Coming Soon to Procurement Contracts – A Contract Clause Prohibiting Certain DEI Activities

On March 26, 2026, the President issued Executive Order 14398 titled “Addressing DEI Discrimination by Federal Contractors.” The Order significantly increases the compliance risks for federal contractors and subcontractors regarding racially or ethnically based diversity, equity, and inclusion (DEI) activities, by mandating inclusion of a new clause in federal contracts and subcontracts prohibiting certain DEI programs and directing federal agencies to enforce compliance with that clause aggressively. Failure to comply with the clause could lead to severe consequences, including contract termination, suspension or debarment from federal contracting, and even False Claims Act liability. This alert summarizes this new Order and what government contractors and subcontractors should do now to prepare for the implementation of the new contract clause and the corresponding compliance obligations it will impose.

How Did We Get Here

The recent Order is not the first time the Trump Administration has identified concerns with DEI programs. Two prior Executive Orders issued in January 2025, Executive Order 14151, Ending Radical and Wasteful Government DEI Programs and Preferencing, and Executive Order 14173, Ending Illegal Discrimination and Restoring Merit-Based Opportunity, identified concerns that DEI programs were a proxy for “illegal and immoral discrimination programs” both in the federal government and required by the federal government in grants and contracts. Executive Order 14398 was issued to address the Administration’s position that “DEI activities are not only unethical and often illegal, but also cause inefficiencies, waste, and abuse within entities that engage in such practices.” 

Since January 2025, the Administration has withdrawn federal funding for programs that it views as involving illegal DEI activities and many agencies have included clauses in federal financial assistance agreements (i.e., grants and cooperative agreements) prohibiting recipients from having illegal DEI programs. Until now, the government had not acted to implement a similar requirement in federal procurement contracts. 

Coverage and Applicability

The requirements of the Order will apply to federal contractors and subcontractors (at all tiers) performing work under federal procurement contracts, including contracts subject to the Federal Acquisition Regulation (FAR). Given that the term “subcontract” in the FAR includes purchase orders, these requirements will impact companies throughout the supply chain for federal contracts.

What the Executive Order Requires

The Executive Order includes the following requirements: 

1. Mandatory Contract Clause. By April 25, 2026, all executive departments and agencies, including independent establishments, must begin including a new clause specified in the Executive Order in all procurement contracts, contract‑like instruments, and subcontracts at all tiers that requires contractors to agree that they will not engage in “racially discriminatory DEI activities.” 

   The term “racially discriminatory DEI activities” is defined as “disparate treatment based on race or ethnicity,” including in:

• Hiring, promotion, and other employment decisions
• Training, mentoring, or leadership development programs
• Vendor and supplier agreements
• Membership or participation in employer‑sponsored programs or initiatives (including educational opportunities, clubs, and associations)
• Allocation or deployment of company resources

Importantly, the focus is on race‑ or ethnicity‑based differentiation, regardless of how a program is labeled or justified. The inclusion of a definition of “racially discriminatory DEI activities” sets the new Order apart from prior Executive Orders targeting “illegal DEI” that left the term undefined and subject to challenge as impermissibly vague.

The clause not only prohibits contractors from engaging in “racially discriminatory DEI activities,” but it also requires the contractor to furnish information and reports and access to its books and records so the agency can ascertain the contractor’s compliance with the clause. The precise scope of this reporting burden remains to be fleshed out in the contract clause adopted by the FAR Council, including whether it will require preparation and submission of regular reports or will simply require contractors to make their books and records available at an agency’s request.

The Order directs the FAR Council to amend the FAR to include the clause specified in the Order in all federal procurement contracts and solicitations, and within 60 days of the Order, issue deviation and interim guidance consistent with the Order. As a result, while contractors may be afforded an opportunity to comment on the contract clause issued by the FAR Council, it appears likely that the clause will be issued as an interim rule that is immediately effective prior to public comment. Thus, contractors and subcontractors should prepare for this clause to be included in solicitations and contracts issued within 30-60 days. 

2. Contractual Enforcement Mechanisms. A failure to comply with the requirements of the clause can result in:

• The cancellation, termination, or suspension of the contract or subcontract (in whole or in part)
• Suspension or debarment of the contractor or subcontractor from federal contracting
• Liability under the civil False Claims Act. 

3. Mandatory reporting. Contractors are required to report any subcontractor’s “known or reasonably knowable” violations of the clause, and whether a subcontractor has sued the contractor and the suit puts at issue, in any way, the validity of the clause.

4. False Claims Act Exposure. The contract clause also indicates that compliance is material to the government’s decision to make payments, which renders noncompliance with the clause a civil False Claims Act (FCA) risk. Continuing the Department of Justice’s current anti-DEI enforcement initiatives, the Order directs the Department of Justice to prioritize potential FCA actions for violations of the new contract clause, under which contractors face potential treble damages and whistleblower actions if they certify compliance while maintaining prohibited practices.

What the Order Does Not Do

The Executive Order does not ban all DEI‑related efforts. It targets race‑ or ethnicity‑based differential treatment, not race‑neutral initiatives that are open to all employees or vendors and administered on objective criteria. Nor does the Order expressly target gender-based initiatives, though such programs may be suspect under the Administration’s expressed concerns regarding programs that provide for differential treatment based on “immutable characteristics.” The Order does, however, reflect heightened scrutiny of contractors’ and subcontractors’ programs, and agencies are instructed to ensure compliance is verifiable, not merely aspirational.

The Order also does not specify whether any contractors are exempt from the requirements of the clause (e.g., contracts for commercial products or commercial services, or contracts for commercially available off-the-shelf (COTS) items, contracts below a certain dollar threshold, etc.). The Order also does not indicate whether agencies will be required to try to amend existing procurement contracts to include the new clause, or if it will only be required in new solicitations and contracts.

Key Takeaways for Government Contractors

• DEI compliance is now a contractual obligation, not just a policy risk—and that obligation and compliance risk will flow down through the federal supply chain to reach entities that operate only as subcontractors or suppliers on federal contracts.
• Existing employment, training, and supplier programs should be reviewed through an ethnicity-neutral and race‑neutral lens.
• Subcontractor oversight and flow‑down compliance will be critical.
• FCA risk materially increases where programs or certifications are misaligned with contract terms.

Recommended Next Steps

As the Administration moves to end racial discrimination with a focus on DEI programs, contractors should:

1. Inventory DEI‑related programs, policies, and eligibility criteria;
2. Evaluate whether any programs differentiate based on race or ethnicity;
3. Prepare for new contract clauses and subcontract flow‑downs in subcontracts at all tiers, including purchase orders; and
4. Align internal documentation and certifications with revised requirements.

If you have any questions regarding Executive Order 14398 and its implications for federal contractors and subcontractors/suppliers, please feel free to contact our team: Jeffrey Kopp, Dan Kaplan, Frank Murray, or Erin Toomey.