New Executive Order Targets “DEI Discrimination” by Federal Contractors

At a Glance

• The new executive order (EO or Order) directs agencies to prohibit “racially discriminatory DEI activities” among federal contractors and subcontractors, and to enforce compliance through the inclusion of new contract clauses, certifications, records requests, monitoring processes, and at the risk of potential contract suspension, debarment, or False Claims Act (FCA) actions.
• The EO directs agencies to ensure that all “contracts and contract-like instruments” issued to federal contractors and subcontractors include new compliance clauses by April 25, 2026, and further directs the Federal Acquisition Regulatory (FAR) Council to issue deviation and interim guidance by May 25, 2026.
• The Order’s explicit materiality language and emphasis on “inefficiencies” and “artificial costs” may also lead agencies and whistleblowers to pursue FCA theories tied to potential overcharging, DEI‑related expenditures that may allegedly be built into indirect rates, and representations of compliance that may result in additional scrutiny during subsequent cost or pricing audits.

On March 26, 2026, President Trump issued Executive Order 14398, titled “Addressing DEI Discrimination by Federal Contractors.” The Order directs federal agencies to prohibit what it characterizes as “racially discriminatory” diversity, equity, and inclusion (DEI) practices by federal contractors and subcontractors (together, “contractors”) and to include new compliance, reporting, and enforcement mechanisms into the federal procurement system. The accompanying White House fact sheet underscores the administration’s intent to pursue an aggressive enforcement posture, including the use of the False Claims Act to address DEI‑related practices that agencies deem inconsistent with federal antidiscrimination laws.

Although the Order applies directly to contractors, its implications may extend beyond the federal procurement context. All recipients of federal funding should anticipate that agencies and the Office of Management and Budget (OMB) will apply similar principles through the Uniform Guidance and may issue similar compliance clauses in new award terms and conditions, while leveraging similar agency‑specific oversight mechanisms. We provide greater detail below on several provisions of the EO and its impact on contractors and federal funding recipients.

Background on Prior Related Actions

The EO builds on a series of earlier actions by the administration aimed at reshaping federal oversight of both federal contracting and grantmaking. As we previously reported, on January 21, 2025, President Trump signed Executive Order 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” revoking a number of longstanding executive orders relating to contractor affirmative action obligations and directing agencies to include new terms in all contracts and grant agreements requiring certification that they do not “operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.” An August 7, 2025, executive order, “Improving Oversight of Federal Grantmaking,” which we covered in a previous client alert, also introduced significant changes to how federal agencies review, award, and manage discretionary grants. Among other mandates, the “Improving Oversight” executive order directed agency heads and political appointees to undertake a sweeping review of all discretionary grants to ensure they “demonstrably advance the President’s policy priorities.” The EO also builds on Proposed Rule 3090-0290, which amends the System for Award Management (SAM) in order to implement the antidiscrimination guidelines articulated in Executive Order 14173.

Separately, in July 2025, the Department of Justice issued guidance regarding “the application of federal antidiscrimination laws to programs or initiatives that may involve discriminatory practices, including those labeled as Diversity, Equity, and Inclusion (‘DEI’) programs.” As outlined in a previous alert, the July 2025 DOJ guidance represented a significant expansion in how DOJ might attempt to apply federal antidiscrimination laws to federal funding recipients going forward, as evidenced by several subsequent FCA inquiries into major private companies.

Together, these actions laid the groundwork for the most recent EO, signaling a coordinated, government‑wide effort to target DEI‑related activities through the lenses of federal antidiscrimination requirements, cost‑allowability rules, and other enforcement mechanisms. We covered the impact of these executive orders in greater detail in previous client alerts, linked in the “Suggested Reading” section below.

Overview of EO 14398

Defining “Racially Discriminatory Practices”

At a high level, the EO asserts that certain DEI activities constitute “racially discriminatory practices” that are both illegal under federal antidiscrimination laws and “cause inefficiencies, waste, and abuse” by “impos[ing] artificial costs in hiring, promotion, and operations.” Unlike previous executive orders, the EO specifically 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.” Further, “program participation” is defined 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 specificity of this definition is notable in that only race-based discriminatory activities are within the scope of the EO, which does not appear to include sex-based discrimination. Additionally, as the definition explicitly focuses on “disparate treatment,” activities giving rise to “disparate impact” discrimination apparently fall outside the scope of the EO.

New Clause for Federal Contractors

The EO also introduces new contract terms for all covered contracts and directs agencies to incorporate a mandatory clause into federal contracts by April 25, 2026, that requires contractors to agree to the following:

1. The contractor will not engage in any “racially discriminatory DEI activities.”
2. The contractor will “furnish all information and reports,” including providing access to books, records, and accounts, as required by the contracting agency for purposes of ascertaining compliance.
3. In the event of noncompliance, the 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 noncompliance that is “known or reasonably knowable” 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 lawsuit puts the required EO clause at issue.
6. The contractor recognizes that “compliance with the requirements of this clause are material to the Government’s payment decisions” and performance obligations for FCA enforcement purposes.

Notably, despite setting forth a more specific definition than in prior executive orders, the scope of practices constituting “DEI activities” remains vague with no clear definition of “illegal DEI,” as referenced in prior executive orders. This may present potential concerns for contractors seeking to review their company practices to determine compliance with the EO. The EO also imposes liability on contractors for the conduct of their lower-tier subcontractors by threatening contract termination in the event of subcontractor noncompliance.

