9 Key Things to Keep in Mind for Government Contractor (GovCon) Payments in 2026
- Kate Coffey
- 6 days ago
- 6 min read
A practical guide for government contractors using Dynamics 365 Business Central
If you sell to the federal government, 2026 will be a different kind of year for payments. New rules, tighter audits, and the increasing use of purchasing cards are changing the way contractors handle credit card transactions. The margins on government contracts are already thin. You don’t want compliance issues or unnecessary fees to take more out of your bottom line.
This blog walks through the key things every GovCon finance and operations team should think about as we head into 2026. Everything here comes directly from our work with government contractors using Dynamics 365 Business Central. These are the issues we see every day and the problems we help teams solve. Let’s get into it.
1. Level 3 data now drives everything
Level 3 data used to be “nice to have” when selling to federal customers. That time is gone. Price, quantity, line-item detail, UNSPSC codes, product descriptions, and tax information must reach the card networks perfectly. Otherwise your transactions fall into a higher fee structure.
Visa’s Commercial Enhanced Data Program (CEDP) has already gone into effect in October 2025. The rules around Level 3 data submission changed. Card brands expect every government transaction to include complete line-item detail. Missing fields cause transactions to downgrade and you pay more. Contractors see this most often with complex order types such as SEWP orders, DoD ESI purchases, GSA SmartPay cards and large ticket shipments.
Level 3 detail is how you qualify for the lowest B2G rates. If you miss even one requirement, you fall into a more expensive category, and the penalty adds up fast when your contract volumes are high.
This is why automation inside Business Central matters. Manually entering Level 3 data creates risk. Incorrect entries lead to higher card fees. When you scale, the errors grow with you. A payment process that relies on manual data entry will not meet the demands of 2026.
2. Non-compliance costs more than high fees
Non-qualified transactions hurt your margins, but compliance gaps create even bigger problems. Government agencies are paying more attention to payment accuracy. They want confirmation that contractors are following purchasing card rules. They look for tax handling, level 3 detail, and accurate transaction timing.
That means more questions and more documentation requests. If your payment system cannot prove that each transaction meets the required standard, you expose yourself to disputes, returns, and delays in payment.
Three issues come up often:
Missing line-item data
Incorrect tax treatment
Settlement timing errors
The good news is that all three problems can be removed with the right automation inside Business Central. If your system validates each transaction before it settles, you avoid the common pitfalls that show up in audits.
3. Tax-exempt processing is not optional
Every purchasing card transaction for federal customers must be processed as tax-exempt. The rule is simple. The challenge is that many payment solutions don’t apply the correct flags in every scenario. When the tax-exempt indicator is missing, the transaction becomes an audit finding.
Most GovCon teams assume their payment processor sends the correct tax values. In reality, many gateways either ignore the flag, apply inconsistent logic, or pass incomplete data. The contractor becomes responsible for the error even if the issue started with the processor.
In 2026, you need a payment solution that applies the tax-exempt flag automatically, validates that your ERP shows $0 tax, and submits the correct information to the card network every time.
When tax handling becomes automated, the risk disappears. That small detail protects you in audits and saves your team hours of rework.
4. Federal buyers are using more purchasing cards
Over the last few years, federal buyers increased their use of P-Cards for speed. It reduces procurement cycles and gets goods delivered faster. In 2026, this trend will continue. Contractors should expect more credit card transactions and larger order values.
This shift benefits contractors who streamline their payment workflows. It also punishes those who rely on manual processes. Higher volume means more opportunities for error. When each transaction requires line-item data, automation becomes the only sustainable approach.
If your current payment setup only handles basic card authorization, it will fall behind the requirements of P-Card processing in Business Central. Your system needs to capture Level 3 data, apply tax exemption, and qualify each transaction for the lowest rate without slowing down fulfillment.
5. Large Ticket savings matter more than ever
Many GovCon orders qualify for Large Ticket rates. The savings are significant. Visa Large Ticket rates start at 1.20% + $35 and Mastercard at 1.45% + $35. These rates can reduce your cost per transaction dramatically, especially for hardware, equipment, and multi-line orders.
To qualify, the card networks require perfect data, accurate shipping information, and clean settlement timing. Most contractors miss Large Ticket qualification because their payment system does not submit the correct data or does not align the booking date with the settlement time.
As order sizes continue to grow in 2026, every contractor should make sure their payment solution supports large ticket qualification, accurate line-item detail, automatic field mapping and settlement timing alerts.
These items have a direct impact on margin. When your system qualifies each transaction correctly, you keep more revenue from the same contract.
6. Business Central needs robust payment automation
Most payment add-ons for Business Central were not designed for government contracting. They handle basic transactions, but they do not support Level 3 fields, tax exemption rules, or GSA requirements. When you force a generic processor into a GovCon workflow, the result is more errors, more fees, and more risk.
In 2026, you need a payment solution that works inside Business Central and augments its strengths. Your team should be able to authorize, capture, refund, or void transactions inside the ERP. You should not switch between systems. You should not maintain separate dashboards or reconciliation tools.
The payment solution should read line-item data directly from your sales orders and invoices. It should validate each field before settlement. It should pass the enhanced data to the card networks without manual intervention. That simple structure removes the friction that slows down fulfillment and reduces the errors that lead to higher fees.
7. Flexibility matters more than vendor lock-in
Most integrations lock you to one processor. That works until you need to negotiate better rates, add new card types, or expand into new markets. Switching processors becomes a heavy project. You reinstall integrations. You change workflows. You disrupt operations.
2026 is not the year to be locked into one provider. You need flexibility, and you should be able to keep your processor if you want, to replace it without changing your ERP, and to connect to new gateways as your contracts grow.
USTPay GovCon supports this idea through Bring Your Own Processor (BYOP). One installation works with more than 120 gateways. That flexibility keeps contractors ready for new requirements without new integrations.
8. Support must understand GovCon, not generic payments
GovCon payments are not like retail payments. Compliance requirements, federal tax rules, and Level 3 data submission create complexity that traditional processors don’t understand. When your team calls support, you need someone who knows:
Visa CEDP requirements
GSA SmartPay mandates
GovCon 365 structures
Business Central financial workflows
In 2026, support will matter as much as the underlying technology. When auditors ask questions, you want experts who can explain how each transaction meets the requirements.
9. Certification letters protect you
More agencies are requesting proof that contractors submit Level 3 data. A certification letter from your payment solution provides that proof. When you have documented assurance from a third party, you reduce the time your team spends validating compliance.
In 2026, more contractors will need certification letters to maintain or renew contracts. Make sure your payment solution can provide one.
Final thoughts
GovCon payments are getting more complex, not less. Requirements from card networks, agencies, and auditors will continue to evolve. Contractors need tools that work inside Business Central, eliminate manual steps, and guarantee the accuracy of each transaction.
If you want to prepare for 2026 with confidence, the first place to start is with your payment process. When you automate Level 3 data, tax handling, settlement timing, and gateway flexibility, you protect your margins and remove unnecessary risk.
If you want a walkthrough of how USTPay GovCon handles this inside Business Central, we can show you how it works in a quick demo.
