The government has warned Atos and Capita they will be stripped of their contracts to carry out Personal Independence Payment (Pip) disability assessments if they fail to improve.
Minister for Disabled People Sarah Newton said she was looking at extending the companies' contracts for two years to "better allow for a stable transition to any new provision".
But, she added in a written statement, the Department for Work and Pensions would also start work on IT systems so it could bring the work in-house.
Frank Field, who chairs the Commons Work and Pensions Committee, said: "The government is making the important first steps to enable it to get out of a hole of its own making.
"Having the capacity to bring assessments back in-house will put it in a far stronger position to turn the screws on its hitherto failing contractors, in the interests of claimants and all taxpayers.
"This should serve as notice for Atos and Capita to start delivering, or else."