Implementing Regulations

Importantly, the EO directs the FAR Council to implement its requirements through amendments to the FAR, specifically directing the FAR Council to issue deviation and interim guidance within 60 days of the date of the EO, ending on May 25, 2026. In practical terms, this means agencies may begin inserting the required DEI‑related contract clause into new solicitations and awards even before the FAR is formally revised. The FAR Council is also directed to revise existing provisions to “remove any provisions that conflict or are inconsistent with” the new contract clause.

Accordingly, contractors should anticipate a multi‑stage process in which agencies first rely on class deviations and procurement memoranda to implement the EO’s requirements, followed by proposed and final FAR rules that codify the new compliance framework across the government‑wide acquisition system and through agency-specific FAR supplements.

Implications for Federal Contractors and Grant Recipients

False Claims Act Exposure and Enforcement

The EO explicitly states that compliance with its DEI‑related prohibitions is material to federal payment decisions. This language is designed to support FCA theories based on implied false certifications, material misrepresentation of compliance, and retention of payments while knowingly violating award conditions. Notwithstanding the uncertainty of what constitutes “illegal DEI” or what falls within the scope of the EO’s definition of “racially discriminatory DEI activities,” it remains to be seen whether federal agencies would succeed on the merits of any related FCA claims.

Going forward, agencies may argue that certain “DEI activities” are unallowable, unreasonable, or not allocable to federal awards, and may treat such expenditures as evidence of overcharging or inflated indirect cost rates. This scrutiny may extend to training costs, personnel costs for DEI staff, internal support programs, outreach and recruitment initiatives, and subrecipient costs.

Relatedly, the White House fact sheet issued alongside the EO suggests that agencies may examine whether DEI programs “artificially restrict[ ]” the labor pool or create other “inefficiencies,” leading agencies or whistleblowers to pursue FCA theories alleging overbilling, mischarging, or defective pricing‑style misrepresentations. To the extent the government seeks to enforce the FCA based on alleged overcharging or other allegations of wrongdoing resulting from performance “inefficiencies,” it would seem difficult for the government to meet its burden in such an instance. That said, FCA defense is expensive, and such allegations could result in a suspension and debarment referral. More likely, claims of inefficiencies may result in audit overreach and related efforts to gain access to additional information not otherwise within the scope of any number of cost or pricing audits, and other information to which relevant auditors may not be entitled.

Further, the EO could encourage whistleblowers, including employees, subcontractors, or students and faculty at educational institutions, to file “qui tam” suits alleging noncompliance with DEI restrictions, misrepresentation of DEI‑related activities, or improper charging of DEI costs to federal awards. While DOJ has historically utilized the FCA to combat fraud against the government in the defense and health care sectors, its expanded use in recent months and separately under the “Civil Rights Fraud Initiative“ represents a clear shift in FCA risk exposure for federal contractors and grant recipients.

Impact on Federal Grant Recipients

While the EO only formally governs “federal contractors,” its principles are also likely to influence federal grantmaking actions and research funding activities. It will likely impact any entity in the federal supply chain. Consistent with the “Improving Oversight” executive order, released in August 2025, OMB may issue guidance encouraging agencies to incorporate similar DEI‑related restrictions into funding notices, award terms and conditions, performance reporting requirements, and termination provisions under 2 C.F.R. Part 200. Agencies may also begin treating DEI‑related costs as unallowable or unreasonable under 2 C.F.R. Part 200, particularly where such costs implicate the types of “racially discriminatory DEI activities” or “program participation” actions defined in the EO itself. Federal grant recipients should continue to work closely with their award officials and monitor any new award terms and conditions issued in the coming weeks and months.

Practical Next Steps and Considerations

Federal contractors and grant recipients should consider reviewing recruitment, employment, and subcontracting practices to identify any initiatives that might be covered by the EO’s definition of “racially discriminatory DEI activities.” Federal funding recipients should also review cost-allocation practices and prepare for potential audits by federal agencies, pursuant to the EO’s new contract term requiring the furnishing of “all information and reports, including . . . access to books, records, and accounts” to ascertain compliance with the EO. Entities should also be informed as to the scope of information covered by audit guidelines and better understand the nature of the “books” and “records” to which they must provide access depending on the type of audit being conducted.

Moreover, contractors, federal funding recipients, and their subcontractors or subgrantees should review their subcontracting templates and “flow-down” procedures to address DEI-related compliance obligations. All contractors and grant recipients should also closely monitor FAR Council actions, OMB guidance, and agency‑specific implementation actions to stay ahead of evolving requirements in the coming weeks.

Conclusion

The executive order represents yet another effort from the administration to increase federal oversight of DEI activities across the contracting and grantmaking landscape. Contractors, grant recipients, and institutions of higher education should continue to assess their internal programs, employment processes, cost practices, and compliance frameworks. As agencies begin implementing the EO, contractors should expect increased scrutiny, expanded reporting obligations, and heightened FCA risks.

For More Information

For further information, you may contact the authors. Faegre Drinker’s government contracts, education, and labor and employment teams will also continue to monitor additional developments in the coming months.