine-strong fleet of Hunter class frigates but calls for more spending on uncrewed and autonomous systems.

“The vast bulk of investment is still going into small numbers of exquisitely capable yet extremely expensive crewed platforms that take years, even decades, to design and manufacture and are potentially too valuable to lose,” it says.

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