The recommendation is one in a major transformation review helmed by Lt.-Gen. Andrew Leslie, who spent the past year looking for cost savings at the behest of Defence Minister Peter MacKay.
The report is being reviewed by military personnel, but has not yet been made public.
According to CBC News, which obtained a copy, the report recommends slashing up to 30 per cent of the $2.7 billion budgeted annually for contractors, consutlants and private sector-providers.
The military would also need to move 3,500 regular forces and 3,500 civil servants into other areas and change 4,500 full-time reservist positions into part-time positions.
Personnel at DND headquarters increased 46 per cent overall between 2004 and 2010, a figure that does not include the contractors or consultants, the report added.
Lt.-Gen. Leslie is due to retire next month, and as such, some media reports say there are questions about how far the report will go.
In 2010, the department was ordered to undergo spending reductions as part of the federal government's strategic review process.
According to the 2011 federal budget, the review will lead to spending $525 million less in 2012-13 and $1 billion less in each of the fiscal years 2013-14 and 2014-15.
Planned spending in 2011-12 will be $20.4 billion, according to DND's report on plans and priorities for 2010-11.