Key Points

• New Trump executive order mandates new DEI clause in all federal contracts, subcontracts, and contract-like instruments by April 25, 2026.
• Contractor compliance with DEI clause deemed "material" to government payment decisions under False Claims Act.
• Contractors must monitor, report and remediate subcontractor noncompliance with the new clause.

A new executive order (EO) signed by President Trump increases pressure on federal contractors to eliminate diversity, equity and inclusion (DEI) practices, threatening the possibility of prosecution under the False Claims Act (FCA), contract termination and debarment.

The EO sets forth a new clause to be incorporated into the Federal Acquisition Regulation (FAR) prohibiting contractors from engaging in racial discrimination on federal contracts, which is defined to include race-based contracting preferences and disparate allocation of contractor resources. The EO further directs the Department of Justice (DOJ) to consider prosecuting contractors who violate the new clause under the FCA and to prioritize investigation of qui tam complaints alleging procurement fraud under the FCA, whether or not the fraud relates to DEI activities.

What Does the New Executive Order Do?

Issued on March 26, 2026, the EO is titled Addressing DEI Discrimination by Federal Contractors.

It directs agencies to incorporate a new clause prohibiting racially discriminatory DEI activities in all federal contracts, subcontracts, and contract-like instruments by April 25, 2026. Unusually, the EO prescribes the text of the clause, rather than allowing the FAR Council or agencies to draft a regulation implementing the EO’s mandates.

The text of the clause reads:

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).

While the Office of Management and Budget (OMB) is tasked with issuing implementation guidance to contracting agencies, the Executive Order instructs that agencies shall cancel, terminate, or suspend contracts where the new clause is violated.

Moreover, OMB, in coordination with other agencies such as the DOJ and the Equal Employment Opportunity Commission, must identify economic sectors that pose “a particular risk” of entities engaging in racially discriminatory DEI activities.

Prior DEI-Related Executive Orders

This EO follows a series issued in 2025 that targeted various aspects of DEI practices in the federal government and among recipients of federal contracts and grant funding, including:

• EO 14173, Ending Illegal Discrimination and Restoring Merit-Based Opportunity, revoked the longstanding requirements for nondiscriminatory hiring practices and most affirmative action plans in federal contracting established by EO 11246, “Equal Employment Opportunity.” EO 14173 required agencies to insert a term in every contract and grant stating that compliance with federal anti-discrimination laws is material to the government’s decision to pay claims for purposes of the civil False Claims Act (“FCA”), 31 U.S.C. § 3729(b)(4).
• EO 14151, Ending Radical and Wasteful Government DEI Programs and Preferencing, terminated federal DEI programs and required agencies to terminate all equity-related grants and contracts, and all DEI performance requirements for contractors and grantees. It also required agencies to list all federal contractors who provided DEI training or information to federal agency employees to the Office of Management and Budget (“OMB”).
• EO 14319, Preventing Woke AI in the Federal Government, prohibited the federal government from procuring AI models that incorporate or promote concepts like DEI or “ideological biases or social agendas.”
• EO 14168, Defending Women from Gender Ideology, Extremism, and Restoring Biological Truth to the Federal Government, required federal agencies to replace references to “gender” with “sex” and eliminate any materials referencing or funding supporting gender ideology.

The administration released a Fact Sheet alongside the EO, which listed key EOs and memoranda (including the four listed here) signed by President Trump in his efforts to “end DEI across the Federal Government.”

New Compliance Obligations for Contractors

The new EO doubles down on prior efforts by the administration to prohibit DEI and affirmative action efforts in the federal procurement process (e.g., race-based hiring, mentoring programs, recruitment, Employee Resource Groups, etc.), but does not change meaningfully the compliance landscape for federal contractors. The administration has previously made clear that it considers such activities illegal under the Civil Rights Act of 1964, and violations could trigger FCA liability and constitute a breach of contract under the new certification requirements.

Notably, the new EO does not address preferences based on protected characteristics generally, instead focusing on “racially” discriminatory DEI activities. It also adds to existing federal anti-discrimination laws by prohibiting contracting decisions based on race or ethnicity. In other words, contractors may not utilize any kind of minority-owned preference for subcontracts or vendor agreements issued in connection with federal contracts. Still, this likely will not have a significant impact on federal contractors since most federal contractors base their own contracting preferences on those flowed down from the federal government, i.e., preferences for small businesses that may be socially disadvantaged or woman-owned. Moreover, the EO’s scope is limited to conduct “in connection with the performance of work under this contract,” so it should not impact federal contractors who have minority business goals imposed by unrelated state or local government contracts.

This latest EO also goes further than existing mandates and guidance by imposing an obligation to report subcontractor non-compliance. In addition to monitoring their own programs, contractors must ensure that their subcontractors comply with the new clause, report subcontractors when they know or reasonably should know of a violation, and take remedial action against subcontractors as directed by the procuring agency.

The DOJ previously explicitly encouraged private parties to file qui tam actions under the FCA reporting illegal DEI activities, aiding DOJ’s efforts under the Civil Rights Fraud Initiative. The EO reiterates this priority by declaring violations of the new clause to be material under the FCA and directing the DOJ to consider prosecuting violations of the new clause. One of the more interesting aspects of the Executive Order is that it also directs the DOJ to prioritize qui tam FCA complaints brought based on any procurement fraud, not just DEI-related fraud.

Takeaways for Contractors

In the short term, contractors should review existing DEI programs and policies to determine whether any could be interpreted as encouraging disparate treatment based on race or ethnicity as defined under the EO. Contractors should expect agencies to incorporate the new clause into both new and existing contracts within the next 30 days. Once this occurs, they will have to ensure compliance moving forward.

Contractors could see an uptick in Civil Investigative Demands (CID) from DOJ in coming months, both DEI-related and otherwise. Upon receipt of a CID, it is important to engage counsel early, as they may be able to narrow the scope of the CID and ensure contractors’ rights are protected.

This information is intended to inform firm clients and friends about legal developments, including the decisions of courts and administrative bodies. Nothing in this alert should be construed as legal advice or a legal opinion. Readers should not act upon the information contained in this alert without seeking the advice of legal counsel. Views expressed are those of the author(s) and not necessarily this law firm or its clients. Prior results do not guarantee a similar outcome.