Key takeaways

• Mandatory clause: Agencies must add a clause to covered contracts prohibiting race- or ethnicity-based disparate treatment across employment, contracting, and programs.
• Binding, defined standard: Unlike Executive Order 14173, the Order imposes enforceable contractual duties and a standalone definition of prohibited conduct.
• Heightened FCA risk: Noncompliance may trigger termination, suspension/debarment, and FCA exposure, with DOJ directed to prioritize enforcement and whistleblower review.

A shift from certification to contractual enforcement

On March 26, 2026, President Trump signed an executive order titled Addressing DEI Discrimination by Federal Contractors (the Order), representing the latest—and most consequential—step in the Administration’s broader campaign to reshape diversity, equity, and inclusion (DEI) practices in federal procurement.  The Order directs federal agencies to incorporate a mandatory clause into contracts and subcontracts prohibiting what it defines as “racially discriminatory DEI activities.” In doing so, it moves beyond prior approaches grounded in policy guidance and certifications, instead embedding compliance obligations directly into the contractual framework. The accompanying enforcement mechanisms—contract termination, suspension and debarment, and False Claims Act (FCA) liability—underscore that these requirements are intended to operate as conditions of continued eligibility and payment, not merely aspirational standards.

The Order builds on, but goes significantly further than, Executive Order 14173 (Ending Illegal Discrimination and Restoring Merit-Based Opportunity), issued in January 2025. EO 14173 required contractors to certify that they did not “operate programs promoting DEI that violate any applicable Federal anti-discrimination law.” That formulation left contractors to interpret existing legal frameworks and assess risk accordingly.

The new Order replaces that open-ended standard with a defined and operational test. It expressly characterizes “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.” By articulating a standalone definition, the Order reduces reliance on external legal benchmarks and creates a compliance standard that agencies can apply directly.  The scope of “program participation” is particularly expansive—it encompasses training, mentoring, leadership development programs, educational opportunities, clubs, associations, and similar initiatives sponsored by the contractor or subcontractor. As a practical matter, this breadth may reach employee resource groups, affinity-based programs, and targeted mentorship initiatives that have become commonplace in large organizations.  The inclusion of “vendor agreements” similarly extends the Order’s reach into procurement practices. Supplier diversity programs that provide preferences based on race or ethnicity may now fall within the Order’s definition, potentially creating tension with existing small business subcontracting goals and diversity initiatives embedded in federal contracting policy. It is important to note that the new Order only relates to race and ethnicity, while EO 14173 mentioned other protected characteristics (e.g., sex, religion). It is possible that the government provides future guidance, further expanding the scope of “DEI activities.” 

The mandatory clause: detailed obligations and downstream risk

A defining feature of the Order is the requirement that agencies incorporate a mandatory clause into all covered contracts, subcontracts, and lower-tier subcontracts within 30 days. Under the clause, contractors agree that they “will not engage in any racially discriminatory DEI activities, as defined in section 2 of the Executive Order of March 26, 2026.” They must also “furnish all information and reports, including providing access to books, records, and accounts, as required by the contracting agency…for purposes of ascertaining compliance,” effectively granting agencies audit-like visibility into internal practices. The clause further provides that, in the event of noncompliance by the contractor or any subcontractor, 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.” These remedies are paired with affirmative obligations to monitor and report subcontractor conduct: contractors must report any “known or reasonably knowable” violations and take remedial action as directed by the government. They must also notify the agency if litigation involving a subcontractor places the validity of the clause at issue.  Most notably, the clause requires contractors to recognize that compliance “is material to the Government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code (False Claims Act).” This express acknowledgment elevates compliance from a contractual requirement to a potential basis for fraud liability. Lastly, and critically, the Order is expressly limited to race- and ethnicity-based disparate treatment and does not address other protected characteristics such as gender, religion, age, or disability. 

A multi-layered enforcement framework

The Order places unusual emphasis on FCA enforcement, signaling a clear intent to leverage the statute as a primary compliance tool. While EO 14173 relied on certification requirements that could support FCA theories of liability, the new Order goes further by requiring contractors to expressly acknowledge materiality and by directing the Attorney General to consider bringing FCA actions against violating contractors.  It also calls for the prompt review of qui tam whistleblower complaints, including efforts to render intervention decisions within the initial 60-day seal period “to the maximum extent practicable.” Taken together, these provisions suggest an expectation of increased whistleblower activity and more rapid government intervention decisions. At the same time, the Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar remains a critical constraint. The Court emphasized that materiality is a “demanding” and fact-specific inquiry that cannot be established solely by the government’s designation of a requirement as material. 

Beyond the FCA, the Order establishes a coordinated enforcement regime across the federal government. Contracting agencies are directed to cancel, terminate, or suspend contracts for noncompliance and to pursue suspension and debarment where appropriate. At a policy level, the Office of Management and Budget—working in coordination with the Attorney General, the Assistant to the President for Domestic Policy, and the EEOC Chairman—is tasked with identifying sectors that present heightened risk and issuing sector-specific compliance guidance. Agency heads must also review implementation and report within 120 days, reinforcing accountability at the leadership level. This combination of centralized policy direction and agency-specific enforcement authority suggests that compliance will be monitored both systematically and at the contract level.

Implementation timeline, regulatory uncertainty, and potential legal challenges

The Order imposes an unusually compressed and potentially disruptive implementation timeline. Federal agencies must incorporate the mandatory contract clause within 30 days—by April 25, 2026—while the Federal Acquisition Regulatory Council has 60 days to issue deviation and interim guidance and begin the process of formally amending the Federal Acquisition Regulation. This sequencing creates an inherent tension: agencies are required to implement binding contractual obligations before uniform regulatory guidance is in place. In the near term, contractors should anticipate variation across agencies in how the clause is interpreted, deployed, and enforced, at least until more consistent direction emerges.

At the same time, the Order’s legal foundation may invite challenge. It relies on the Federal Property and Administrative Services Act (FPASA), a statute that has long underpinned executive action in the procurement space but whose scope remains unsettled. Federal courts have taken divergent approaches, with several circuits—including the Fifth, Sixth, Ninth, and Eleventh—concluding that FPASA does not confer unlimited authority to regulate contractors’ internal operations, while others, including the D.C. and Tenth Circuits, have adopted a broader view. In the absence of definitive guidance from the Supreme Court, the Order is likely to face scrutiny, raising the prospect of litigation that could further shape—or constrain—the boundaries of executive authority in federal contracting.

Practical implications for contractors

For contractors, the implications are immediate and consequential. Organizations should begin by closely examining existing DEI-related programs, policies, and training initiatives, with particular attention to any elements that could be characterized as disparate treatment based on race or ethnicity. Subcontracting practices warrant equal scrutiny, as the clause imposes affirmative obligations to monitor, report, and remediate subcontractor conduct. Contractors should also prepare for increased government oversight, including requests for information and potential audits, by establishing clear internal protocols and ensuring that relevant records are readily accessible. At the same time, the Order’s focus on FCA enforcement underscores the importance of evaluating potential exposure and strengthening compliance controls accordingly.

We will continue to monitor developments and provide strategic guidance to help clients remain compliant and mitigate risk in this rapidly changing environment.