Federal IT Spending Trends: Why Growth Is Contracting and Where It Is Shifting

TBR estimates the federal IT market will reach nearly $140 billion in total market value by CY30, growing at a 2.2% CAGR between CY26 and CY30. After federal IT spending surpassed $126 billion in CY24, the Trump administration’s Department of Government Efficiency (DOGE) and the 43-day federal shutdown upended the federal IT market, severely disrupting federal technology procurement, particularly in the civilian space. Growth slowed significantly in CY25, and TBR projects overall federal IT spending will contract in CY26, primarily due to continued softness in civilian IT spending. IT spending in the defense and intelligence segment remained essentially stable in CY25, and growth will accelerate to midsingle-digit rates by CY27.
 
TBR anticipates the civilian IT market will remain very challenging in federal fiscal year (FFY) 2026 with continued volatility in agency IT budgets, unexpected stoppages on ongoing programs, and continued scope reductions or outright cancellations of discretionary, consulting-focused spending. Stabilization in the civilian market might not occur until FFY27, but this remains unclear. Conversely, the Trump administration has proposed a double-digit increase in defense spending, which will flow through to IT budgets in the Department of Defense (DOD) and Intelligence Community (IC), particularly in areas of national security (e.g., missile defense, enhancing cybersecurity offense as well as defense and border security), which will receive top priority. Federal IT acquisition is also slowly pivoting to embrace outcome-based contracting, while the DOD looks to accelerate IT purchasing by adopting new and innovative IT procurement approaches.

DOGE’s aggressive review of consulting contracts and the advisory aspects of IT services awards in FFY25 may have negative downstream consequences for IT transformation engagements

Scenario 1: What if DOGE-related termination and scope reduction of consulting contracts in FFY25 negatively impact broader digital transformation engagements in subsequent years?

TBR estimates that as much as 90% of DOGE-related terminations were for services (not product) contracts, affecting over $20 billion worth of engagements in FFY25. TBR believes tighter scrutiny of advisory work is now the standard in federal IT and professional services procurement, and this will remain the case for the foreseeable future. Several federal systems integrators (FSIs), particularly those hardest hit by the cancellations or scale-backs of consulting contracts in FFY25, are now apprehensive about how the new normal in federal IT procurement could impact future engagements.
 
Contractors fear that because DOGE’s definitions of “consulting services” were imprecise and ambiguous, even services contracts that are predominantly technology-based could be subject to gratuitous or needless scrutiny, especially given the heightened pressure that vendors will be under to clearly demonstrate how new IT programs will streamline operations and reduce operating costs.
 
To avoid having legitimate IT services erroneously reclassified as nonessential “consulting services,” FSIs will reframe IT transformation engagements to emphasize operational improvement, directly link fees to measurable outcomes and increase leverage of reusable modernization platforms. Vendors will also more heavily underscore the AI and cybersecurity components of an engagement while productizing more elements of their respective portfolios.
 
The traditionally advisory aspects of a digital transformation or IT services engagement will have to be deemphasized, or provided pro bono, potentially eroding margins and future margin opportunities. FSIs will need to defend pricing by directly tying billing to customer savings as efficiency requirements continue to expand across the federal IT landscape. Federal IT contractors across the board will also have to lean heavily into the embrace of outcome-based, fixed-price contracting in federal IT procurement.
 
CACI stands out to TBR as an FSI uniquely positioned to adapt to the evolving environment, as its portfolio has steadily shifted toward more platform- and product-based solutions over the last several years, while the company has been evolving its delivery model to be more software-centric, IP-heavy and outcome-focused. Despite having adopted more of a consultative mindset in recent years, CGI Federal has also been promoting longer-term, platform-based solutions (and winning strategic engagements with these offerings) to modernize and streamline federal financial, supply chain and procurement systems — an approach that may enable the company to avoid having its technology-based offerings mistakenly interpreted as nonessential consulting services. Leidos has been expanding its suite of repeatable digital solutions to enhance project governance and the predictability of program workflows and costs, while increasingly splitting up parts of larger contracts and rescoping to deliver according to outcome-based criteria.

Federal IT decision makers may slow their adoption of AI if deployments do not produce results; uncertainty in the federal market could result in greater responsibility for FSIs

Scenario 2: What if there is not a meaningful, instant ROI on AI?

Technology integration drives production scaling and is traditionally a core competency of commercial vendors. The challenge for these companies ultimately lies in demonstrating meaningful value and at scale. Although proprietary AI platforms are table stakes for them, a study by the Massachusetts Institute of Technology in July 2025 discovered that only 5% of enterprise AI deployments were able to produce a quantifiable ROI.

Scenario 3: What if hyperscalers become more risk-averse?

As FSIs’ contracts came under scrutiny from DOGE and the 43-day government shutdown throttled vendors’ operations, hyperscalers also experienced disruptions. Given the federal market’s recent instability, hyperscalers like Amazon Web Services and Microsoft may ultimately become more risk-averse.
 
Several FSIs such as ICF International have leaned into commercial energy and other areas to mitigate the material impact of these disturbances. Similarly, hyperscalers could try to reduce their risk by limiting their exposure. Hyperscalers may be more selective with bidding, pursuing fewer opportunities where the cloud service providers are the primes. Hyperscalers would also shift their rapidly evolving partnership models to make FSIs bear more accountability, potentially trimming vendors’ top and bottom lines by forcing them to manage the expanded delivery risk and take on greater workloads. Additionally, the demand for cleared talent — particularly cloud security engineers — would surge, further pressuring FSIs’ margins.

New Research: Federal IT Services Market Forecast

Technology Business Research, Inc., is pleased to announce the launch of the Federal IT Services Market Forecast, the first market forecast in our Federal IT Services research area.
 
“The extreme volatility in the federal IT market in 2025, after a multiyear run of unprecedented growth, has left federal IT vendors and their partners scrambling to make sense of how future near- and long-term technology investments by the world’s largest single buyer of IT and IT services will play out,” said TBR Senior Analyst and report co-author John Caucis.
 
“Our new Federal IT Services Market Forecast provides TBR’s unique insights, developed through the lens of the leading federal systems integrators (FSIs), regarding federal IT spending trends over the next five years and how the industry’s largest IT contractors will adapt to shifting federal technology investment patterns.”
 
Focusing on the top 11 companies serving the U.S. federal government’s IT services needs — Accenture, Booz Allen Hamilton, CACI, CGI, IBM Consulting, ICF International, Leidos, KBRWyle, General Dynamics Technologies, Maximus and SAIC — this report includes five-year CAGR analysis for each covered company and analysis of both the civilian sector and the defense and intelligence sector.
 
The first publication of this annual report is now available. If you would like to learn how to access the full research, click here.