Federal Spending Trends 2026: Where the Government Is Investing

The federal contracting market has been growing slowly for the better part of a decade. Total awards have increased in five of the last six fiscal years, adding roughly $83 billion over five years — a 14% nominal increase. But FY2026 is different. Two massive forces are colliding at the same time, and the directional shift depends entirely on which agencies you serve.

On the defense side: Congress passed a $1.01 trillion national defense authorization, the first time the defense budget crossed the trillion-dollar threshold. The DoD is planning to spend an additional $152 billion from the budget reconciliation bill in a single year. That is an extraordinary acceleration of spending, concentrated in AI, cybersecurity, munitions, and military construction.

On the civilian side: DOGE has restructured, cancelled, or recommended elimination of over $85 billion in contracts across 24 agencies. The cuts are concentrated in consulting, research, environmental services, and international development. If your pipeline runs through USAID, the Department of Education, or the EPA, you already know what this means. If it runs through DoD, DHS, or VA — you're looking at one of the strongest demand environments in recent memory.

The single most important thing you can do right now is understand which side of this divide your business sits on — and either double down or pivot accordingly. The CapturePilot market intelligence tools track agency-level obligation data in near real-time so you can see where spending is actually landing before your competitors do.

The federal government reported $744.7 billion in total contract obligations for FY2025, compared to $776 billion in FY2024. That apparent drop is partly an artifact of timing — the Department of Defense typically reports Q4 spending late, and the FY2025 full-year number will settle higher once final agency reports come in. FY2024 itself was a near-record year, and the baseline heading into FY2026 is strong.

What matters more than the headline total is the composition. Federal contracting is increasingly concentrated in a handful of categories:

The pattern is consistent: technology, defense, and direct service delivery are growing. Policy, advisory, and development work are contracting. If your NAICS codes sit in professional services or research, now is the time to assess your agency mix and look hard at where demand is still robust.

The FY2026 National Defense Authorization Act passed with $848.3 billion in discretionary DoD spending plus $113.3 billion in mandatory reconciliation funding — totaling $961.6 billion directly for defense, with the full national security budget crossing $1.01 trillion when you include military construction and other related programs. More notably, the DoD announced plans to spend the entire $152 billion reconciliation package within a single fiscal year, which is an unprecedented pace of obligation.

Where is that money going? The investment priorities are clear from the NDAA language and DoD procurement forecasts:

For small businesses, the defense surge creates real opportunity — but you need to be on contract vehicles to access it. The DoD's preference for IDIQ task orders and GWACs means that if you're not already on a vehicle like OASIS+, Polaris, Seaport-NxG, or a service-specific IDIQ, you may be frozen out of the largest opportunities. Read our guide to IDIQ contracts to understand how to get on the right vehicles now.

The Department of Government Efficiency has recommended cancellation or reduction of over $85 billion in federal contracts since early 2025. The scale is unprecedented, but the distribution is highly uneven — knowing which agencies and categories are hit hard tells you exactly where to avoid overcommitting pipeline resources.

The practical implication: if your business model depends on management consulting, policy advisory, or DEI-related services to civilian agencies, you're navigating a materially different market than two years ago. That doesn't mean there's no work — it means your pipeline needs to be larger to account for lower win rates and more cancellations.

The contractors weathering this best are the ones who diversified their agency mix before the cuts hit and who had strong past performance records across multiple departments. Single-agency dependency is the most common structural weakness we see in small business GovCon pipelines.

Federal cybersecurity spending grew from $18 billion in FY2020 to over $32 billion in FY2025 — a 78% increase in five years. The DoD alone committed over $32 billion in combined AI, cloud, cybersecurity, and data analytics contract ceilings in the first half of FY2026. These are not projections. These are awarded contract values you can bid task orders against.

The AI piece is accelerating fastest. DoD's $13.4 billion AI and autonomy budget request for FY2026 is the largest single-year AI investment in defense history. And small businesses are winning a meaningful share: small business AI contract awards grew 34% over three fiscal years, from $554 million in FY2022 to $740 million in FY2024. That's a 34% increase at a time when the government was still figuring out what it wanted.

For small businesses, the entry points into cyber and AI work are clearer than they look from the outside. You don't need to be a Fortune 500 defense prime to capture this spending. The specific on-ramps:

• SBIR/STTR programs: The Small Business Innovation Research program set-asides are specifically designed for small businesses doing early-stage R&D in areas including AI, machine learning, and autonomy. Awards range from $150K (Phase I) to $1M+ (Phase II).
• GSA Polaris GWAC: The GSA Polaris contract vehicle for small businesses covers IT services including cybersecurity, AI/ML, and cloud. It has separate pools for WOSB, SDVOSB, HUBZone, and SDB. This is the vehicle to pursue if you're an IT firm.
• CIO-SP4 (NIH GWAC): NIH's government-wide IT acquisition contract spans health IT, cybersecurity, and data analytics. Small business unrestricted and set-aside pools are both open.
• Subcontracting to primes: Large primes winning JWCC, Polaris, or other major cyber/AI vehicles need qualified subcontractors. A teaming agreement with a prime on a vehicle you don't hold can get you into task orders immediately.
• DIU commercial solutions: The Defense Innovation Unit awards Other Transaction Authority (OTA) agreements to commercial technology companies — often without the full FAR compliance burden. If your product has a commercial market, DIU is worth tracking.

