Finding Opportunity in the FY26 Federal Budget

Introduction: A Pivotal Year for Federal Spending Shifts

On May 2, 2025, the White House released an advance budget letter outlining its discretionary funding priorities for Fiscal Year 2026. While not a full budget submission, this early guidance reveals the administration’s direction — and signals major shifts for federal contractors.

The FY26 plan reflects a strong emphasis on defense, veterans’ services, law enforcement, and domestic infrastructure. At the same time, this draft proposes steep reductions in education, public health research, environmental science, and global aid.

Below, we break down what’s in the request, where the money is moving, and how federal government contractors can position for success in this evolving landscape.

Budget Overview: A Shift Toward Defense and Domestic Restructuring

The President’s FY26 discretionary request proposes $1.45 trillion in base discretionary spending, plus $163 billion in reconciliation-authorized resources — for a total of $1.6 trillion, matching FY25’s topline.

However, the similarities stop there. Within that total, there are sweeping shifts:

• Defense funding rises to $1.0 trillion, including $119.3B from reconciliation — a 13% increase over FY25.
• Non-defense discretionary funding falls to $601.2 billion, reflecting sharp reductions across civilian agencies.
• Department of Homeland Security (DHS) funding jumps to $107.4 billion, up $42.3B, largely due to border and cyber security investments.

A Note on the Budget Process & Reconciliation

While this analysis includes reconciliation-adjusted figures — because they reflect the full scope of proposed spending — it’s important to note that both base and reconciliation funding are subject to change.

The House has already passed a budget resolution allowing for reconciliation, and many key increases (e.g., in DoD and DHS) depend on its passage. But until Congress finalizes appropriations and authorizes those funds, the amounts remain provisional.

Still, for contractors, these numbers represent the best available indication of where growth opportunities are most likely to emerge.

Growth Opportunities

The administration is prioritizing investments in the following areas:

Department of Defense (DoD):
$1.0T requested — investments in missile defense (“Golden Dome”), next-gen air platforms (F-47), and shipbuilding and readiness across the Navy and Marine Corps.

Department of Homeland Security (DHS):
$107.4B total — major boosts in border surveillance, Coast Guard modernization, and federal cybersecurity.

Veterans Affairs & Public Health:
+$5.4B for VA, including $2.2B for EHR modernization. The new MAHA campaign earmarks $500M for preventive health and chronic disease initiatives.

Transportation & Infrastructure:
$824M for FAA system upgrades, plus increased funding for maritime logistics and freight mobility.

Areas Facing Major Reductions

Several traditionally well-funded civilian programs are slated for deep cuts, which will have ripple effects across the contracting community:

National Institutes of Health (NIH):
Cut by nearly $18B, with substantial spending reductions in global health, gender research, and climate-health initiatives.

Environmental and Climate Science:
EPA funding cut by more than 50%. NSF and DOE programs in clean energy and environmental justice are significantly reduced or eliminated.

Health and Human Services (HHS):
CDC, SAMHSA, and AHRQ face major reductions, especially in mental health, opioid response, and community health equity programs.

Education, Housing, and International Aid:
Funding for major education programs and HUD’s Community Development Block Grants is zeroed out or redirected to states. Global aid and refugee support are heavily reduced.

Equity and Community-Based Grants:
Programs tied to DEI, sustainability, and refugee support are eliminated across multiple agencies.

Strategic Guidance for Federal Contractors

1. Reposition Offerings: Tailor solutions toward veterans’ services, security, and mission-critical infrastructure. Position capabilities in terms that resonate with the current funding environment. Terms like “Operational Excellence” should be used over “Management Consulting.”
2. Audit Your Pipeline: Flag opportunities tied to NIH global health, DEI-focused research, climate, and social policy initiatives. Shift business development resources to programs with clearer support in the FY26 plan.
3. Use Alternative Procurement Vehicles: Pursue opportunities through OTAs, SBIR/STTR, CSOs, and unsolicited proposals that bypass lengthy FAR-based timelines. (see below, How Red Team Can Help You Navigate FY26 and Grow)
4. Refresh Account Planning Efforts: Update your strategic growth efforts within your target accounts to adjust for these new priorities. For new or consolidated agencies like DOI Federal Wildland Fire Service, new account plans should be developed.
5. Shifts to State Funded Programs: Programs like Medicaid innovation, housing, and education are shifting to block grants, requiring state-level implementation support. Look to partner with or subcontract to firms embedded in state systems. Longer term strategy would be to enter the State & Local market as a prime.

How Red Team Can Help You Navigate FY26 and Grow

At Red Team Consulting, we have spent the past two decades helping companies successfully navigate federal market transitions. The FY26 budget landscape is no exception. While many programs face reductions, smart companies recognize that disruption creates opportunity. We are here to help you identify those opportunities and position your company for sustainable growth.

We have supported more than 1,000 companies, from agile small businesses to billion-dollar integrators, through some of the most complex contracting environments — including the 2008 financial crisis, sequestration, and the COVID-19 pandemic.

Most recently, we have helped clients transform their market positioning in response to shifting federal priorities:

• One client — a $100M company with 70% of revenue in Education — collaborated with us to reposition their pipeline after DOGE cut many of their contracts. We helped them identify new adjacent agencies gaining funding, resulting in a more future-proof portfolio for FY26.
• Another — a $1.5B integrator — partnered with us on a full market gap assessment. We are guiding their agency expansion strategy, building account entry plans, identifying M&A targets, and developing a pipeline tailored to opportunity-rich areas.

Whether you are reevaluating your pipeline, adjusting to agency-level changes, or positioning for new IDIQs, we offer services that meet you where you are:

• Strategic Growth Planning
  From mission planning to market diversification, we help you align your strategy with where the money is moving — not where it used to be.
• Capture and Proposal Execution
  Our experts lead competitive assessments, win strategy development, pricing support, and team formation — all culminating in compelling, compliant proposals tailored for the current climate.
• Training and Enablement
  Our business development, capture, and proposal training programs are designed to build internal capacity and equip your team to respond effectively to FY26 opportunities.

Smart companies are investing now — not just to weather the changes, but to emerge stronger on the other side. With Red Team as your partner, you will be ready to adapt, compete, and win in this evolving federal landscape.

Final Thoughts

The FY26 budget request gives federal contractors a clear preview of emerging priorities — even if the final numbers remain in flux.

With sharp increases in defense, homeland security, and veterans’ services — and deep cuts to civilian programs — the key to growth will be early alignment, focused positioning, and agile execution.

Companies are already adapting. With the right strategy and support, this can be a year of meaningful expansion.