how about cutting a few managers instead

They can cut rates - but I bet the contractors will silently cut the amount of work they do, too.

I think "Dilbert" had something to say on the matter. When you cut people's pay they just goof around (surf the web, take long lunches, do less work) more to restore the balance.

Since it's the contractors and techy-permies who actually do the work, they're the last people you want to antagonise. How about reducing some of the higher-up headcount, who wouldn't be missed. It may even be that without them, the work gets done better, faster and happier.