Overview: A Market Evolving at Breakneck Speed
When we began tracking federal AI spending in 2022, we described the market as chaotic, immature, and dominated by small experimental contracts. Four years later, the landscape has transformed beyond anything we anticipated. The Trump administration’s America’s AI Action Plan, which emphasizes deregulation, infrastructure expansion, and global AI dominance, has dramatically accelerated federal investment. As we recently wrote, the plan aims to remove “regulatory barriers and ‘ideological’ bias in AI,” and the data show that agencies have responded with unprecedented enthusiasm.
The statement in our most recent report was that “the 2026 budget was even more staggering” captures the scale of change. Federal AI spending has not merely grown. It has exploded.
A Surge in Spending Without Precedent
Between 2024 and 2026, our data from Leadership Connect shows that obligated federal AI spending increased from USD 675m to USD 7.2b. This represents a 966 percent increase. Potential contract value rose even more sharply, from USD 4.6b to USD 91.8b. This represents a 1,912 percent increase. This surge mirrors global trends, with worldwide AI spending projected to reach USD 2.52t in 2026.
Despite this dramatic expansion, the structure of the market remains concentrated. Two NAICS categories, Professional, Scientific, and Technical Services (54) and Information (51), account for 98 percent of all federal AI spending. As we noted, “together, NAICS 54 and NAICS 51 represent 98 percent of the federal AI spending.” This suggests that while the market is growing, it is doing so within a narrow band of technical and advisory services.
This concentration has implications for workforce development, vendor diversity, and long-term capability building across government.
Defense Dominance and a Structural Imbalance
The most consequential finding in our 2026 analysis is the overwhelming dominance of the Department of Defense. In 2026, the department accounted for 1,319 of the 1,743 AI contracts and 98.9 percent of all potential contract value. This equals USD 90.7 billion and represents a 1,605 percent increase from 2024.
Other agencies, including HHS, NASA, and Commerce, saw modest activity. However, their spending is dwarfed by the scale of defense investment. In the report, we observed that “all other agencies substantively became a rounding error.”
This imbalance raises important questions for public management. How do civilian agencies build AI capacity when they command only a fraction of the resources? What risks emerge when nearly all federal AI innovation is defense oriented? How does this shape the federal AI workforce of the future?
Vendor Landscape: Consolidation and Experimentation
The vendor ecosystem reflects a market in transition. Large, established firms such as Palantir, MITRE, ECS Federal, Booz Allen Hamilton, and SAIC now dominate total contract value. At the same time, 87 percent of vendors hold only one or two contracts. This indicates that the market remains open to experimentation and new entrants.
This duality is healthy. It suggests that while major integrators are scaling enterprise level AI solutions, smaller firms continue to drive innovation at the edges.
However, participation by small and women owned businesses remains alarmingly low. Only 12 contracts were set aside for service-disabled veteran owned small businesses. Only one contract went to a women owned small business. Whether this decline stems from policy changes or structural barriers, the result is the same: we are underutilizing a critical source of innovation. As we wrote, “ignoring this pool of vendors may be a mistake.”
Contracting Approaches: Signs of Maturity and Caution
The rise of firm fixed price contracts indicates growing clarity around requirements and deliverables. Agencies and vendors increasingly understand what AI work entails and how to price it.
At the same time, order dependent and cost-based contracts still represent the majority of potential value. This reflects ongoing experimentation, uncertainty about long term mission needs, and the rapid evolution of AI capabilities.
This mix of maturity and caution is typical of a market transitioning from pilot projects to enterprise adoption.
Assessing the Administration’s Three Pillars
The Trump administration’s AI strategy rests on three pillars and we assessed the government’s performance in addressing these pillars.
This pillar is strongly supported. The explosion of contract volume and diversity reflects accelerated innovation across agencies.
- Building AI Infrastructure
This pillar is also supported. With more than 4,000 data centers nationwide and demand expected to triple by 2030, AI infrastructure is becoming a major federal priority.
Fulfilling this pillar is less evident. Because nearly all federal AI spending is defense oriented, these advances are unlikely to be shared globally. As we noted, “it is not clear if the U.S. is providing any noticeable or impactful leadership in AI practices and policies.”
Looking Ahead: A Market Still in Transition
Federal AI spending in 2026 reflects a market undergoing rapid expansion but not yet full maturity. The dominance of defense spending, limited participation by small and women owned firms, and continued reliance on flexible contracting vehicles all point to a system still evolving.
As we concluded, the federal government is still “in the experimental phase of AI,” and many of the most important developments are still ahead.
