Recently, President Trump issued an executive order focused on federal contractors and DEI (meaning “Diversity Equity and Inclusion”) initiatives. Through this executive order, the President has quickly placed new requirements on federal contractors and agencies to include specific terms within their contracts and subcontracts. These terms add up to a somewhat lengthy contract clause, with the basic requirement that parties agree to not utilize DEI practices and agree to comply with any investigations of such practices by an agency. The executive order also provides some stark consequences for any failure to comply with its aims. Let’s dive in.
On March 26, 2026, President Trump issued an executive order titled “Addressing DEI Discrimination by Federal Contractors.” According to the executive order, “some entities continue to engage in DEI activities and often attempt to conceal their efforts to do so” and “DEI activities are not only unethical and often illegal, but also cause inefficiencies, waste, and abuse within entities that engage in such practices.” Therefore this executive order was issued to “promote economy and efficiency in Federal contracting by preventing racial discrimination.”
To start off, the executive order 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.” It also defines “Program participation” as membership or participation in, or access or admission to different opportunities “that are sponsored or established by the contractor or subcontractor.” With that foundation set, the executive order then discusses the new requirements and expectations for federal contractors.
Within 30 days of the executive order (which was issued on March 26, 2026), “executive departments and agencies” must ensure that “contracts and contract-like instruments, including contractors’ subcontracts and subcontractors’ lower-tier subcontracts,” include the following clause (provided in its entirety here for your reference):
“In connection with the performance of work under this contract, [the contractor/appropriate party (contractor)] agrees as follows:
1. The contractor will not engage in any racially discriminatory DEI activities, as defined in section 2 of the Executive Order of March 26, 2026 (Addressing DEI Discrimination by Federal Contractors);
2. The contractor will furnish all information and reports, including providing access to books, records, and accounts, as required by the contracting agency pursuant to the Executive Order of March 26, 2026 (Addressing DEI Discrimination by Federal Contractors), for purposes of ascertaining compliance with this clause;
3. In the event of the contractor’s or a subcontractor’s noncompliance with this clause, this 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;
4. The contractor will report any subcontractor’s known or reasonably knowable conduct that may violate this clause to the contracting department or agency and take any appropriate remedial actions directed by the contracting department or agency;
5. The contractor will inform the contracting department or agency if a subcontractor sues the contractor and the suit puts at issue, in any way, the validity of this clause; and
6. The contractor 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).“
The executive order then explains that the Office of Management and Budget (“OMB”) will issue guidance for agencies, and consistent with such, contracting agencies will be able to “cancel, terminate, suspend, or cause to be cancelled, terminated, or suspended, any contract or contract-like instrument, or any portion or portions thereof, for failure of the contractor or subcontractor to comply with the clause” described above. The OMB will also work with other departments to identify “economic sectors” which could pose a risk of racially discriminatory DEI activities. Within 120 days of this executive order agencies will review implementation of the above required clause and report to the “Assistant to the President for Domestic Policy” regarding such. After that initial report to the White House, the agency head will then regularly conduct a review for compliance with this executive order. Additionally, the Attorney General is now given the ability to work with agencies to determine if a False Claims Act action should be brought against any contractors or subcontractors who violate the requirement to include the above discussed clause in its subcontracts.
Finally, the President directs the Federal Acquisition Regulatory Council to amend the FAR to implement the requirement of the above discussed clause in the FAR and remove any provisions which conflict with it. Also within 60 days of this executive order, the Federal Acquisition Regulatory Council is expected to issue deviation and interim guidance regarding implementation of these new requirements.
This executive order should hopefully drive contractors and subcontractors to quickly amend their subcontracts to reflect the required clause, and expect similar changes to any prime contracts or solicitations. Also, contractors should review their current processes and policies to ensure they would not trigger some finding of “racially discriminatory DEI activities” as defined in the executive order. The executive order places an expectation on contractors to ensure downstream subcontracts are compliant with this executive order, and to report any violations seen. The stakes are high here as the punishments range from payment issues, losing contracts, or even False Claims Act issues. Contractors have 30 days from March 26. 2026 to implement these changes in their subcontracts and internal processes. Unfortunately, that timeline does not line up seamlessly with guidance from OMB and the FAR Council, so much will need to be assumed by contractors as they implement this executive order. Contractors should also stand ready to be flexible and anticipate additional future changes as further guidance is provided by OMB and the FAR Council.
Of course, if you find yourself with legal issues related to federal contracting, such as compliance with this new executive order, make sure to reach out to federal government contracting lawyers such as ourselves.
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