Global defense spending will reach $6.38 trillion by 2035, growing from $2.7 trillion in 2024 at a compound annual growth rate of 8.13%, according to Spherical Insights & Consulting research. This massive expansion coincides with fundamental shifts in how the U.S. government procures defense capabilities and manages contractor relationships.
Margarita Howard, CEO and owner of aerospace and defense firm HX5, sees transformation coming to almost every aspect of defense contracting on the heels of groundbreaking technological advances.
“Government agencies will increasingly utilize AI to streamline procurement processes, evaluate contractor performance, and probably predict future needs based on historical data that they collect,” she says.
Audit Advancements
Historically, government audits of contractors have relied on scheduled reviews, document submissions, and periodic site visits. By 2035, this model may largely disappear. “Compliance protocols will be automated,” Howard predicts. “Contractors will be required to integrate systems that provide continuous reporting and real-time audit capabilities.”
Federal agencies are already moving toward this reality. In 2025, the General Services Administration announced plans to manage $400 billion in procurement consolidation, marking a fourfold volume increase from previous levels. Managing this increased scale could require automated oversight rather than manual reviews.
With more automated auditing capabilities contractors could transmit performance data continuously to government systems. Financial transactions, milestone completions, and compliance metrics could flow automatically into federal databases. Anomalies might trigger immediate alerts rather than being discovered months too late during scheduled audits.
AI-Powered Procurement Decisions
Procurement administrative lead time currently frustrates both government and industry. AI tools can produce statements of work in minutes rather than days, according to Greg Young, general manager for civilian at Unison Software.
“If you have to change a core element on 100 different contracts or you need to change a term and condition in 1,000 different contracts, you can use automation and newer AI technologies to do that one time and then repeat 1,000 more times,” he said.
In the coming years, AI could help analyze a contractor’s past performance across thousands of data points. Machine learning models might predict which companies can successfully complete specific projects based on historical patterns. Procurement officers may review AI-generated recommendations rather than starting evaluations from scratch.
Howard anticipates these systems could use a wide range of nuanced historical data to make increasingly sophisticated predictions. Contract awards might occur within days rather than months as AI can help accelerate the process of matching requirements to qualified contractors.
Workforce Transformation and Demographic Shifts
Congressional Budget Office projections show defense outlays increasing from $891 billion in 2023 to $1.07 trillion by 2034. Yet the workforce supporting these expanding budgets faces demographic pressures that technology must address.
Howard recognizes generational differences in workplace expectations. “Gen Z thrives in digital-native environments,” she says. HX5 has already “modernized some of our internal communication processes to include those platforms that we believe that they’re comfortable in.”
Real-Time Financial Transparency
Current federal procurement systems create payment delays and reconciliation problems. Contractors often work “at risk,” performing approved work before funding arrives. “It might be that the funding will be a little late, and we’re paying out of pocket, basically, during that period,” Howard explains about current practices.
The Federal Acquisition Regulation overhaul, the first major revision in 40 years, aims to eliminate outdated and duplicative regulations while accelerating acquisition timelines. Plain language requirements and simplified processes could enable smaller contractors to participate without armies of compliance specialists, and could streamline payment to avoid performing “at risk” work.
Security Infrastructure as Competitive Differentiator
Cybersecurity requirements could determine which contractors survive the next decade.
“There are heightened cybersecurity requirements, and contractors will not have a choice but to implement them if they want to be a government contractor,” Howard stated plainly.
Contractors are expected to meet Cybersecurity Maturity Model Certification standards, though currently only 4% of contractors meet these minimum standards. Going forward, contractors unable to achieve certification may lose eligibility for federal contracts entirely, as cybersecurity only continues to grow in importance for government work.
By 2035, AI could monitor contractor networks continuously for threats. Automated responses might isolate breaches instantly. Government agencies may maintain real-time visibility into contractor security postures.
Geographic Flexibility Through Digital Integration
HX5 operates across 34 states at 90 government locations, demonstrating the geographic demands of current contracting. Future digital integration could reduce physical presence requirements while maintaining service quality.
“Where it makes sense, we have implemented flexible work models, like hybrid work models, allowing some flexibility while maintaining very strict security standards,” Howard says about her firm’s current adaptations.
Augmented reality and virtual collaboration tools allow remote workers to participate in on-site activities. Engineers in different states can collaborate on designs as if sharing the same room. Training and knowledge transfer might occur through immersive digital environments rather than travel-intensive programs.
Preparing for the Automated Future
The transformation Howard predicts requires immediate preparation. Contractors cannot wait until 2035 to develop AI capabilities, achieve security certifications, or modernize their operations. “If you don’t embrace it, you’re just going to be gone,” she says.
Workforces need training in digital collaboration tools and AI interfaces. Financial systems must prepare for instant payment processing and real-time reporting.
Most critically, contractors must shift from reactive compliance to proactive transparency. The future Howard envisions rewards contractors who voluntarily provide performance data rather than those who submit minimum required documentation.
Defense contracting in 2035 could bear little resemblance to today’s processes. Real-time monitoring, AI-driven decisions, and automated compliance may create a more efficient but demanding environment. Contractors who begin preparing now, as Margarita Howard and HX5 have, are positioning themselves to thrive in this transformed environment.
