Market analysts project the military AI sector will reach $33.6 billion by 2035, up from $10.5 billion in 2025. Defense contractors now confront a straightforward calculus: implement AI systems or watch competitors capture the contracts that fund next-generation capabilities. The technology has shifted from optional enhancement to prerequisite for survival.
“The bottom line is, if you don’t embrace it, you’re just going to be gone,” says Margarita Howard, CEO of government contractor HX5. Her company employs over 1,000 professionals supporting NASA and Department of Defense programs across over 20 states. Howard authorized early AI investments at HX5.
The Department of Defense awarded contracts worth up to $200 million each to Anthropic, Google, OpenAI and xAI for AI development during July 2025. Pentagon Chief Digital and AI Officer Doug Matty framed the procurement bluntly, telling CNBC that the technology would “transform the Department’s ability to support our warfighters and maintain advantage over our adversaries.”
A 2023 aerospace industry analysis from Middle Market Growth noted that AI “has become a required enabler for government contractors, like cybersecurity capabilities were around ten years ago.”
Meanwhile, traditional defense primes like Lockheed Martin, Northrop Grumman, and Raytheon Technologies have committed billions to AI integration. Smaller contractors face a different challenge. They often lack the capital buffers that allow major firms to absorb implementation costs and multi-year development timelines. For companies like HX5, delays mean elimination from consideration for upcoming contract awards that explicitly require or benefit from AI capabilities.
Automation Reshapes Procurement Standards
Howard predicts government procurement will move toward automated compliance within the next decade.
“Contractors will be required to integrate systems that provide continuous reporting and real-time audit capabilities,” she explains.
The 2025 National Defense Authorization Act includes Section 1532, mandating expansion of secure, high-performance computing infrastructure for federal defense agencies to support AI training.
Congress has pushed provisions requiring data synchronization and modern format implementation across weapons systems, command-and-control platforms, and sensors. With this ongoing move in the direction of more automation and AI capabilities, contractors unable to demonstrate AI-enabled data management may find themselves shut out of major procurement opportunities.
HX5’s approach to AI has moved from planning to deployment, says Howard. “We’re developing AI tools internally that we’re using and seeing benefits from,” she explains. The company has focused on productivity improvements and operational efficiency, the unglamorous work that often determines whether contractors can deliver projects on schedule and within budget.
Demographics and Technology Adoption Pressures
PwC data shows only 7% of aerospace and defense employees are under 25 years old, while 25% are aged 56 or older. Additionally, 43.3% of the workforce has been with their current company for less than five years. The sector confronts simultaneous challenges: experienced professionals retiring, younger workers expecting digital-native environments, and insufficient pipeline of STEM graduates entering defense careers.
Generation Z candidates evaluate potential employers based partly on technological sophistication.
Howard has adjusted HX5’s internal systems to accommodate these expectations. “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,” she says.
Companies that implement AI systems can handle larger workloads with existing staff, providing competitive advantages in an era of talent scarcity. Contractors relying exclusively on manual processes face compounding disadvantages as their workforce ages and junior talent gravitates toward more technologically advanced competitors.
Implementation Challenges
Technical implementation presents distinct obstacles for defense contractors. Unlike commercial technology firms, defense work requires systems that function within classified environments. AI tools must meet federal security standards while processing sensitive information.
“We have already seen cybersecurity standards being enforced more across the board,” Howard notes. “These are heightened cybersecurity requirements that contractors will not have a choice but to implement if they want to be a government contractor.”
A June 2025 DoD report warned that U.S. dominance of the AI startup market faces no guarantee of continuation. Talent shortages create implementation obstacles as companies depend on foreign talent and shift R&D operations abroad.
Defense contractors operate under additional constraints that commercial AI developers don’t face. Proposals must demonstrate validated AI expertise through objective proof: validated skills assessments, demonstrated experience with federal AI frameworks, systematic quality control addressing agency risk concerns.
HX5’s Approach
HX5’s approach reflects calculated risk. Howard invested in the company’s technical infrastructure and talent before pursuing maximum growth. “Right from the beginning, we invested heavily in purchasing and implementing specialized systems,” she explains. “We knew the government was very familiar with them and that they would provide us with the necessary tools to pass audits and gain approval for contract performance.”
The company has extended this emphasis on establishing a foundation in technical infrastructure as an early adopter of AI.
Companies that delayed AI investments now face compressed timelines. They must simultaneously build internal capabilities, train staff, and compete against firms already operating AI-enabled systems. The lag compounds because AI implementation may require months or years to generate measurable operational improvements.
Howard’s management philosophy has evolved to support the AI transformation. “I’ve learned that my job is less about solving every problem and more about creating a culture where solutions could come about organically,” she says.
Looking toward 2035, the convergence of mandatory AI requirements, automated compliance systems, and demographic shifts in the defense workforce could reshape government contracting. Firms that establish AI capabilities now hold advantages when these changes accelerate.
Even as early as 2018, the Pentagon’s AI strategy stated the implications clearly: “Failure to adopt AI will result in legacy systems irrelevant to the defense of our people, eroding cohesion among allies and partners, reduced access to markets that will contribute to a decline in our prosperity and standard of living, and growing challenges to societies that have been built upon individual freedoms.” That declaration, made before the explosion of large language model capabilities in recent years, only seems more true in 2025.
Defense contractors face no ambiguity about what’s required. The question is execution speed, not whether to proceed with AI. Competitors still merely evaluating their options have already fallen behind.
