Government Contracting: A Year in Review and a Look Ahead to 2026

Nearly 100,000 companies work with the federal government each year, delivering essential construction and services that keep local, state and federal government agencies operating and communities supported. Service-based government contractors—many of them small and mid-sized businesses—remain the backbone of this ecosystem. In fact, roughly 25% of all federal contracting dollars are awarded to small businesses, many operating on tight margins while navigating complex compliance requirements under the Service Contract Act (SCA) and Davis-Bacon Act (DBA).

A Challenging Year for Service Contractors

This past year tested the resilience of government contractors in unprecedented ways. Service contractors in particular faced a convergence of pressures:

• Operational uncertainty driven by the federal government shutdown causing contract cancellations, funding delays, and shifting agency priorities

• Workforce instability triggered by inflation that required contractors to balance employee retention, fluctuating workloads and payroll obligations

• Compliance complexity tied to perceived changes to the interpretations of SCA and DBA regulations and corresponding increased scrutiny from the Department of Labor

• Cash flow constraints caused in part by delayed payments and higher borrowing costs

For companies employing anywhere from a handful to several hundred workers, these challenges were more than administrative hurdles—they directly impacted the ability to retain talent, remain compliant, and continue contract performance .

SCA and Davis-Bacon: Compliance Under The Microscope

Service Contract Act and Davis-Bacon contractors operate in a highly regulated landscape. As highlighted above, this year underscored just how high the stakes can be:

• Misinterpreting wage determinations or fringe benefit obligations can result in back-pay liability, penalties, and reputational risk

• Inadequate documentation and benefit plan misalignment increase audit exposure

• Workforce turnover amplifies compliance risk when onboarding, classification, and benefits administration are not tightly managed

As audit readiness expectations remain a critical focus for government contractors, many recognize that compliance cannot be treated as an afterthought—it must be prioritized.

A More Optimistic Outlook for 2026

Despite the challenges, the outlook for 2026 is cautiously optimistic. Federal agencies continue to rely heavily on outsourced services, and service-based contracts remain essential. Contractors that can adapt are better positioned for stability and growth.

Key trends shaping a stronger path forward include:

• Renewed emphasis on compliance and audit preparedness as a competitive differentiator

• Greater focus on employee retention through competitive, compliant benefit offerings

• Strategic partnerships with vendors that understand the nuances of federal labor standards

• Smarter cost management by leveraging fringe benefits as allowable, contract-reimbursable expenses rather than pure overhead

Contractors who invest in their people, compliance expertise and workforce support will be better equipped to weather future disruptions.

The Advantage of the Right Benefits and Compliance Partners

One of the clearest lessons from this year is that it is hard for service contractors to go it alone. Working with industry-leading third-party benefits providers and administrators provides a meaningful advantage—particularly for companies subject to SCA and Davis-Bacon requirements.

Partners like The Boon Group and GSA National, now working together as partner companies, bring deep expertise in:

• Designing and administering SCA- and DBA-compliant fringe benefit solutions

• Reducing administrative burden and compliance risk

• Supporting audit readiness with proper documentation and reporting

As contractors look ahead to 2026, aligning with experienced partners who understand the realities of federal service contracting can be the difference between simply surviving and having a sustainable, competitive business.

Resilience, preparation, and partnership will define the next chapter of government contracting—and service contractors who take action now will be better positioned for what comes next.