Defense contractors face urgent AI adoption to stay competitive

U.S. defence contractors must rapidly integrate AI technology or risk obsolescence, as Pentagon boosts funding and sets higher technical standards amid a burgeoning military AI market projected to reach over $30 billion by 2035.

The calculus facing U.S. defence contractors has hardened: adopt artificial intelligence now or cede the future to competitors. That blunt choice is exemplified by Margarita Howard, chief executive of HX5, a government contractor with more than ...

1,000 employees supporting NASA and Department of Defense programmes across more than 20 states. “The bottom line is, if you don’t embrace it, you’re just going to be gone,” she says, describing a strategy that moved from early planning to active deployment of AI tools within her firm.

According to the original report, market analysts project sharp expansion in military AI spending over the coming decade. A variety of forecasts underline the trend, although they differ on scale and timing: the lead analysis cited projections that the military AI sector could reach $33.6 billion by 2035, while an industry study by Grand View Research projects the global AI-in-military market will reach $19.29 billion by 2030, growing at a compound annual growth rate of about 13% from 2025 to 2030. Industry data shows that growth is being driven by greater adoption of cloud-based high-performance computing, specialised AI chips and rising government defence funding.

The Department of Defense’s procurement actions have made the stakes concrete. In July 2025 the Pentagon awarded contracts of up to $200 million each to major commercial AI firms , Anthropic, Google, OpenAI and xAI , to accelerate the development of agentic AI workflows for national security missions. The moves, announced by the Pentagon’s Chief Digital and AI Office, were framed as essential to “transform the Department’s ability to support our warfighters and maintain advantage over our adversaries,” a message echoed in reporting by multiple outlets. The awards signal that commercially developed large-scale AI capabilities will play a growing role in intelligence analysis, logistics, enterprise information systems and warfighting support.

For large primes such as Lockheed Martin, Northrop Grumman and Raytheon Technologies, hefty investments in AI integration have become part of standard strategy. Smaller and mid‑tier contractors, however, face a different calculus: they often lack the capital reserves and multi‑year runway required to build and validate AI systems that meet federal security and audit standards. As the original report notes, contractors that delay face compressed timelines; they must build internal capabilities, train staff and compete against firms already delivering AI‑enabled systems , a lag that can take months or years to reverse.

HX5’s approach offers a case study in early adoption. “We’re developing AI tools internally that we’re using and seeing benefits from,” Howard says, adding that the firm has prioritised productivity and operational efficiency gains that determine whether projects finish on schedule and on budget. “Right from the beginning, we invested heavily in purchasing and implementing specialised systems,” she explains, arguing those investments ease audits and approval for contract performance. Howard also describes an evolution in management style: “I’ve learned that my job is less about solving every problem and more about creating a culture where solutions could come about organically.”

Policy and procurement are converging to raise technical bars. The 2025 National Defense Authorization Act expands secure, high‑performance computing infrastructure to support AI training, and Congress has pushed provisions that require data synchronisation and modernised formats across weapons, command‑and‑control platforms and sensors. Industry observers expect procurement to move toward automated compliance , continuous reporting and real‑time audit capabilities , meaning contractors will increasingly need demonstrable AI‑enabled data management to remain eligible for major awards.

Technical constraints complicate implementation. Defence AI must operate within classified environments and satisfy heightened cybersecurity standards. “We have already seen cybersecurity standards being enforced more across the board,” Howard notes, warning that such requirements are now non‑negotiable for government contractors. A June 2025 Department of Defense report cautioned that U.S. dominance in the AI startup market is not guaranteed, pointing to talent shortages that push some firms to seek foreign recruits or locate R&D overseas , a dynamic that could hamper secure, mission‑critical AI development for defence.

Demographics intensify the pressure. PwC data cited in the original analysis shows only 7% of aerospace and defence employees are under 25, while a quarter are aged 56 or older; at the same time, a large portion of the workforce has short tenures. Generation Z candidates are assessing employers for technological sophistication, and HX5 reports modernising internal communications and collaboration tools to attract and retain younger talent. Companies that deploy AI can expand capacity with existing staff, gaining an advantage amid talent scarcity; those that cling to manual processes risk losing both market access and recruits.

The wider market picture is nuanced. Different research houses offer varying timelines and size estimates for the military AI opportunity, and procurement decisions by the Pentagon and Congress will shape which technologies and vendors dominate. The company said in a statement that early technical foundations and validated processes offer a path to pass the intense scrutiny of government audits and competitive procurements. At the same time, reporting on the Pentagon’s July 2025 awards underscored a strategic turn toward integrating commercially advanced AI into defence missions, increasing pressure across the supply chain.

For many contractors, the immediate question is not whether to adopt AI but how quickly and securely they can do so. The original analysis invoked a warning first voiced in the Pentagon’s 2018 AI strategy: failure to adapt will render legacy systems irrelevant and erode alliances, markets and prosperity. That statement, made before the advent of large language models and the recent acceleration in commercial AI, now resonates more strongly. In the evolving procurement landscape, execution speed, validated capability and adherence to security standards will determine which firms survive and which are left behind.

Source: Noah Wire Services