On March 26, 2026, President Trump issued an Executive Order, Addressing DEI Discrimination by Federal Contractors (the “EO”), directing federal agencies to incorporate a new clause into covered contracts and contract‑like instruments¹ addressing diversity, equity, and inclusion (“DEI”) practices. The EO directs agencies to prohibit what it defines as “racially discriminatory DEI activities,” including as it relates to subcontracts and vendor agreements; imposes new compliance and reporting obligations on contractors and subcontractors; and authorizes a range of contractual and enforcement consequences for noncompliance.

The accompanying White House Fact Sheet characterizes the EO as part of the Administration’s broader efforts to promote “merit‑based” and “efficient” federal contracting and to prevent what it views as race‑based discrimination in contractor employment and programmatic practices.

Key Takeaways

• New DEI‑related contract clause. Federal agencies² must begin incorporating a new clause into covered contracts and contract‑like instruments within 30 days, imposing new compliance and reporting obligations. The clause requires the contractor to recognize that compliance with the requirements is material for purposes of the False Claims Act (“FCA”). Building on that language, the EO directs the Department of Justice (“DOJ”) to consider filing actions under the FCA for violating the clause, and to ensure prompt review of FCA qui tam actions when filed by whistleblowers.
• Shift from policy guidance to enforceable contractual consequences. Unlike prior executive orders addressing DEI primarily through policy directives, this EO operates through a mandatory contract clause with direct contractual and enforcement consequences, including potential termination, debarment, and FCA exposure.
• Expansive definition of covered DEI activities. The EO adopts a broad definition of “racially discriminatory DEI activities” that reaches employment, contracting, program participation, and internal resource allocation, including employee resource groups, mentoring, and leadership initiatives.
• Significant conflict with small business subcontracting goals. The prohibition on DEI as it relates to subcontractors and vendor agreements calls into question whether prime contractors should now eliminate subcontracting goals for small disadvantaged businesses and women owned businesses.
• Accelerated implementation through Federal Acquisition Regulation (“FAR”) deviations. The EO directs the Federal Acquisition Regulatory Council (“FAR Council”) to amend the FAR and issue interim deviations or guidance within 60 days, increasing the likelihood of near-term and inconsistent agency implementation.
• Program substance, not labels, govern coverage. The accompanying Fact Sheet cautions that rebranding DEI initiatives will not insulate race-based programs from scrutiny under the EO.
• Increased prime–subcontractor exposure. Because the clause applies to subcontractors and includes reporting obligations, prime contractors should expect enhanced diligence, monitoring, flow-down requirements, and careful consideration of subcontracting goals for small disadvantaged business and women-owned small businesses.

Contractual Requirements and Legal Framework

The EO invokes the Federal Property and Administrative Services Act (“FPASA”), the statute that authorizes the President to prescribe procurement‑related policies to promote economy and efficiency in federal contracting. The EO frames the prevention of race‑based discrimination in contractor practices as advancing that goal, asserting that certain DEI activities increase costs and reduce efficiency by constraining hiring, promotion, or contracting decisions based on race or ethnicity. Courts have generally afforded deference to executive orders issued under FPASA, though implementation of such orders may raise issues where requirements extend beyond traditional procurement terms into contractors’ internal employment or programmatic practices.

Section 3 of the EO directs agencies, within 30 days, to ensure that contracts, subcontracts, and lower‑tier subcontracts include a clause under which the contractor agrees, among other things, that:​

1. It “will not engage in any racially discriminatory DEI activities,” as defined in section 2 of the EO.
2. It will provide information, reports, and access to books and records as required by the contracting agency to ascertain compliance.
3. Contract noncompliance may result in cancellation, termination, or suspension of the contract, and the contractor “may be declared ineligible for further Government contracts.”
4. It will report known or reasonably knowable subcontractor conduct that may violate the clause and will take remedial actions as directed.
5. It will notify the agency if a subcontractor sues the contractor and the suit puts at issue the validity of the clause.
6. It “recognizes that compliance with the requirements of this clause are material to the Government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code (False Claims Act).”

Section 2 defines “racially discriminatory DEI activities” broadly to encompass “disparate treatment based on race or ethnicity” in “recruitment, employment (e.g., hiring, promotions), contracting (e.g., vendor agreements), program participation, or allocation or deployment of an entity’s resources.”  The EO indicates that this framework extends to a range of training, mentoring, and development programs offered by contractors and subcontractors.³The inclusion of disparate treatment based on race or ethnicity in contracting (e.g., vendor agreements) is particularly difficult to reconcile with statutorily required small business subcontracting goals for women owned and disadvantaged businesses.

