GovCon market grew in 2025, but challenges are mounting

The government market's double-digit growth in 2025 cannot mask significant challenges contractors face, according to the latest edition of Deltek’s annual Clarity report.

Contractors reported 15% growth on average and acknowledged that costs, compliance demands and workforce constraints have intensified.

Profit margins are under pressure with labor costs, overhead expenses, and subcontractor and vendor prices increasing.

Speed is now a competitive requirement. But cybersecurity, compliance and pricing defensibility are also rising quickly.

The report’s bottom line is that to be successful contractors need to focus on moving faster without losing control and executing in a more scrutinized environment.

For the Clarity report, Deltek surveyed 917 contractors between Jan. 12 and 26. Deltek asked 198 questions across multiple business functions such as finance, artificial intelligence, project management and business development.

Some of the key trends identified in the Clarity report include the increasing use of AI, cybersecurity as a competitive differentiator, and talent being the biggest constraint.

AI is pervasive across the market with 94% of contractors using AI for one or more business functions. On the downside, only 5% report fully developed AI governance.

Most companies are piloting (37%) and scaling (38%) AI technologies. Significantly, 45% report that the return on investment on AI use is unclear.

Concerns voiced about AI include data privacy risks (37%), inaccurate/unreliable forecasts (29%) and difficulty validating AI insights (26%).

Respondents said that they use AI predominantly for cybersecurity and IT (56%), and risk management (47%).

Contractors see cybersecurity as a gatekeeper for opportunities because firms that cannot meet security requirements will not be allowed to bid.

For example, 59% of respondents said that compliance with Cybersecurity Maturity Model Certification requirements will apply to their companies.

Fifty-eight percent said they will need Level 2 certification, which requires a third-party certification. CMMC only applies to defense contracts currently.

While respondents expect compliance costs to hold steady or rise, they said that talent will be the biggest cost driver companies face. Attracting and retaining talent are primary concerns for the next 12 months, respondents said.

In this area as well, AI will play a significant role with 98% of human capital management respondents expecting to use AI to streamline onboarding and new hire processes. They also expect to automate many administrative tasks.

Now in its 17th year, the Clarity report gives contractors a long-term look at how the market is evolving.

This edition's takeaway is that the industry is at an inflection point. Revenue appears strong, but the operational and compliance pressures are building.