Over the last few weeks, I have been exploring federal spending data to get a sense of what agencies could potentially spend on information technology (IT) contracts in the fourth quarter (Q4) of fiscal year (FY) 2026.

First, I considered what contractors might expect for Q4 FY26 IT spending if agencies spend 90% of what they spent in all of FY 2025, adjusted for quarterly fluctuations and any underreporting in Q3 of this year. Second, I looked at the spending status at this point in FY 2026 and monthly trends in Q4 to put some data behind expectations and get a sense of the potential opportunity.

This week, I will focus on small business contract spending trends over the last few years and how Q4 FY26 may take shape. The following contract obligations data presents what federal departments and agencies spent on IT goods and services with contractors that were designated as a small business at the time of the contract award.

Federal IT Contract Spending with Small Businesses Slowed In FY 2025

Looking at the historical spending data over the last five years reveals that while overall IT spending has grown, agency spending with small businesses (SBs) has also grown, although unevenly. More recently, agency spending with SBs has plateaued.

The proportion of agency IT spending with SBs has remained in the 33-35% range, with FY 2023 peaking at 35% and FY 2022 and FY 2025 coming in at 33%. FY 2025 was a year of significant challenges and changes in the federal contracting landscape, especially for SBs, so after three years of growth IT contracting in FY 2025 fell by just over $1B (-2.2%) from the FY 2024 historic high.

Total IT Spending with Small Businesses by Fiscal Quarter

Narrowing our focus to the last few years and how spending with SBs was distributed among fiscal quarters provides some perspective on trends and the potential for Q4 FY 2026.

Total federal spending with SBs for IT in FY 2025 dropped from $43.2B in FY24 to $42.2B in FY25. Most of the FY25 reduction occurred in Q3, while Q1 and Q2 saw growth from FY24 to FY25.

Looking at FY 2026 year to date (YTD), spending with SBs in Q1 through Q3 in aggregate came in at $22.5B, slipping back to below the FY25 level of $24.5B and the FY24 level of $24.9B. Again, Q3 of FY26 is significantly underreported due to Defense reporting lags so it is difficult to assess what the final Q3 amount will be, but another $2B would need to be reported for Q3 to get on par with Q1-Q3 FY25. One bright spot is that FY26-YTD reported spending is ahead of where we were at this same point in FY25 by $2.6B.

Comparing the Civilian and Defense segments provides some perspective into the nuances of each segment. Civilian agency spending with small businesses fell by $1.7B in FY 2025 compared to FY 2024, with those reductions coming in Q3 and Q4. In contrast, Q2 and Q3 of FY26 have helped put FY26 on a much more positive growth track (after a slow Q1 due to the extended shutdown and delayed funding for DHS) than FY25.

For Q1-Q3 FY26, the Civilian segment is $1.0B ahead of what agencies spent in Q1-Q3 FY25 and just $200M below the same period in FY24. Further, reported Q4 FY26 (i.e., July) spending is $1.0B ahead of where the Civilian agencies were at this point last year, so some positive signs are there that Civilian agencies are working through some of the lingering impacts of the shutdown and the numerous changes that they experienced in FY 2025.

     

The Defense segment shows some similar year-to-year trends in its quarterly SB obligation rates from FY24 to FY25, with growth in Q1 and Q2 and reductions in Q3 and Q4. However, the Defense segment overall grew in FY 2025, albeit by a marginal $700M. For FY26-YTD the Defense segment has reported $10.2B in SB IT obligations, which is on par with what was reported at this point in FY25.

Fourth Quarter IT Spending with Small Businesses – Monthly Trends

Narrowing the focus specifically on Q4 spending, historically both the Civilian and Defense segments spend roughly 50% of their Q4 IT obligations with SBs in September. However, FY 2025 was an unusual Q4 for the Civilian segment in that these agencies in aggregate spent 57% of their Q4 total in September, versus 50% in September FY 2024. Even with that growth in September, the reductions in July and August 2025 resulted in a roughly $600M drop in Civilian Q4 SB spending. For FY 2026, July is showing signs of rebounding from the FY25 slump, but not enough to reach the FY24 level.

     

For Defense, we saw slight growth in July FY25 compared to July FY24, only then to see $400M in reduced spending in August and September, leading to an overall $100M (-1.4%) reduction in Defense SB contracting in FY 2025. At this point in Q4, the Defense components have reported just $60M in IT obligations with small businesses, further illustrating the reporting lag compared to Civilian agencies.

Potential Q4 FY26 IT Spending with Small Businesses

In focusing on what federal agencies may potentially spend with SBs in the final quarter of FY26, I followed the same year-to-year comparison and “90% of FY25 assumption” approach I used in my first article looking at the total IT market.

Fourth Quarter FY 2026 spending (highlighted column) is estimated based on an annualized percentage of what agencies spent in all of FY 2025 to correct for any Q3 reporting lags, and to then apply my “if they spend 90% of what they did in FY 2025” assumption. If that 90% assumption holds true, small businesses could see roughly $15.4B – or more –  in federal IT contract spending in Q4 of FY 2026.

Small Businesses IT Contracting – Agency Trends

The chart above shows that the twenty top-spending departments accounted for $40.5B in IT spending with SBs in FY 2025, which is 96% of the $42.2B in total SB IT contract obligations for the year. As noted above, total SB IT obligations were lower in FY 2025 than in FY 2024, and this was true for both the top twenty agencies and across all federal agencies.

Looking at quarterly SB IT spending in FY 2025, these top twenty agencies accounted for $6.2B, $8.7B, $8.7B and $17.0B in Q1, Q2, Q3 and Q4, respectively. This shows that the top twenty agencies spent a disproportional 42% of their FY 2025 IT dollars in Q4, compared to 15%, 21% and 21% for Q1, Q2 and Q3, respectively. This disproportionate level of Q4 spending is typical for federal agencies, and part of the reason Q4 gets dubbed the “federal busy season” in the contracting world.

How does FY 2026 compare? For FY26 YTD, these top twenty departments have reported $4.5B, $8.4B and $7.6B in SB IT obligations for Q1, Q2 and Q3, respectively. Each quarter, Q1-Q3 in FY26 is below those quarters in FY25, as illustrated in the bar charts above, pointing to continued challenges that agencies are having, overall, in sustaining their SB utilization.

However, many Civilian agencies have reported higher Q3 FY26 SB spending versus Q3 FY25, including DHS, VA, Treasury, USDA, Commerce, NASA, Transportation, Energy, Interior and SSA. The Defense components, on the other hand, generally show lower Q1 and Q2 SB spending in FY26 versus FY25, although some Q2 data may still be trickling in, and thus are potentially slightly understated.

Final Thoughts

Historically, Q4 spending on IT has been strong across the federal market and for nearly all business sizes. Nevertheless, many agencies are still recovering from the ripple effects of a long shutdown and organizational changes, and in some cases have been operating under constrained or delayed budgets.

In a market where there are signs of both positive and softening growth, small business contractors must leverage every available resource, including data-informed market intelligence and experienced research support, to maximize their opportunities in the fourth quarter and beyond.