From 2020 to 2024, private firms received $2.4 trillion in Pentagon contracts, approximately 54% of the department’s $4.4 trillion in discretionary spending, according to a Brown University study. This concentration of defense dollars coincides with an acceleration in artificial intelligence capabilities that promises to reshape the entire industry.
The potential value of AI-related federal contracts increased by almost 1,200% in a single year, from $355 million to $4.6 billion between August 2022 and August 2023, according to a Brookings Institution report. This explosion in federal AI spending was substantially driven by the Department of Defense.
Margarita Howard, the founder and CEO of aerospace and defense contractor HX5, has been preparing for this AI transformation through deliberate technology investments. “If you don’t embrace AI, you’re just going to be gone,” she says. “We’re adopting it heavily.”
The Competitive Reality of AI in Defense
The Pentagon’s July 2025 awards of $200 million contracts each to Anthropic, Google, OpenAI and xAI signal the scale of federal AI investment. Among other goals, these contracts are aimed at enabling the Department of Defense to develop agentic AI workflows, systems that use advanced reasoning to address and act on complex problems autonomously.
AI is the most recent and most substantial example of traditional defense contractors competing with tech giants for relevance. But interest in contracting industries has continued to grow. The aerospace and defense workforce expanded by 4.8% from 2022 to 2023, outpacing the national average growth rate of 1.7%, according to the Aerospace Industries Association.
In order to continue to compete against demographic pressures for younger technical talent, companies like HX5 are foregrounding AI capabilities.
“We’re actually developing AI tools internally that we’re using and seeing benefits from,” says Howard.
The Defense Industrial Base AI Roadmap identifies talent shortages as a critical constraint, noting companies increasingly rely on foreign talent and shift R&D abroad to meet AI development needs. This creates particular pressure on mid-sized contractors competing against both tech giants and prime defense contractors for limited expertise.
Howard addresses workforce evolution through targeted modernization. “Gen Z thrives in digital-native environments,” she says. “We’ve modernized some of our internal communication processes to include those platforms that we believe that they’re comfortable in, such as instant messaging, interactive project management, and some tool/workspace changes.”
Meanwhile, employee retention provides stability at HX5 during these technological transitions. “Many [HX5 employees] have been with us for 10 years or so, and we just have a highly dedicated and experienced workforce,” Howard says.
Cybersecurity as Foundation for AI Implementation
AI adoption, especially at the rapid pace expected, can’t occur without robust security infrastructure.
Yet, according to a recent Merril Research report, only 4% of defense contractors are fully prepared to meet the Department of Defense’s minimum cybersecurity requirements known as the Cybersecurity Maturity Model Certification. The average Supplier Performance Risk System score across surveyed contractors sits at -12, far below the required 110 to meet CMMC standards.
Howard sees cybersecurity as a necessary foundation as the industry transitions to more thorough AI dependence.
“We have already seen cybersecurity standards being enforced more across the board,” Howard says. “It’s heightened cybersecurity requirements, that contractors will not have a choice but to implement if they want to be a government contractor.”
The National Industrial Security Program Operating Manual governs how contractors handle classified information, with the Defense Counterintelligence and Security Agency overseeing compliance. As AI systems potentially interact with classified data, contractors must ensure implementations meet these standards across all locations.
For HX5, operating across 90 government sites means cybersecurity investments multiply. Each facility requires appropriate safeguards, with government approval needed before any contractor can store or generate classified material on automated information systems.
Preparing for Automated Future Operations
Looking toward 2035, Howard anticipates fundamental changes in government contracting mechanics.
“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
Automation extends beyond procurement to compliance itself. “Compliance protocols will be automated. Contractors will be required to integrate systems that provide continuous reporting and real-time audit capabilities,” Howard predicts. This shift from periodic audits to continuous monitoring requires contractors to build systems capable of real-time data provision.
Competitive Positioning Through Early Action
Most analysts agree that contractors who fail to adapt to AI will not survive. Howard’s belief is that HX5’s early investments in AI development, combined with infrastructure preparations for automated compliance, position the company for coming changes in federal contracting.
The AI arms race is accelerating, and contractors face mounting pressure to demonstrate capabilities rather than intentions. A convergence of multiple pressures—aging workforce demographics, increasing cybersecurity requirements, automated compliance protocols, and AI-enhanced procurement processes—creates an environment where only prepared contractors will thrive. HX5’s proactive stance, guided by Howard’s willingness to invest ahead of requirements, demonstrates one path through this transformation.
