Private contractor Capita has lost hundreds of thousands of pounds in performance payments after failing to meet Army recruitment targets.
The company, which took over Army recruitment in a £50 million-a-year contract in 2012, had £750,000 withheld in one month alone, the Daily Mirror reported.
The disclosure comes as the latest Army manning figures showed it has 80,260 full-time trained soldiers compared with a target of 82,000 by 2020.
The Ministry of Defence (MoD) confirmed that performance payments had been withheld but said recruitment rates were improving.
"In order to ensure best value for the taxpayer, Capita is required to meet certain performance targets. We've seen recruitment rising this year and we expect this to continue," a spokesman said.
Capita said it had made "significant improvements" to the recruitment process and was attracting more "quality applicants".
"Capita is committed to supporting the MoD's plans for an Army of 82,000 by 2020, and has made significant improvements to the recruitment process which have made it easier and quicker for people to join the Army," a spokesman said.