The CAPEX trap
Government budget structures systematically favour outsourcing. A one-off consultancy contract is typically categorised as CAPEX (capital expenditure); permanent salaries are mostly OPEX (operational expenditure). On annual budget cycles, the CAPEX option consistently appears cheaper - even when it is dramatically more expensive over three to five years and builds no lasting capability. The NAO has identified this as a structural problem. The same structural logic - outsourcing as project spend, salaries as a permanent liability - has produced equivalent distortions in Australia, Canada, and across the EU, where governments have quietly built 'shadow workforces' of contractors that dwarf the civil service headcount they were designed to circumvent. HM Treasury had a target to reduce consultancy spend by £550 million in 2024–25.
The Cost Evidence for In-House Capability
The most common objection to building in-house AI capability is cost. The evidence consistently points the other way: in-house capability is substantially cheaper than the contractor alternative - and unlike contractor arrangements, it compounds rather than resetting to zero at contract end.
What in-house actually costs
i.AI draws on the government's published DDAT (Digital, Data, and Technology) pay framework, with London weighting. A senior AI engineer or data scientist in permanent government employment costs a fraction of what an equivalent contractor through a prime supplier charges per day - and that permanent employee compounds domain knowledge year on year. A contractor resets the knowledge clock when the engagement ends.
What the contractor alternative costs
Indicative rates for a senior developer through a government prime supplier are £800–£1,200 per day. A Big Four consultant on an AI project: £900–£1,400 per day. At 230 working days per year, that quickly adds up. And this does not include the management overhead of procurement, the knowledge loss at contract end, or the premium on repeat engagements when the expertise walks out the door.
Published evidence supports the structural case. POGO (US, 2011) found contractors cost federal agencies on average 1.83× equivalent permanent staff - and in over a third of roles studied, more than double. The UK NAO's November 2025 report (HC 1381) documented £1.36 billion in central government consultancy spend in 2022–23, with the MCA reporting £5.3 billion across the wider public sector in 2023. The NAO found the government 'does not have consistent data on how much individual departments spend on consultants' - suggesting these figures understate the real cost.