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Contractors (in government or not) aren't cheaper in the "per hour" rate than FTEs (Full Time Employee). Contractors are usually more expensive. However, they're cheaper overall because you can release a contract at the end of the work, or at any time, without employment protection repercussions. You don't have to pay them when there's no work (or not enough). If the only work you have is lower skilled, you can release your expensive high skilled contractor, and pay less for a lower skilled contractor to do the work you have right now. You also generally don't have to pay to train contractors, which FTEs are expensive to train. You hire a contractor that already has the skills you want.
There's also no such thing as a Performance Improvement Plan with a contractor that you would have to go through with an underperforming FTE. Firing an FTE is time consuming, carries legal liability, and is expensive to have them underperform until you've built up your case for firing. Even then you may have to pay out severance or accrued PTO. If the contractor is underperforming, you call the agency you're getting the contractor though, and you have a different contractor in very short order. You don't even have to "fire" the contractor, their agency will call them up and tell them they've been released from the contract.
As a skilled contractor on the plus side, if you're skills are in high demand, you can charge egregiously high rates and you'll get the work and be paid handsomely. If the organization had instead cultivated their FTEs and trained them themselves, they would likely be able to get the work done for less money with their own trained FTEs. Further, after the work is done, their trained FTEs would be much better at maintaining the new work, while the org that just got contractors to do it may struggle to keep it running after the contractors are gone.
This is what is attractive to organizations to use contractors. Source: am in contracting