Article
Navigating the perfect storm: A&D manufacturing trends and strategies
Aug. 25, 2025 · Authored by Cameron A. Reid and Tan Le
The aerospace and defense sector (A&D) manufacturing stands at a juncture in 2025, facing what industry leaders describe as a ‘perfect storm’ of challenges including the new administration, shifting budgets priorities, compliance pressures and policy flux. In a recent webinar, Baker Tilly’s Cameron Reid, Director, and Tan Le, Principal, along with Deltek’s Padma Raghunathan, Product Marketing Manager, shed light on how the A&D manufacturing sector is standing at crossroads in recent times along with the tips and solutions on how to navigate this period by investing strategically in digital transformation as well as building resilient supply chains.
Deltek Clarity Study 2025
Now in its 16th year, Deltek Clarity is the industry’s most comprehensive benchmarking study — providing government contractors with data-driven insights into market confidence, challenges and opportunities shaping the year ahead. One of the ways to gauge contractor confidence is through the Government Contractor Confidence Index or GCCI. It serves as a pulse check, measuring the overall confidence that government contractors can grow their public sector revenue over the next 12 months.
According to the study, which surveyed nearly 900 government contractors across different sizes, the GCCI dropped to 138.0 from last year’s 142.8. This marks the lowest level in six years. The decline is a notable shift reflecting growing caution as contractors are approaching the year with concerns about policy uncertainty, rising costs, talent gaps and mounting compliance pressures.
Key trends reshaping the A&D manufacturing industry
Rising operational costs
According to the study, a full third of manufacturers cite increasing operational costs as their top challenge. These pressures note beyond simple inflation to include material volatility, wage increases and tariff impacts. For A&D firms operating in a fixed-price, compliance-bound environment, even minor cost overruns can jeopardize entire contracts. The data reveals telling statistics about how manufacturers are responding:
- 56% track workforce deployment and capacity utilization
- 39% scrutinize plant equipment and shift alignment to demand
- 35% monitor quality metrics, which include defects and rework costs
Talent acquisition and retention crisis
Nearly 30% of respondents imply attracting and retaining skilled labor as an ongoing struggle. The challenge is a culmination of:
- Experience gaps due to the wave of retirements among experienced professionals like machinists and engineers
- Wage competition from larger firms and adjacent industries, making it harder to compete
- Digital readiness gaps in workers, slowing technology adoption
Despite the above shifts, 60% of companies are investing in training and upskilling. This marks a shift from short-term hiring to long-term workforce development.
Supply chain and quality interconnected risks
Supply chain continues to be the number one operational concern, with quality issues following as the top pressure point for one-third of contractors. These challenges create the following ripple effects:
- Workforce and material shortages slow production
- Compressed schedules lead to quality lapses
- Quality issues lead to program delays, rework expenses and customer escalations
The situation is further complicated by volatile sourcing conditions. These conditions include material inflation, tariffs and shifting environmental, social and governance (ESG) mandates.
Digital transformation, slow but gaining momentum
While industrial technologies offer potential, the reality is more sobering. About 58% of manufacturers report that their operations are not automated, creating risks through manual and patchwork processes that increase error rates and reduce agility. However, there is progress which is evident in major investment areas:
- Process reengineering initiatives
- Enterprise resource planning (ERP) and production system integration (25% of manufacturers)
- Artificial intelligence (AI) and digital documentation investment
Much of this transformation can be attributed to compliance mandates like Cybersecurity Maturity Model Certification (CMMC) which requires digital readiness for participation in defense contracts.
The CMMC compliance
CMMC certification is now essential for winning and maintaining Department of Defense (DoD) contracts. The three tier system includes:
- Level 1 (Foundational): Self-assessment focused on Federal Contract Information (FCI)
- Level 2 (Advanced): Third-party assessments by certified CMMC Third Party Assessment Organization (C3PAO) for Controlled Unclassified Information (CUI) protection
- Level 3 (Expert): Protecting CUI and mitigating Advanced Persistent Threats (APTs) by the Defense Industrial Base Cybersecurity Assessment Center (DIBCAC)
Learn more about CMMC here.
Cameron Reid, Director, Baker TillyWhile certain government initiatives like CMMC may be mandated, it’s the actions you take in response to the compliance models you adopt that drive value and create a strategic advantage.
Strategic considerations for moving forward
While the challenges facing A&D manufacturers are major, they also present an opportunity to rethink operations and build long-term resilience with a clear imperative: organizations that act decisively and strategically will be positioned better in the perfect storm. With that in mind, below are the considerations to guide the path forward.
Smart integration and connected systems: Manufacturers need to address the challenge of disconnected systems that ultimately create delays, errors and audit risks. Proper integration and data unification between financial, procurement, manufacturing execution and quality management systems improves data quality and performance monitoring.
Supply chain resilience: The past five years have highlighted supply chain fragility in the industry. Most chains handle single events but tend to fail when multiple disruptions occur simultaneously. Manufacturers should now prepare for multi-event scenarios such as ongoing tariff changes and shipping cost fluctuations. Focus areas should include:
- Traceability of goods and digital record maintenance
- Extended supply base visibility beyond tier one suppliers
- Country of origin and serialization tracking
Realistic technology implementation: While advanced technologies like AI and machine learning (ML) offer much potential, organizations should apply realistic cost-benefit analysis and avoid overwhelming their workforce. Hence, change management becomes important for successful technology implementation. Technology adoption should also align technology deployments and long-term competitiveness goals.
Legislative changes supporting the A&D manufacturing industry growth
In parallel with these shifts, recent legislative developments have provided some relief for manufacturers. The One Big Beautiful Bill Act, signed on July 4, includes business-friendly provisions:
- Bonus depreciation: Permanent restoration of 100% equipment write-offs
- Qualifies production property: New 100% expensing for qualifying commercial manufacturing property
- Section 179 limits: Increased maximum expensing to $2.5 million
- R&E expenses: Immediate deduction restoration for domestic research and experimental (R&E) expenditure
- Business interest expense: More generous deduction limits
- Excess Business Loss (EBL) rules: Previously set to expire, the EBL limitation rules are now permanent
- Expanded Qualified Small Business Stock (QSBS) benefits: The bill broadens eligibility and increases the tax exclusion for gains on QSBS
These provisions offer meaningful financial relief and incentives for manufacturers investing in innovation, infrastructure and workforce development.
We’re here to help
Deltek’s integrated manufacturing ERP doesn’t just connect your operations, it transforms them. By unifying project accounting, purchasing, supply chain, materials, inventory, shop floor execution, quality assurance and labor tracking into one secure, scalable, and government-compliant platform, A&D manufacturers gain the visibility and control needed to reduce risk, improve performance and accelerate growth.
Missed the webinar? Watch the full on-demand recording to learn actionable strategies for navigating A&D manufacturing challenges and building resilient operations here.
As a trusted Deltek strategic alliance for over 20 years, Baker Tilly empowers the Aerospace and Defense (A&D) sector to transform government contracting operations with Deltek’s leading enterprise software.
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