Employees gets legal protections that contractors can only dream of. Also, most contracts have specific terms of completion and duration. If the contractor screws up, you can sue them, withhold payments for lack of specific deliverables, or just let the contract run out.
Contracts are usually of fixed, short, duration — 6 or 12 months. You just stop renewing the contract. Employees are forever.
Firing is costly to morale, and carries legal risks.