For the past 17 years, Deltek has surveyed companies in the U.S. and Canada to identify business risks, challenges and priorities for the coming year. Results are provided annually in the GovCon Clarity Report, the latest one published in mid-May.

This year, more than 900 firms, including 307 small businesses, responded to nearly 750 survey questions about the federal contract and business landscape. This article examines key findings from small business respondents.

Small Business Respondent Demographics

Nearly three-quarters of the small companies responding had fewer than 500 employees. Their annual revenue totals were split evenly between those with less than $20M and those with $20M to $50M; none reported higher revenue totals. Among these, 58% reported doing business with the federal government. Two-thirds indicated they received less than $20M annually from prime and subcontracts, 35% received between $20M and $50M and 2% received $50M to $200M in annual contract dollars.

Professional services (19%) and IT products and services (18%) represented the largest federal market sectors for small businesses. Manufacturing, construction, and health care and medical sectors accounted for 8% each, with operations and maintenance accounting for 5% of firms. Architecture and engineering, R&D, management consulting, and energy and environmental-related areas represented a combined 14%; 10% were unclassified.

Three-quarters participated in one or more of the Small Disadvantaged Business (SDB) socioeconomic programs. Veteran-Owned and Service-Disabled Veteran-Owned Small Businesses accounted for 34% of participants. Small Disadvantaged Businesses and 8(a) firms represented a combined 21%; Women-Owned businesses 15%; and HUBZone firms 4%. More than half of the 8(a) respondents were about midway through the program; a quarter had two or fewer years remaining; and 21% were new entrants.

Market Challenges and Risk Landscape

Policy changes, regulatory shifts and contract consolidations significantly transformed the competitive landscape in 2026. Increased competition, reduced face-to-face meetings with decision-makers, access to agency advocates like Small Business specialists, and a recession-driven, restrictive spending environment were the top challenges. Other obstacles included government use of unfamiliar contracts, insufficient business development resources and processes, and the ability to price effectively in an inflationary environment. Notably, only 1% viewed changes to small business size standards and recertification as significant, and more than half were neutral on their confidence in navigating FAR changes.

Nearly half of the small businesses identified cybersecurity compliance requirements as a major risk in the coming year, followed closely by supply chain risk management, subcontractor management and AI requirements. Talent shortages, price fluctuations, regulatory and policy shifts, technology adoption and return on investment were also high-risk areas. However, the majority consistently ranked the impacts on their businesses, including those from small business regulations, as positive.

Financial Challenges and Investment Priorities

The survey asked participants to rank cost drivers on a scale from one to five.  The results, in order, were:

• Labor 39%
• Cost of Goods 28%
• Supply Chain Risks 26%
• Compliance 30%
• Interest rates 34%.

To address this, firms plan to improve efficiency and accuracy in their business practices, change pricing strategies, reduce operating costs and increase investments in automation and operational systems such as AI, digital tools or quality management systems. Yet despite talent shortages consistently ranking as an elevated risk, only 41% prioritized investments in workforce solutions.

Of the 307 small business respondents, 61 identified anticipated financial challenges over the next 12 months. More than half of those saw increasing profitability and cost reductions as the biggest hurdles. The need to increase cash flow, obtain financing and increase company valuation were among the top five challenges. To offset these, nearly half plan to invest in AI, automation and digital tools to improve financial efficiency. Other key initiatives included investments in business intelligence systems, enterprise resource planning (ERP) system upgrades or replacements, and new accounting solutions. Teaming and exploring potential mergers and acquisitions were listed as possibilities for a third of respondents. Only 9% indicated plans to implement a hiring freeze or reduce employee compensation programs.

Respondents also evaluated possible revenue strategies to address current market conditions. Nearly a third plan to offer a more diversified set of products and services, while 16% are considering transitioning their government business to private industry. Fourteen percent anticipate pursuing prime contracts over subcontracts, 11% plan to move in the opposite direction, and another 14% plan to transition to state and local opportunities. Other possibilities include increasing strategic teaming and pursuing other contract formats such as subcontracting, Other Transaction Agreements, or Commercial Solutions Openings opportunities. Notably, given ongoing contract consolidations, only 9% said they plan to pursue more Government-wide Acquisition Contracts (GWACs) or multiple-award contracts (MACs).

Technology Investment and AI Adoption

Among small businesses, an average of 35% had implemented AI across multiple business functions. Business development, opportunity identification and proposal development, pricing and IT/cybersecurity efforts were the most common applications with firms stating it had improved their performance. Policy compliance, analytics and design functions were also ranked high. Looking ahead, an average of 36% plan to incorporate AI within the next 12 months, and an average of 20% have no plans for using it.

Companies viewed technology investments in cybersecurity and data security as the most important, even within the embedded investments. This was not surprising, considering cybersecurity was a top risk factor for most. Remarkably, all small-business respondents rated investments in business operations as only slightly important. Edge computing and the Internet of Things were also considered important embedded investments, but Robotic Process Automation and Big Data were considered less critical.

Read the complete results and insights in Deltek’s free 2026 GovCon Clarity report here.