On March 26, 2026, President Trump issued a new executive order, “Addressing DEI Discrimination by Federal Contractors” (the Order), marking a continuation of the Administration’s comprehensive effort to discourage and punish diversity, equity, and inclusion (DEI) programs and practices in U.S. businesses and institutions. The Order emphasizes the Administration’s view that federal contractors are continuing to engage in impermissible DEI activities and directs agencies to move quickly to eliminate those practices.
The Order touts the Administration’s efforts to combat DEI activities but claims that “some entities continue to engage in DEI activities and often attempt to conceal their efforts to do so.” The Order reiterates the Administration’s assertions in prior executive orders that DEI activities are “unethical and often illegal.” The Order and accompanying “Fact Sheet” likewise repeat earlier claims by the Administration that DEI activities lead to “workforce inefficiencies” and undermine merit-based hiring and promotion.
The Order requires federal agencies to prohibit “racially discriminatory DEI activities” in all contracts and “contract‑like instruments,” including subcontracts at any tier, and directs the Department of Justice (DOJ) to consider False Claims Act (FCA) enforcement for violations of these requirements.
In particular, the Order requires U.S. government executive branch agencies to add standardized contract language prohibiting DEI activities to federal contracts and contract-like instruments within 30 days. The Order further directs agencies to require prime contractors to monitor and report on subcontractors’ compliance and expressly ties these contractual obligations to the materiality standard that provides a foundation for liability under the FCA. The Order also outlines penalties for noncompliance, signaling heightened federal scrutiny of company DEI programs in the federal contracting context.
The Order builds on President Trump’s January 2025 Executive Order (EO) 14173 (“Ending Illegal Discrimination and Restoring Merit-Based Opportunity”). Although EO 14173 was similarly focused on ending federal support for DEI activities, it did not attempt to define the race- and ethnicity-based DEI activities that it sought to prohibit.
Overview of the Order and New Contract Clause
Section 3 of the Order directs executive departments and agencies—“to the extent permitted by law”—to add a new clause to all “contracts and contract-like instruments, including contractors’ subcontracts and subcontractors’ lower-tier subcontracts.” The specific reference to “contract-like agreements” may be intended to capture “other transaction” agreements and agreements that are not otherwise subject to the Federal Acquisition Regulation (FAR). It is not yet clear whether the Order will be applied to cover non-procurement financial assistance agreements; it is notable that the Administration has proposed a similar but distinct annual certification requirement for federal financial assistance registrants in the SAM.gov system.
The new clause would provide, in relevant part, that contractors must not engage in “racially discriminatory DEI activities,” which the Order defines 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.” This definition does not expressly incorporate or cross-reference an antidiscrimination statute such as Title VII of the Civil Rights Act of 1964 or 42 U.S.C. § 1981. The Order further defines “program participation” as “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.”
The clause would also require contractors to (1) furnish relevant information and provide the contracting agency with access to the contractor’s books and records for purposes of ascertaining compliance; (2) acknowledge that the contract can be canceled and the contractor or subcontractor declared ineligible for future government contracts as a result of noncompliance; (3) pledge that the contractor will report any violations by subcontractors; and (4) recognize that its compliance with these terms is material to the government’s payment decision for FCA purposes.
Additionally, beyond merely flowing down the clause to subcontractors at any tier, the clause would require contractors to “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.” This requirement is unusual, as most FAR flow-down clauses require only that higher-tier contractors include specified terms in lower-tier subcontracts and do not require that the contractor take additional steps to ensure compliance with those terms. Thus, the Order would add a monitoring and reporting requirement on top of the traditional flow-down framework.
The Order requires agencies to incorporate the proposed clause in new and existing contracts within 30 days. That deadline is likely to pass significantly before the issuance of any guidance by the Federal Acquisition Regulatory Council, which has 60 days to “issue deviation and interim guidance” on the implementation of the new contract language. In other words, some agencies might attempt to impose new compliance obligations upon contractors before any implementation guidance has been issued.
Penalties for Noncompliance
Section 4 of the Order directs the Office of Management and Budget (OMB) to provide guidance to agencies for terminating contracts with contractors that fail to comply with the clause and to suspend or debar contractors for failure to comply. It further directs OMB, DOJ, and the Equal Employment Opportunity Commission to “identify economic sectors that pose a particular risk of entities engaging in racially discriminatory DEI activities” and issue additional guidance to ensure compliance in those sectors. Finally, it directs DOJ to consider whether to bring FCA claims against contractors that violate the clause and to promptly review qui tam FCA actions brought by private plaintiffs alleging violations of the clause.
Analysis and Next Steps
EO 14173, which we previously discussed here, included a provision directing agencies to require that federal contractors and award recipients certify that they did not “operate any programs promoting DEI that violate any applicable Federal anti-discrimination law” and to agree that such compliance was material to the government’s payment decisions for purposes of the FCA. EO 14173 did not, however, define what constituted unlawful DEI or prescribe how the required certifications would be imposed on subcontractors and subrecipients.
The Order also goes further than EO 14173 by (1) directing agencies to take specific actions in response to noncompliance, including grant termination and debarment, and (2) directing DOJ to consider bringing FCA actions against entities that do not comply. The Order also relies in part on a different legal basis: the Federal Property and Administrative Services Act, 40 U.S.C. §§ 101 et seq., a statute that grants the President authority to prescribe policies designed to achieve efficient procurement practices in the federal government.
The practical effect of the Order will depend on forthcoming guidance from OMB, subsequent FAR amendments, the nature and scope of agencies’ enforcement actions, and the outcome of any legal challenges to the Order itself or to agency implementation efforts, as agencies move to incorporate the new requirements into federal contracts. As a result, while the creation of standardized terms may seek to promote a unified federal contracting approach, contractors may be looking at a period of heightened uncertainty during the early implementation period until there is additional guidance.
WilmerHale is monitoring these developments, including implementing guidance and potential litigation, and is available to assist clients in assessing potential implications for their contracting and compliance programs.
