New Executive Order Addresses “Racially Discriminatory DEI Activities” in Federal Contracting

On March 26, 2026, President Donald Trump issued an Executive Order, “Addressing DEI Discrimination by Federal Contractors” (the “EO”). This action is the latest step in the Administration’s ongoing scrutiny of contractor DEI initiatives, building on a prior executive order that revoked decades-old affirmative action requirements and Department of Justice (DOJ) investigations of contractor DEI programs under the False Claims Act (FCA).

The new EO requires contracting agencies to include a new clause in all federal contracts and subcontracts prohibiting “racially discriminatory DEI activities.” This Legal Update summarizes the EO’s requirements, highlights key legal questions, and outlines practical considerations for federal contractors navigating these new requirements.

EO Requirements

Definition of “Racially Discriminatory DEI Activities”

Section 2 of the EO defines “racially discriminatory DEI activities” as “disparate treatment based on race or ethnicity in the recruitment, employment (e.g., hiring, promotions), contracting (e.g., vendor agreements), program participation, or allocation or deployment of an entity’s resources.”

Notably, unlike the Administration’s prior actions on DEI issues, which encompassed both race- and sex-based preferences, this EO is focused exclusively on race and ethnicity.

“[P]rogram participation” includes “membership or participation in, or access or admission to, training, mentoring, or leadership development programs; educational opportunities; clubs; associations; or similar opportunities that are sponsored or established by the contractor or subcontractor.”

Mandatory Contract Clause

Section 3 of the EO directs all executive departments and agencies, including independent establishments subject to the Federal Property and Administrative Services Act (FPASA), to ensure that, within 30 days, all “contracts and contract-like instruments,” including subcontracts at all tiers, include a new six-part clause. The clause requires contractors to agree to the following:

• Do not engage in racially discriminatory DEI activities. The contractor will not engage in any racially discriminatory DEI activities, as defined in Section 2 of the EO.
• Access to books and records. The contractor will furnish all information and reports, including access to books, records, and accounts, as required by the contracting agency for purposes of ascertaining compliance.
• Remedies for noncompliance. In the event of noncompliance, the contract may be canceled, terminated, or suspended in whole or in part, and the contractor or subcontractor may be declared ineligible for further government contracts.
• Subcontractor reporting obligations. The contractor will report any subcontractor’s known or reasonably knowable conduct that may violate the clause to the contracting department or agency and take any appropriate remedial actions directed by the agency.
• Litigation notification. The contractor will inform the contracting department or agency if a subcontractor files suit against the contractor that puts at issue, in any way, the validity of the clause.
• FCA materiality. The contractor recognizes that compliance with the clause is material to the government’s payment decisions for purposes of the FCA.

Agencies are likely to begin including this clause in new solicitations and awards and may attempt to incorporate it into existing contracts through modifications.

Penalties and Enforcement

Section 4 of the EO also establishes an enforcement framework:

• Office of Management and Budget guidance. The Office of Management and Budget (“OMB”) Director will issue guidance to contracting agencies to ensure compliance with the EO. The guidance will also identify economic sectors that “pose a particular risk” of entities engaging in racially discriminatory DEI activities based on current or past conduct, and will issue sector-specific best practices.
• Contract remedies. Contracting agencies are directed to cancel, terminate, or suspend contracts (or portions thereof) if contractors or subcontractors fail to comply, and to take appropriate action to suspend and debar contractors or subcontractors that fail to comply.
• Agency compliance reviews. Within 120 days of the Order (by July 24, 2026), each agency head must review its agency’s implementation of the EO and report to the Assistant to the President for Domestic Policy. Agencies must thereafter “regularly review” that implementation and take appropriate measures to ensure ongoing compliance.
• FCA enforcement. The Attorney General is directed to consider whether to bring FCA actions against contractors or subcontractors that violate the clause. The Order also directs the Attorney General to ensure prompt review of qui tam actions brought by private whistleblowers under the FCA, including by rendering a decision on intervention in such cases within the 60-day statutory period “to the maximum extent practicable.”

Key Legal Questions

The Order raises several significant legal questions that contractors should monitor closely.

• Vagueness and scope of the definition. While the Order’s focus on race- and ethnicity-based disparate treatment is more targeted than the broad references to “DEI” in prior executive orders, there remains uncertainty about how the definition of “racially discriminatory DEI activities” will be applied in practice.
• FCA exposure. The Order incorporates an FCA materiality provision that could strengthen a Government argument in an enforcement action that compliance with the provision is material. The Supreme Court held in Universal Health Services, Inc. v. United States ex rel. Escobar that a contractual designation of a provision as a “condition of payment” is relevant to materiality but “not automatically dispositive.” Even so, the clause increases enforcement and qui tam risk for contractors that do not comply with its requirements.
• FPASA authority. The Order is issued under FPASA, which grants the President broad authority to prescribe policies and directives to promote “economy and efficiency” in federal procurement. Courts have increasingly scrutinized whether procurement-related directives bear a sufficient connection to that standard. Whether prohibiting certain types of “DEI” activities falls within the scope of that authority is not settled and would be a key issue in any court action challenging the EO.
• Flow-down requirements. The clause must be flowed down to subcontractors at all tiers. The EO could create new compliance and monitoring obligations for prime contractors, which must not only ensure their own compliance but also report any subcontractor conduct that “may violate” the clause.

Practical Considerations for Federal Contractors

Federal contractors should consider taking the following immediate steps in response to the EO.

• Review and assess current DEI programs and practices. Contractors should review existing DEI-related policies, programs, and initiatives to identify any that could be characterized as involving disparate treatment based on race or ethnicity. The goal is to identify potential risk areas now and develop a response plan. The assessment should be conducted with the assistance of counsel to preserve privilege.
• Expect contract modifications. Contractors should anticipate that contracting officers will seek to incorporate these new obligations into existing contracts through bilateral or unilateral modifications.
• Monitor OMB and FAR Council guidance. OMB guidance on sector-specific risk assessments and the FAR Council’s interim guidance will provide details about how the EO will be implemented in practice. Contractors should monitor these developments closely and be prepared to adjust compliance programs accordingly, especially if the guidance identifies particular areas or programs of focus relevant to your business.
• Assess internal reporting and documentation. Given the emphasis on FCA enforcement and the encouragement of qui tam actions, contractors should ensure that internal reporting channels are in place for employees to raise concerns about compliance. Documenting the rationale for maintaining or discontinuing specific programs, and preserving evidence of good-faith compliance efforts, may also be important in defending against any enforcement action.
• Monitor litigation developments. The legal landscape surrounding the Administration’s anti-DEI executive orders is very much unsettled. Ongoing challenges to EO 14173 and agency-specific implementations may affect the enforceability of this new EO and the clause it mandates. Contractors should track relevant litigation, including pending appeals and any new challenges to this Order, and be prepared to adjust their compliance posture as the law develops.

Conclusion

The Order creates significant new compliance obligations for federal contractors and their subcontractors. Federal contractors should review their DEI-related programs and practices, prepare for contract modifications, and monitor forthcoming guidance from OMB and the FAR Council. We will continue to track this matter and provide updates as the situation develops.