FY 2025 Federal Contract Spending in Review – How Did the Year Settle Out?

By any account, fiscal year (FY) 2025 was a dizzying year in the federal contracting market, marked by significant change and the resulting uncertainty that such change creates. Now that we are well into FY 2026, let us look at where we finished in FY 2025, contract spending-wise, to see how the year panned out.

Contract Data Reporting Delays

Given that FY 2026 began with a 43-day government shutdown, it was prudent to wait a bit before pulling data to give agencies a chance to begin digging out of any backlog in their reporting of contract obligations. It has been just about a month since the end of the latest shutdown, so we may be hopeful that the Civilian sector data is reasonably complete and able to provide some general observations. As usual, one very key aspect to consider in evaluating FY 2025 contract spending is the customary reporting lag by the Department of Defense (DoD), which traditionally may lag up to 90 days.

Total Federal Contract Spending in FY 2025

To date, federal departments and agencies have reported $744.7B in total contract obligations for FY 2025, compared to $776.0B in FY 2024 and $778.1B in FY 2023. While the 2025 drop is significant, the DoD has yet to report Q4 FY25 spending in a significant way, so view this drop with that in mind. The Q4 FY25 amount will only go up from here as DoD reports.

It is noteworthy that FY 2023 and FY 2024 were historically high years for federal contracting, so even if FY 2025 settles into a lower level, it still may prove to be a strong year for contractors, uncertainty notwithstanding.

Looking at quarterly performance at the total contracting level, Q1 and Q2 of FY 2025 showed strength early in the year, with Q1 up 8.2% and Q2 up 12.2% year-over-year. However, that momentum was not sustained into the second half of the fiscal year, with Q3 down 10.3%. Still, Q3 FY25 was on par with FY 2022 and FY 2023.

Breaking out the Civilian and Defense sectors side-by-side provides a more nuanced perspective. The Civilian sector overall had a record-setting FY 2025 for total contract spending, coming in at $309B, or 4.7% above FY 2024. Further, Q4 FY25 showed a 27% increase from Q4 FY24, but clearly some Q3 FY25 spending slipped into Q4.

  

The Defense sector had a strong Q1 through Q3 in FY 2025, compared to FY 2024. This kept Defense roughly on-par with FY 2023 through Q3 of these years. We will just have to wait to see where Q4 FY25 lands as DoD reports their data over the next month or two.

Federal Information Technology Spending in FY 2025

Homing in on Information Technology contract spending provides a view into one of the most robust contracting market segments. Like total contracting, IT has shown significant growth over the last several years. In FY 2025, Q1 and Q2 were strong quarters, while Q3 showed some softening over previous years. It is interesting that total IT spending for FY 2025 is currently sitting at just $9B below FY 2024, which was a historic year for IT contracting. We can expect DoD to help boost that with their reporting as it is completed.

Separating the two buying sectors reveals just how well FY 2025 performed against previous years. In Civilian, except for FY 2024, FY 2025 exceeds all recent previous years. If any agency reporting still lags due to the latest shutdown, then FY 2025 could potentially compete with FY 2024.

  

In the Defense sector, Q1 through Q3 of FY 2025 kept pace with the previous two fiscal years and exceeded FY 2021 and FY 2022. With some slight variances, Q1 and Q2 of FY 2025 were a bit more dominant than most previous years. Finally, for Q4 FY25 DoD would need to report just $9B more in IT contracts to match the historic Q4 FY24 and exceed the total FY 2024 IT spend for the department.

Federal Professional Services Spending in FY 2025

The federal professional services market has faced some significant challenges in FY 2025, perhaps more than any other contracting market segment. From the Trump Administration’s efforts to reduce spending on consulting services to the DoD’s proposed cuts to Advisory and Assistance Services going forward, the pressure on federal agencies to reduce their contract spending on professional services has been strong. In FY 2025, agencies reported lower PS spending in each of the first three quarters of the year, with Q4 likely to follow suit. In some respects, FY 2025 spending could eventually settle in around FY 2022 levels.

Placing the Civilian and Defense sector PS spending alongside each other shows that the Civilian sector has taken the bulk of the hits in FY 2025, with those occurring during Q2-Q4 under the Trump Administration’s trimming efforts.

  

While the DoD is also seeking to reduce spending on PS contracts, the Defense sector in FY 2025 does not appear to have been as impacted as Civilian agencies, which is largely where we have seen contract terminations and cancelations occur.

Closing Thoughts

Based on the aggregate data, contracting in FY 2025 turned out to perform better than many people anticipated, even compared to historic contract spending in FY 2023 and FY 2024. IT contracting essentially held strong while professional services spending received the most significant reductions. That is from a top-line spending perspective, with DoD data still trickling in over the next 30 days or more. That data will almost assuredly improve the overall picture. The remaining question is, how much?