The FY2026 NDAA also codified new cybersecurity requirements and AI governance frameworks for defense contractors. Zero Trust architecture mandates are real deadlines now, not aspirational goals — and agencies need contractors who understand implementation. If you've done this work commercially or in another regulated sector, your experience translates directly.

The Department of Veterans Affairs carries a $301.4 billion FY2026 budget — up 8.2% year-over-year — making it one of the fastest-growing agencies in the federal government right now. That growth is driven by the PACT Act (expanding VA benefits for burn pit exposure veterans), the Electronic Health Record Modernization (EHRM) program restarting deployments in 2026, and a massive contract the VA is readying for veterans' private-sector healthcare access.

The EHRM program — the Cerner/Oracle Health implementation — is slated to go live at 13 additional medical facilities in 2026, with full deployment projected through 2031. Each facility go-live generates significant demand for implementation support, training, change management, and integration services. Small businesses with health IT experience and existing VA relationships are well-positioned.

At HHS, the picture is more mixed. The overall HHS budget sits at $156.7 billion (down 1.2% year-over-year from FY2025), and DOGE-driven cuts have hit advisory and consulting programs. But the modernization agenda is intact. HHS requested $100 million for cybersecurity in FY2026, $130 million for a new chief technology officer office, and the HHS One Professional Services Solutions (HOPSS) contract — a $3.6 billion small-business set-aside — is moving toward award in 2027.

For veteran-owned businesses, the VA is the most favorable agency in the entire federal market. The Veterans First contracting policy gives SDVOSBs and VOSBs priority over all other set-aside categories at the VA — not just preference, but mandatory sequencing. If you hold SDVOSB certification, the VA should be at the top of your agency target list. Read our SDVOSB contracts guide for a full breakdown of how to position for VA work.

Military construction is one of the most consistent and predictable spending categories in the federal market. Congress approved $19.737 billion for military construction and family housing in FY2026 — 4.5% above the President's request. The projects in the pipeline are large, multi-year, and clearly defined.

The priority investments for FY2026 MILCON include:

• Navy shipyard modernization: Dry-dock modernization at major Navy shipyards supporting Columbia and Virginia-class submarine production. These are multi-year construction programs with significant civil and specialty construction work.
• Indo-Pacific posture upgrades: Hardened facilities and airfield improvements on Guam and across the Pacific are a stated DoD priority. Engineering, construction, and facilities management work for small businesses with relevant experience.
• Child Development Centers: Congress appropriated funding beyond the President's request specifically for on-base Child Development Centers — construction and renovation work for small contractors familiar with DoD installation projects.
• PFAS environmental remediation: The NDAA includes expedited funding for remediation of PFAS contamination at military installations. Environmental engineering and construction firms should be tracking these requirements closely.
• Civilian facilities O&M: Beyond DoD, facilities operations and maintenance (O&M) at GSA-managed federal buildings remains a steady market with hundreds of small contract opportunities across every region.

Construction government contracting has specific compliance requirements — bonding, Davis-Bacon Act wage rules, and SBA size standards that differ by project type — that separate prepared bidders from aspirational ones. If you're new to federal construction, understand the compliance requirements before you bid your first solicitation.

The Biden administration announced that small businesses received a record $183 billion in prime contracts in FY2024, representing 28.8% of all federal contracting dollars — exceeding the 23% statutory goal for the fourth consecutive year. That headline is accurate and meaningful. But it doesn't capture the structural challenge underneath it.

The number of small businesses actively participating in the federal market has declined by 49% since FY2010. More dollars are flowing to small businesses, but fewer businesses are capturing them. That means the pie is shared among a shrinking group of active participants — which is either concerning or an opportunity, depending on where you sit.

The implication: entering the federal market right now still makes sense, but the barriers are real. The businesses winning are the ones who invest in understanding the market before they bid — not the ones who find a SAM.gov opportunity and immediately start writing a proposal. Use the CapturePilot matching engine to surface opportunities where your specific certifications, NAICS codes, and past performance give you a structural advantage — not just opportunities that sound interesting.

If you haven't determined which set-aside certifications apply to your business, that's the first thing to fix. Certifications like 8(a), SDVOSB, WOSB, and HUBZone can fundamentally change your competitive position — not just your eligibility. Our guide to federal contracting certifications covers which ones actually move the needle and how to pursue them.

The 2026 federal market rewards specificity. Broad capability statements and generic proposal language don't win in an environment where contracting officers are managing more pressure with less time. Here's the positioning framework that applies right now.

The biggest mistake small businesses make in a shifting market is treating their pipeline as a set of individual bids rather than a portfolio of relationships and positions. Managing that portfolio systematically — knowing your pipeline health at every stage — is what separates businesses that grow in this environment from ones that scramble.

The CapturePilot pipeline tool gives you a single view of every opportunity you're tracking, from sources sought through proposal submission, so you can see your probability-weighted revenue, identify where you're thin, and manage capture work before deadlines become emergencies.