Why is the defence sector struggling to engage contractors?

A common theme in the defence sector right now is how companies work with contractors. The reliance on this workforce has always been there, but following chats at this year’s DSEI UK, it’s clear the UK defence sector is facing challenges. In many ways, these challenges are unique to defence.

The sector already faces a well-reported skills shortage, driven in part by a national skills gap across all STEM disciplines. But layer in the complexity of IR35, the fact blanket determinations have become default, and the security vetting backlog, you end up with a far narrower pool of available talent.

These are ongoing challenges that are impacting who gets hired, under what terms, and how reliably defence projects can progress. So what can be done?

Expecting on-site in a remote world

One of the defining features of contracting in defence is just how often roles require someone to be full-time, on-site. Sensitive and classified programmes, or equipment that can’t leave secure facilities, make it difficult for firms to offer flexibility. For many, five days a week on site is still the expectation.

For UK teams tied into US programmes, ITAR (administered by State/DDTC under the AECA) controls USML “technical data” and treats any unlicensed release to a foreign person (including via remote access) as an export, which is why employers often confine this work to access-controlled, on-site environments.

That type of requirement becomes a major barrier in areas where local talent is scarce. We know by now that remote flexibility is a major driver, and considering a contract workforce is even more used to operating on their own terms, the defence industry faces a challenge whereby their available candidates could favour projects in aerospace, security, space, or other advanced engineering sectors.

Even when contractors do agree to on-site work, companies face soaring costs in travel, accommodation, and in some cases relocation when they need to fill urgent gaps. And when a contractor does accept but finds the on-site role burden unsustainable for them, the drop-out risk rises.

To navigate this firms should be looking to split the work conducted into secure-site only and remote-permissible. You may choose to undergo assessments and seek advice on how to identify what positions can be effectively and compliantly done remotely, and rotate teams through by project phase / by team so they can perform those parts of their duties remotely. The GOV.uk website offers specific working from home guidance for distinct classifications.

IR35 and blanket determinations

More than 4 years on from the private sector reforms to off-payroll working rules, IR35 remains one of the most difficult parts of engaging contractors in defence.

For large employers, running individual assessments on every contract or role is seen as unmanageable. With thousands of contractors engaged each year up and down the country, across a spectrum of different roles, many larger firms have defaulted to the blanket position that everything falls inside IR35.

The approach reduces admin, but increases costs put on to the employer. Contractors working inside IR35 typically lose between 20-30% of their take-home pay compared to working outside, and to offset this, companies have to increase rates in order to bring talent on. It means a higher cost to the company with no real gain in compliance confidence.

The reality you can point to when making the case for proper determinations is this – the same contractors you’re using now are likely raising their day rates to compensate for being determined as inside. Industry calculators and analysis show this is sometimes by up to 50%.

Proper determinations that are set for each role, evidence-backed, and repeatable, will help save on this inflated rate in the long-term.

Security Clearance bottlenecks

Putting talent through clearance programmes is taking longer than expected. UK Security Vetting has consistently struggled to hit clearance targets in recent years, and it’s having an impact on newly vetted talent entering the workforce.

Across software, systems, mechanical engineering, firms are coming to us with roles that require SC or DV clearance. The people are out there, but finding them, and finding them available at the right time, is becoming increasingly tough.

Part of the challenge is that the best-qualified candidates often don’t hold active clearance, and while some firms offer sponsorship, these bottlenecks are meaning employers have to look much further in advance if they’re planning to engage contractors for a specific deadline.

Many contractors with the right technical background sit in adjacent industries like aerospace, robotics, or industrial engineering. They’ve got the skills, but without clearance in place they can’t step into a defence programme straight away. That rules out a huge segment of potential talent. The few who are available become expensive, and programmes risk stalling while companies wait for the right fit to come along.

Where we’ve seen success is with employers who take a very proactive approach. Maintaining a pipeline of security cleared contractors, or committing to sponsor clearance for adjacent-industry specialists they know they’ll need down the line – but taking into effect the delays that can often happen in gaining cleared status, this can require foresight that not every firm can resource.

The takeaway for companies engaging defence contractors

Many feel boxed in by their own available resource, as well as governance and security, so blanket IR35 determinations and five-days-on-site become the path of least resistance.

Start by treating IR35 like any other control in your business – quick, evidence-backed, repeatable, and engage an external partner to help you lay that ground work. Even if the roles do end up being inside, you will find contractors are more agreeable to the conditions when the determination is done properly, and the rate reflects it. That work could lower the ‘inside premium’ you’re paying at the moment.

Requiring 100%-on-site is a tougher one to begin to tackle, and often depends on the nature of the work and the external parties your product or services works alongside.

And when it comes to clearances, keep an in-date roster of contractors continually engaged that you can mobilise. Sponsor adjacent-industry specialists early and sequence them onto non-classified backlog while their checks go through and complete. That’s how you plan long-term to be able to shorten the time-to-fill at the start of every engagement.

For support in engaging and managing security cleared contract talent, reach out to the team today.