If we analyze the landscape of U.S. federal procurement, defense contractors are eyeing the fiscal year 2026 (FY26) budget submissions from the Department of Defense (DoD) and Department of Homeland Security (DHS) with keen interest. These budgets, in combination with reconciliation bills, signal significant opportunities for contractors offering innovative solutions in border security, cybersecurity, supply chain enhancements, and more. Drawing from insights shared by Stephanie Kostro, President of the Professional Services Council (PSC), in a recent discussion with Terry Gerton, this newsletter explores the key opportunities, challenges, and strategies for contractors looking to capitalize on these developments. Whether you’re a technology provider, logistics expert, or professional services firm or whichever sector you are willing to thrive your businesses on , understanding these budget priorities can position your business for success in 2025 and beyond. 

Understanding the FY26 DoD Budget: A Goldmine for Contractors

The DoD’s FY26 budget, recently released, is a treasure trove of opportunities for defense contractors, with approximately 40% of PSC’s 400 member companies actively engaged with the department. Below are the critical areas where contractors can make a significant impact, so get ready to take notes. These stuff do come handy.

1. Border Security: A Multi-Billion Dollar Priority

The DoD budget allocates over $5 billion to achieve 100% operational control of the southwest border, a priority that intersects with DHS objectives. This funding opens doors for contractors offering:

• Technology Solutions: Advanced surveillance systems, drones, and AI-driven monitoring tools to enhance and keep the borders secured.
• Personnel Support: Staffing solutions for border operations, which includes logistics and administrative support.
• Detention Center Operations: Approximately 90% of detention centers along the border are contractor-operated, providing essential day to day services like food, shelter, family support, and education.

For contractors, this is a chance to showcase expertise in scalable, technology-driven solutions that align with national security goals. Companies with experience in integrating cutting edge technologies or managing high-volume service contracts will find ample opportunities to bid on these initiatives.

2. Cybersecurity: A $15 Billion Opportunity

Cybersecurity remains a cornerstone of the DoD’s strategy, with over $15 billion allocated in the FY26 budget. This substantial investment reflects the department’s reliance on private sector expertise to combat evolving cyber threats. Contractors can expect opportunities in:

• Developing and deploying advanced cybersecurity software and hardware.
• Providing managed services for network security and threat detection.
• Offering training and advisory services to bolster DoD’s cyber defenses.

Given the DoD’s emphasis on cutting-edge technologies, contractors with innovative cybersecurity solutions such as AI-driven threat analysis or zero-trust architectures can gain a competitive edge.

3. Supply Chain Enhancements: $1.3 Billion for Resilience

The DoD is investing $1.3 billion to strengthen the industrial base supply chain, a critical area for contractors specializing in logistics, manufacturing, and supply chain management. Opportunities include:

• Streamlining logistics for military operations, particularly in the Indo-Pacific region.
• Developing resilient supply chain solutions to support mission-critical equipment.
• Implementing technologies like blockchain or IoT for real-time supply chain visibility.

Contractors with expertise in optimizing supply chains or delivering just-in-time logistics will find this a fertile ground for growth. Small business also can have their chunk of the benefits in this sector.

4. Nuclear Enterprise and China Deterrence: The Golden Dome

The $25 billion down payment for the “Golden Dome” initiative, aimed at modernizing the nuclear enterprise, the goal is to defeat China. This is a flagship priority in both the DoD budget and the reconciliation bill. Contractors can contribute by:

• Developing innovative capabilities for nuclear modernization.
• Supporting R&D for advanced defense systems.
• Providing advisory and technical services to enhance deterrence strategies.

This initiative underscores the DoD’s reliance on private sector innovation, making it a huge are for interest for the contractors with expertise in high-tech defense solutions.

5. Operations and Maintenance (O&M) and RDT&E: Steady Opportunities

While the O&M budget for FY26 remains flat compared to FY25, it continues to offer significant opportunities for contractors in:

• Platform Sustainment: Maintaining and upgrading military equipment and facilities.
• Logistics Support: Managing supply chains and transportation for global operations.
• Research, Development, Testing, and Evaluation (RDT&E): Driving innovation in defense technologies, particularly for the Pacific Deterrence Initiative (PDI), which includes over $10 billion to counter China and support Taiwan.

Contractors with experience in facility management, logistics, or R&D can leverage these stable funding streams to secure long-term contracts. The key is to keep their eyes open.

