Prisoners will make sandbags, fence posts and other kit for the army as part of a drive to teach them the “value of a hard day’s work”, the government has announced.

The 10-year-deal to produce equipment will save the armed forces money and give inmates valuable employment skills, justice secretary Chris Grayling said.

It comes as new reforms to rehabilitate offenders kick in, including support at the prison gate when they finish their sentence.

Grayling said: “For too long we have released prisoners back onto the streets with £46 in their pockets and little else than the hope that they would sort themselves out. It’s little wonder things haven’t improved – but now all this will change.

“For the first-time we will be giving all offenders a proper chance at rehabilitation, instead of just leaving them to wander the streets and get on with it.

“And I’m proud that on the same day this starts we can also announce an innovative agreement that will see our prison workforce helping our armed forces. By providing this new service, prisoners will be giving something back to their country, while learning important new skills and the value of a hard day’s work.”

The agreement to supply army equipment – struck by the Ministry of Justice (MoJ) and the Ministry of Defence and signed at Coldingley prison – builds on a six-month trial that the government says has already reaped savings of nearly £500,000.

It will see a number of products made by inmates, such as hydraulic jacks for military vehicle maintenance and includes some that were previously produced overseas.

From today, extra support will be offered to short-term prisoners under previously announced plans to boost rehabilitation, with a focus on helping them to beat drug and alcohol addictions and finding them jobs and homes.

Figures released by the MoJ show around 86,000 further crimes were committed by offenders released from sentences of less than a year in 2012, including more than 600 violent offences, just one month after release.

Defence equipment minister Philip Dunne said: “I was pleased to visit HMP Coldingley this week to see the workshops in action and speak to the prison workforce supporting our armed forces. During times of austerity we’re always looking at ways to be more efficient and this is a fantastic initiative.

“The pilot projects have been very successful, so signing the agreement here today is a great step in widening the benefits for both departments and society as it will offer prisoners more opportunities to develop skills and prepare for employment when released.”

Juliet Lyon, director of the Prison Reform Trust, said: “The justice secretary is staking everything on making prison an early port of call, rather than a place of last resort, in the justice system. Ignoring his own department’s figures released just three days ago showing that community sentences outperform short spells behind bars.

“Chris Grayling risks encouraging the courts to bypass more effective penalties and instead use already overcrowded prisons as a gateway to treatment. The Ministry of Justice estimates that these new mandatory measures will lead to 13,000 recalls and the need for 600 more prison places at a cost of £16m.

“Following hard on the heels of slashing prison budgets, cutting the probation service in half and restricting access to justice, this is a massive social experiment to make custody the route to rehabilitation.”