On March 26, 2026, President Trump issued an Executive Order titled “Addressing DEI Discrimination by Federal Contractors,” establishing a new federal contracting policy that treats certain diversity, equity, and inclusion practices as prohibited racial discrimination in the performance of federal contracts and subcontracts. The order states that the Administration’s policy is to promote “economy and efficiency” in federal contracting by preventing racial discrimination, and it defines “racially discriminatory DEI activities” broadly to include disparate treatment based on race or ethnicity in recruiting, hiring, promotions, vendor agreements, program participation, and the allocation or deployment of company resources. The White House has also released a “fact sheet” that outlines the Order’s main enforcement mechanisms including required contract clauses, OMB guidance, potential contract termination or debarment, and possible False Claims Act exposure.

Within 30 days, agencies must include a new clause on Federal prime contracts, contract-like instruments, subcontracts, and lower-tier contracts that require contractors to:

• agree not to engage in covered DEI activities
• provide information and access to books and records requested by the government to assess compliance,
• report known or reasonably knowable subcontractor conduct that may violate the clause
• notify the agency if litigation involving a subcontractor places the validity of the clause at issue.

Most notably, the order states that compliance with the clause is “material” to the government’s payment decisions for purposes of the False Claims Act. This moves DEI-related compliance from a policy and HR issue into the realm of contract performance, payment eligibility, suspension and debarment exposure, and potential False Claims Act criminal liability.

The enforcement provisions are significant. The order instructs agencies to cancel, terminate, or suspend contracts for noncompliance and to pursue suspension and debarment where appropriate. It also directs the Attorney General, in consultation with contracting agencies, to consider False Claims Act enforcement against contractors or subcontractors that violate the clause and to ensure prompt review of related qui tam actions brought by private relators. In addition, OMB, DOJ, the Domestic Policy Council, and the EEOC are directed to identify sectors deemed to pose heightened risk and to issue further compliance guidance for those industries.

The order also directs the Federal Acquisition Regulation (FAR) Council to amend procurement regulations to incorporate the new clause and remove inconsistent provisions and to issue interim guidance within 60 days, pending formal rulemaking. Agency heads must review implementation within 120 days and continue regular oversight thereafter.

Significant Risk and Burden for Contractors
The EO essentially creates three layers of exposure at once:

• liability for the underlying conduct;
• liability for weak documentation, reporting, and subcontractor oversight; and
• enforcement consequences through contract remedies, debarment, and potential False Claims Act cases.

This order materially increases legal and compliance risk for federal contractors and subcontractors. Because the order’s definition of prohibited activity is broad and reaches employment practices, vendor relationships, mentoring and leadership programs, and resource allocation, contractors should expect scrutiny not only of formal set-aside or preference programs, but also of internal diversity initiatives and supplier-diversity practices that may be characterized by enforcement officials as race-based decision-making.

While the enforcement is clear, many of the requirements of contractors are not. For example, the EO requires contractors to report subcontractor conduct that is “known or reasonably knowable,” that “may” violate the clause but it does not define that phrase, leaving scope for later interpretation through OMB guidance, FAR implementation, and enforcement practice.

The EO also adds significant record keeping and flow-down management oversight of subcontractor activities, essentially forcing prime contractors to face risk both from their own conduct and from failures to manage downstream compliance.

Recommended Next Steps for Contractors
Federal contractors should promptly review DEI-related employment, promotion, mentorship, supplier-diversity, subcontracting, and training programs to assess whether any elements could be alleged to involve differential treatment based on race or ethnicity. Companies should also review subcontractor oversight processes, contract certifications, compliance protocols, document retention practices, and escalation procedures for government inquiries. Contractors with active federal business should be prepared for new contract clauses, additional agency guidance, and heightened enforcement attention over the next 30 to 120 days.

Call to Action

The EO directs OMB and other agencies to issue guidance and identify sectors viewed as higher risk, and the FAR Council is expected to amend the FAR. Businesses, large and small, that expect disproportionate harm should stay in close contact with your Regional Council leadership to monitor the Federal Register and be prepared to provide comments, propose clarifying definitions, press for safe harbors, and document unintended economic consequences for contractors, subcontractors, and supply chains.

Small and minority-owned businesses, and the organizations that support them, must contact their representatives in the House and Senate immediately and with urgency. Congress must oppose this EO which creates a serious risk that fear-driven compliance, legal uncertainty, and administrative burden will lead prime contractors and agencies to narrow opportunities, restrict access, and preemptively exclude diverse firms from federal supply chains at every level. If left unchallenged, the result could be fewer pathways into the federal marketplace, reduced competition, weakened supplier networks, and lasting damage to inclusive economic growth. Policymakers must hear now, directly and clearly, that the consequences of this Order extend far beyond compliance—and will undermine opportunity, participation, and economic resilience across the federal contracting ecosystem. Large prime contractors should consider shifting from identity-explicit preferences to race-neutral criteria such as outreach to underserved markets, identifying under-resourced businesses, small-business capacity building, broader recruiting pipelines, mentorship open to all, or geographically targeted opportunity programs. This approach can preserve business goals while reducing exposure under the EO’s wording, which is framed around “disparate treatment based on race or ethnicity.”