Rundown of FY2026 Budget Proposal: How It Impacts GovCon

Introduction 

In any budget proposal, there are winners and losers. The recent White House’s FY2026 budget proposal exemplifies this allocation disparity very well. It should not come as a surprise to anyone paying attention to the current administration that the Department of Defense and Department of Homeland Security have been allocated substantial funding increases, while numerous other departments face significant budgetary constraints.   

Figure 1 – National security is the winner overall, with many details still TBD.

What’s Going on Within the Wins

While Figure 1 shows DoD and DHS as the big winners, it’s worth exploring specific areas that define areas of opportunity and risk to GovCon businesses. Many adjustments made in the budget do not have a direct impact on GovCon businesses; rather, they more directly impact the “everyday citizen”, along with recipients of grant programs (state and local governments, universities, research institutions), which depend on that funding.   

Let’s focus on specific aspects of the overall budget proposal as disclosed and how it may impact GovCon.   

Note that we will not review every agency illustrated in Figure 1. The following are selected highlights we find relevant to U.S. Government contractors. This is NOT intended to be all-inclusive.   

U.S. Department of Defense

The immediate winners are aerospace, shipbuilders / maintainers, and technology developers.  Additionally, their subordinate supply chain partners and service contractors support production operations.   

U.S. Department of Homeland Security

DHS is a big winner in the FY2026 budget proposal. There are few surprises here. It is worth noting that the USCG’s boosts parallel similar boosts for the U.S. Navy.   

It’s also noticeable that security capacity enhancements are partially handled via grants and technical assistance. Contracts may be involved to administer the grants and provide technical assistance. 

Undoubtedly, those who are construction contractors “win” in this when and if any construction contracts are awarded. CBP and DHS S&T are always exploring new border security technologies. USCG gains will be similar to the U.S. Navy, but on a smaller scale. It’s unclear how much USSS will outsource to help with their enhanced readiness.  

U.S. Department of Veterans Affairs

The VA is a frequently politicized topic regarding the provision of care for our veterans. The current budget proposal includes both funding increases and reductions across various VA programs. 

On the losing side of the ledger are IT systems. There have already been significant cancellations, which is unlikely to stop anytime soon. There is an expansive ecosystem of large systems integrators and service-disabled veteran owned small businesses who have thrived working for the VA. Many of these won T4NG2 during its initial award phase; consequently, what was previously considered an exceptionally desirable client has lost some of its luster.  

U.S. Department of Transportation

The FY2026 budget is a boon for DoT and specifically for FAA contractors. Other general construction (and specialized firms) businesses will likely benefit.   

The entire ecosystem around the FAA has very specialized knowledge to support the overall National Airspace System (NAS).  Anyone involved in staffing and training air traffic controllers stands to gain. The major gain for the FAA is investment in the NAS, which will positively impact some (soon to be very pleased) aerospace contractors, both large and middle market. 

U.S. Department of Justice

There are significant reductions in grants-related funding, which should not be a surprise to anyone paying attention to current administration priorities and policies.   

There are no real gains in the budget here, as the overall DoJ budget is reduced. We should look more closely at how they are trimming their budget, especially considering how this affects companies that provide contract support and specialized expertise to the DOJ.  

• FBI is to be more focused on counterintelligence and counterterrorism. 
• FBI is “moving to the field,” which means moving assets outside of the greater Washington, D.C. region into areas such as Huntsville, AL, where a greater buildout of a facility based in the Redstone Arsenal accelerates. 
• DEA focuses its operations more in Mexico, Central America, South America, and China, while pulling back from Europe. 
• ATF focuses its efforts on illegal firearms traffickers related to violent crime and gun tracing specific to criminal organizations such as MS-13 gang members. 

U.S. Department of Commerce

NOAA was an early DOGE target, so it should be no surprise that Commerce has not fared well. Germane to contractors who serve NOAA, we highlight areas of budget reductions: 

• Significant reductions to Operations, Research, and Grants 
• Reduction of procurement of weather satellites and infrastructure specific to climate observations 

U.S. Department of the Treasury

The IRS – which is the Treasury’s biggest agency in terms of budget and staff – will be cutting back on technology upgrades and modernization efforts. This is a significant development given how much the IRS typically spends on information technology.  

U.S. Department of Labor

There are extensive reductions planned for the Job Corps programs and related contracts.  Any involvement in these programs will certainly result in spending reductions, as the administration suggests these resources could be redirected toward alternative workforce development initiatives more closely aligned with the President’s economic opportunity priorities.   

National Science Foundation

Considering much of the NSF’s budget is centered around grants and grants management, these reductions are significant.  The budget aims to reduce funding for climate and clean energy initiatives, along with social, behavioral, and economic sciences that are deemed lower priority. However, funding for areas involving artificial intelligence and quantum computing remains unchanged. 

National Aeronautics and Space Administration

If this budget goes through, NASA will see significant reductions in Earth and Space science research programs while gaining some in human space exploration.   

Legacy human exploration systems such as the Space Launch System (SLS) rocket and Orion capsule are being replaced with more cost-effective commercial systems. Additionally, Space Technology funding is reduced, cutting failed propulsion projects and other initiatives deemed unnecessary or better suited for private sector development.  Other legacy systems, such as the International Space Station, will be reduced in anticipation of their retirement.   

While human space exploration is the lone “winner” in this budget, while related mission support such as IT services, NASA Center operations, facility maintenance, and construction and environmental compliance activities will be streamlined and reduced across NASA centers.  

 U.S. Department of Energy

Substantial budget cuts planned are largely centered on drastic reductions to green energy, energy alternative programs, climate research, and environmental programs. Some reductions are also seen in nuclear energy and fossil energy research. 

National security-related programs are largely unaffected, such as programs from the National Nuclear Security Administration. 

U.S. Department of State/USAID 

We are all well aware of the fate of USAID and its remnants being absorbed into the Department of State. Whether this budget is good news or bad news depends on your point of view (and perhaps your profession or investments). 

There are significant investments in the new America First Opportunity (A1OF) Fund and more funding for the Development Finance Corporation (DFC). 

As we examine the likely impact on GovCon, there are significant reductions in:  

• Economic support funds and development assistance  
• Disaster relief 
• International Narcotics Control & Law Enforcement 
• Democracy initiatives 

…and more.  

We would expect contracts connected to the Bureau of International Narcotics and Law Enforcement to be drastically impacted.  

U.S. Department of Health and Human Services 

Almost every single operating division will experience reductions as a result of the significant restructuring of HHS as a whole. Highlights include: 

• Consolidations across Health Resources and Services Administration (HRSA) specific to managing grants, health workforce development programs, education, and training. 
• Significant reduction of the Centers for Disease Control and Prevention (CDC) in terms of reducing broad categories of grants and research. 
• Drastic reduction in research spending and grant funding available to the National Institute of Health (NIH).   
• Eliminations of Substance Abuse and Mental Health Services Administration (SAMHSA) public health programs. 
• Reduction of the Agency for Healthcare Research and Quality (AHRQ) research. 
• Slight reduction in Centers for Medicare and Medicaid Services (CMS) program management. 
• Eliminating the Administration for Strategic Preparedness and Response (ASPR) Hospital Preparedness Program 

If you want to know more about the direct impact on your business and future plans, we incorporate our ongoing exploration of the “new normal” environment into all of our market intelligence work.  Contact us today to find out more. 

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Author: Brian Lindholm