US government AI contractors recorded revenue growth above 40% in Q3 2025, driven by $2.3 billion in Pentagon contracts—exceeding China's estimated $1.8 billion quarterly military AI expenditure and dwarfing the EU's total €6.5 billion AI investment plan through 2027.
Palantir Technologies reported $726 million in government revenue for Q3, up 40% year-over-year, from Pentagon battlefield AI systems and intelligence platforms. The company closed 104 deals over $1 million, with 34 exceeding $5 million. Innodata posted 44% growth to $48.3 million, its government segment expanding 67% sequentially on defense AI data contracts.
Major awards included $480 million to Scale AI for data labeling and $310 million to Booz Allen Hamilton for combat system AI integration. Civilian agencies added $216 million: $127 million for Department of Homeland Security border surveillance and $89 million for IRS fraud detection algorithms.
The Office of Management and Budget allocated $24.1 billion for AI and emerging tech in fiscal 2025, up 18% from 2024. Draft 2026 budgets propose $28.7 billion, with defense AI rising to $17.2 billion—triple the UK's £2.3 billion national AI strategy and exceeding South Korea's $2.1 billion AI investment.
Federal AI procurement is forecast to hit $37 billion by 2027 as agencies implement Executive Order 14110 governance frameworks. Palantir raised 2025 government revenue guidance to $2.86 billion, projecting Q4 growth of 38%. Innodata expects Q4 government revenue of $65 million, up 52% annually.
The spending surge positions US federal agencies ahead of international competitors in AI deployment, with procurement growth rates exceeding private sector adoption through 2026. Companies holding GSA Task Order contracts are capturing recurring revenue as pilot programs scale to production.