6. Navigating Insourcing Risks

A May memo from the Secretary of Defense raised concerns about insourcing IT management and advisory services, prompting contractors to closely monitor budget materials for indications of the DoD’s stance. While insourcing poses a risk, the significant investments in cybersecurity and supply chain enhancements suggest continued reliance on private sector expertise. Contractors should:

• Highlight their unique value propositions, such as proprietary technologies or specialized skills.
• Engage early with DoD stakeholders to shape requirements before insourcing decisions are finalized.
• Monitor future budget releases for clarity on insourcing trends.

DHS Budget: Border Security and Immigration in Focus

The DHS budget, combined with $170 billion in the reconciliation bill, emphasizes border security and immigration enforcement, aligning with President Trump’s priorities. Key opportunities for contractors include:

1. Border Barrier System: Technology Over Walls

The shift from a physical wall to a “border barrier system” opens opportunities for contractors offering:

• Remote Surveillance Technologies: Drones, sensors, and AI-powered monitoring systems to secure the border without heavy reliance on physical infrastructure.
• Data Analytics: Tools to process and analyze border activity in real-time.
• Maintenance and Support: Services to maintain and upgrade border security technologies.

Contractors with expertise in smart technologies or remote monitoring can position themselves as leaders in this evolving space.

2. Detention Center Operations

With over 90% of detention centers operated by contractors, there’s a strong demand for services that ensure humane treatment, including:

• Food and shelter services.
• Family support and education programs.
• Health and safety compliance solutions.

Contractors with a track record of compassionate, efficient service  can secure and safeguard long-term contracts in this area.

The FAR Overhaul: A New Era for Contractors

The ongoing Federal Acquisition Regulation (FAR) “revolutionary overhaul” is reshaping how contractors engage with federal agencies. Lets study the key developments :

• Comment Periods and PSC Engagement: The PSC is facilitating member input through its FAR overhaul action center, allowing contractors to put their opinions revisions or rescissions to FAR provisions.
• Compliance Challenges: Contractors must navigate legacy FAR provisions in existing contracts while adapting to new regulations. PSC is working to ensure compliance through education and advocacy.
• Pre-RFP Opportunities: The overhaul encourages contractors to provide input before RFPs are issued, promoting common-sense compliance and reducing administrative burdens.

Contractors should stay on top by:

• Submitting comments to influence FAR revisions.
• Training teams on new compliance requirements.
• Leveraging pre-RFP engagement to shape contract terms.

Legislative Proposals: Forged Act and Speed Act

The PSC is advocating for legislative changes to support contractors, including:

• Forged Act (Senate): Proposed by the Senate Armed Services Committee, this act aims to streamline acquisition processes and enhance contractor-government collaboration.
• Speed Act (House): Winding through the House Armed Services Committee, this act focuses on accelerating procurement to meet mission needs.

Contractors should monitor these bills for opportunities to influence policy and secure favorable terms.

Strategic Recommendations for Contractors in 2025

To capitalize on these defense contracting opportunities in 2025, consider the following strategies:

1. Leverage Technology: Invest in AI, cybersecurity, and remote surveillance solutions to align with DoD and DHS priorities.
2. Engage Early: Participate in pre-RFP discussions to shape requirements and demonstrate expertise.
3. Focus on Compliance: Stay ahead of FAR changes by training teams and collaborating with industry groups like PSC.
4. Highlight Value-Added Services: Offer training, sustainability solutions, or surge support to differentiate your bids.
5. Monitor Budget Trends: Regularly review DoD and DHS budget materials for emerging opportunities in RDT&E, cybersecurity, and supply chain management.

Case Study: FedClean’s BPA Success as a Model

To illustrate the power of strategic contracting, consider the case of FedClean, a mid-sized janitorial firm that leveraged a GSA Schedule BPA to grow its federal footprint. By bundling eco-friendly cleaning services, offering surge support, and implementing automated inventory management, FedClean achieved a 150% increase in order volume and a 20% reduction in per-facility costs. This success underscores the importance of aligning offerings with agency priorities (e.g., sustainability) and streamlining operations through technology.

Conclusion: Seize the Moment in Defense Contracting

The FY26 DoD and DHS budgets, combined with the FAR overhaul and legislative proposals, present a dynamic landscape for defense contractors in 2025. By focusing on high-priority areas like border security, cybersecurity, and supply chain resilience, contractors can secure lucrative contracts and build lasting relationships with federal agencies. Stay proactive, leverage technology, and engage with industry advocates like PSC to navigate this complex but rewarding market. For the latest updates on federal contracting opportunities, sign up for our daily newsletter and never miss a beat.