Déjà Vu? New Executive Order Outlines Restrictions on Contractor and Subcontractor DEI Activity

On March 26, 2026, President Trump issued an executive order (EO) titled Addressing DEI Discrimination by Federal Contractors. The EO declares diversity, equity, and inclusion (DEI) “activities” “unethical and often illegal,” and imposes new obligations on federal contractors and subcontractors related to DEI programming. Contractors that do business with the federal government — or that work as subcontractors for companies that do — should review the EO closely to determine the extent to which they are compliant with the new requirements.

What the EO Does

The EO prohibits federal contractors from engaging in “racially discriminatory DEI activities,” defined 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.”

The EO requires a new mandatory contract clause that all federal agencies must, within 30 days, include in their contracts and contract-like instruments. Under this clause, contractors must agree to:

• Not engage in any “racially discriminatory DEI activities.”
• Provide full access to books, records, accounts, and other information required by the contracting agency “for purposes of ascertaining compliance with this clause.”
• Acknowledge that noncompliance may result in cancellation, termination, or suspension of a contract, or result in a contractor being “declared ineligible for further Government contracts.”
• Report “known or reasonably knowable” subcontractor violations and take remedial actions as directed by the contracting agency.
• Notify the agency if a subcontractor files a lawsuit that “puts at issue, in any way, the validity of the clause.”
• Recognize that compliance is material to government payment decisions, with direct implications under the False Claims Act (FCA).

The EO directs agencies to report on their implementation of the EO within 120 days, i.e., by July 24, 2026.

The EO directs the Office of Management and Budget (OMB) to issue guidance to agencies to ensure compliance with this order. Consistent with any such guidance, agencies are directed to “cancel, terminate, [or] suspend” contracts, or cause those actions to be taken, where contractors or subcontractors fail to comply with the clause, and to suspend or debar contractors or subcontractors for their failure to comply. In the same vein, the EO directs the attorney general to consider bringing FCA actions against noncompliant contractors and to prioritize review of qui tam lawsuits alleging such noncompliance in federal contracts and subcontracts.

The EO further requires OMB to identify economic sectors “that pose a particular risk of entities engaging in racially discriminatory DEI activities based on current or past conduct” and issue targeted guidance for those industries.

Contractors should expect Federal Acquisition Regulation (FAR) deviations to implement the EO, followed by formal rulemaking. The EO directs the FAR Council to, within 60 days, “issue deviation and interim guidance under subpart 1.4 of the Federal Acquisition Regulation, as appropriate and consistent with applicable law, regarding agency implementation of the clause[.]” This suggests that agencies will modify solicitations and may seek to modify contracts to incorporate any class deviations within the next few months. (We note, however, that contractors may see modifications sooner because the EO also directs agencies to add the EO’s required clause within 30 days.) The FAR Council is also directed to amend the FAR to add the EO’s clause and remove any inconsistent clauses.

Comparison to 2025 EOs

The EO is best understood as a “Phase 2” contracting implementation of the administration’s earlier January 2025 executive orders (EO 14151 and EO 14173) by adding a more operational, procurement-ready compliance mechanism that agencies must embed in covered contracts and subcontracts.

EO 14151 directed broad termination of DEI and “environmental justice” offices and activities within the federal government and called for termination of “equity-related grants or contracts,” as well as identification of contractors providing DEI training and materials. EO 14151 primarily targeted internal government DEI architecture and “equity-related” spending, setting the policy predicate for the March 2026 EO.

EO 14173 revoked EO 11246, which established the Office of Federal Contract Compliance Programs (OFCCP) and provided OFCCP its operational authority to ensure federal contractor compliance with anti-discrimination laws, including through mandated affirmative action. That order directed the OFCCP to cease promoting “diversity” and holding contractors responsible for “affirmative action” or workforce balancing on specified bases. It also required agencies to include in every contract or grant award an FCA materiality term and a certification that the party “does not operate any programs promoting DEI that violate any applicable federal anti-discrimination laws.” Significantly, EO 14173 did not include a definition of what constitutes an unlawful DEI program, though subsequent guidance from the administration throughout 2025, including from the Equal Employment Opportunity Commission (EEOC) and the attorney general, provided contractors some insight.

The March 2026 EO doubles down on the January 2025 framework by specifying the government’s concern with “racially discriminatory DEI activities;” imposing a mandatory clause with an apparent flow-down and subcontractor reporting obligation; reiterating and operationalizing the FCA materiality concept inside the clause itself; giving agencies broad access to contractors’ documents and information; and requiring FAR Council action to integrate the approach into the FAR.

Key Questions for Consideration

This EO raises a number of questions for contractors about the scope and applicability of the clause, how it will be implemented, and whether the clause is subject to challenge. As these questions play out, contractors should be on the lookout for proposed contract modifications to implement the EO.

Immediate questions for consideration include:

• The extent to which the term “racially discriminatory DEI activities,” as defined in the EO, squares with prior administration guidance on “unlawful DEI,” and, more importantly, how both terms are to be interpreted in light of federal anti-discrimination law. 
• Whether the term “contract-like instrument[s]” referred to in the EO includes grants, other transactions agreements, or contractors’ supplier agreements.
• The impact of this EO on state laws requiring participation in supplier diversity programs, including whether the EO’s prohibition of “racially discriminatory DEI activities” impacts Small Business Administration (SBA) set-aside programs or small business subcontracting goals.
• Whether the EO or its statutory authority (Federal Property and Administrative Services Act (FPASA) (40 U.S.C. § 101 et seq.)) authorizes the president to direct a FAR class deviation and amendment.
• Whether the EO will require contractors to both certify and affirmatively demonstrate or document compliance with the certification, and what such demonstration or documentation would entail.
• Whether the EO’s requirement for contractors to provide their books and records to demonstrate compliance conflicts with contractual audit provisions, especially for commercial contracts.
• What types of subcontractor conduct are “reasonably knowable.” What types of contract assurances or compliance programs that standard might require, and whether the standard is enforceable.
• The extent to which the proposed clauses may serve as a predicate for an FCA claim and whether a blanket requirement for all contractors to certify to materiality may serve as evidence of the same.

Crowell would like to thank Lauren Phillips for her contribution to this alert.