The EO’s definition of “racially discriminatory DEI activities” overlaps with, but does not reconcile, existing federal anti‑discrimination statutes such as Title VII and 42 U.S.C. § 1981, creating potential tension where programs that may be defensible under existing law nonetheless draw scrutiny under the EO’s contractual standard.

Enforcement Mechanisms and FCA Overlay

The EO establishes multiple enforcement mechanisms that, taken together, signal increased scrutiny of DEI‑related compliance and potential exposure under the FCA.

• Agency enforcement. The EO directs the Office of Management and Budget (“OMB”) to issue guidance and instructs agencies to cancel, terminate, or suspend contracts, and to pursue suspension or debarment, for failures to comply with the new clause. Agencies must report to the White House within 120 days on implementation and are directed to conduct ongoing reviews to ensure compliance.
• Sector‑specific guidance. OMB, in coordination with DOJ, the Domestic Policy Council, and the Equal Employment Opportunity Commission (“EEOC”), must identify economic sectors that pose a heightened risk of “racially discriminatory DEI activities” and issue best‑practice guidance for agency compliance within those sectors.
• FCA emphasis. The EO directs DOJ to consider bringing actions against contractors and subcontractors that violate the clause and to ensure “prompt review” of qui tam actions. Typically, DOJ’s investigation of allegations in qui tam complaints takes months or even years, but the EO directs DOJ to complete its investigation and make a decision whether to intervene and take over a litigation or allow the whistleblower to proceed on behalf of the United States “to the maximum extent practicable” within the initial 60‑day seal period. That short time frame may lead to more quick declinations that allow whistleblowers to litigate DEI-based FCA cases in the name of the United States.
• FAR implementation. The EO requires the FAR Council to amend the FAR to incorporate the new clause and eliminate “inconsistent” provisions, and to issue interim deviations or guidance within 60 days to enable implementation before formal rulemaking. The compressed timeline increases the likelihood of inconsistent agency implementation, including variations in clause language, flow‑down requirements, and contracting officer expectations during the initial rollout. Although the EO directs the FAR Council to remove provisions that are “inconsistent” with the new clause, the order also provides that implementation must be consistent with applicable law, suggesting that existing statutory antidiscrimination and procurement obligations will continue to frame any resulting FAR changes.

While the EO states that compliance with the DEI clause is “material” for FCA purposes, the Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar⁴ makes clear that materiality is a “demanding” and fact-specific inquiry and is not established solely by the government’s characterization of a contractual requirement.

Practical Implications for Contractors

Federal contractors and subcontractors should expect the new clause to be incorporated quickly into solicitations and awards. Several obligations under the EO require fact‑specific assessments, including reporting requirements tied to subcontractor conduct that is “known or reasonably knowable” and that “may violate” the clause. These requirements are likely to require judgment calls and may lead prime contractors to adopt more robust subcontractor oversight than they have historically maintained and to consider the elimination of supplier diversity programs that preference women or minorities as well as goals for those programs.

Agencies are also expected to focus on DEI‑related initiatives affecting recruitment, hiring, promotion, compensation, supplier diversity, leadership and mentoring programs, employee resource groups, and similar activities, as well as on subcontractor practices and representations. Contractors should anticipate expanded reporting and record‑access expectations, including requests for information to assess compliance with the new clause, which will require close coordination among legal, human resources, and compliance functions, as well as careful management of privilege and sensitive personnel data.

Given the anticipated use of interim FAR deviations, contractors may want to take steps to prepare in advance of final regulations. Near‑term considerations include reviewing DEI initiatives and policies, reassessing subcontractor diligence and flow‑down provisions, developing protocols for responding to agency information and access requests, providing targeted training to relevant personnel, and monitoring further guidance and early enforcement activity. As always, it will be important to document good faith decision-making around legal DEI practices and programs that contractors chose to keep.

1 “Contract‑like instruments” generally refers to binding federal agreements that are not traditional procurement contracts, including other transaction agreements (“OTAs”), certain cooperative or grant‑style arrangements, and interagency agreements or memoranda of understanding that operate in practice as contracts for goods or services.

2 “Agencies” include executive departments and “independent establishments” subject to Federal Property and Administrative Services Act. See EO § 3 (citing 40 U.S.C. § 102(4)(A)).

3 Section 2(b) of the EO states: “‘Program participation’ means 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.”

4 579 U.S. 176 (2016).