The ACT government recently overhauled the way it manages contractors and the recruitment companies that source them, by setting a flat margin on procurement.

At about 7 per cent, the ACT's new labour hire margins are less than half of those paid by the Commonwealth government, which is already a reduced rate.

But while the new system will save taxpayers about $2 million per year, Horizon One Recruitment director Simon Cox said the lower procurement costs means the ACT will be shortchanged on workers.

He said the new system will further stretch a tight labour market and makes it uneconomical for small recruitment companies to operate in Canberra.

"In Canberra we have some of the largest candidate shortage markets in Australia so it's got the lowest unemployment and in key areas like IT, accounting and finance and other specialist areas we've got serious market shortages," Mr Cox said.

"An IT contractor on average across Australia is the hardest market to source people, on average it takes 25 days to source someone. In Canberra it takes 60 days.

"They might see it as lower procurement costs but it's the whole 'pay peanuts, get monkeys'. They'll cut off access to quality people, they'll get a lot of failed placements and then they'll have to pay twice to get someone to come and fix it up."

Manager for government relations and media at Recruitment & Consulting Services Association Australia & New Zealand, Simon Schweigert said there had been no consultation before the government slashed margins and some Canberra-based companies had been cut out of the loop completely.

"There's strong competition across ACT government as well as federal government and the private sector for really good candidates and so consequently it is important that each of the players in that market are working together rather than simply saying 'hey let's dive to the bottom, let's get the cheapest price we can and then use that as a means of basically controlling our supplier network as well'. For us as an industry that's a really really poor outcome," Mr Schweigert said,

However an ACT government spokesman said the same system had been used in NSW in 2013 with no evidence that the quality of contractors had been impacted.

"This change has absolutely no impact on the contracts the government signs with thousands of Canberrans who provide services to the ACT Government every year as it doesn't fix or reduce contract workers' pay rates," the spokesman said.

But Mr Cox said the NSW labour market did not have the same shortages as the ACT and it was like "comparing apples and oranges".

"To be fair, I'd say the NSW government is very used to recycling average candidates because I know people who worked on the panel in Sydney and they put their worst recruitment consultants on it and send them the leftover candidates in the market because they can't get a fair margin on them," Mr Cox said.

He said while recruitment was seen as a "soft target", the move could massively damage local businesses.

"We can't imagine any other industry that wouldn't be completely up in arms about this unilateral move by a government organisations to cut the margins by more than half," Mr Cox said.