New Executive Order Places Federal Contractors’ DEI-Related Programs Under Immediate Scrutiny

Seyfarth Synopsis: Yesterday, President Trump issued an Executive Order requiring agencies to incorporate anti‑discrimination obligations directly into federal contracts and subcontracts on an accelerated timeline. The Order adopts a broad definition of prohibited “racially discriminatory DEI activities,” which extends to internal programs, contracting relationships, and “allocation or deployment of an entity’s resources.” The Executive Order carries a consistent message regarding the Administration’s continued focus on DEI activities for federal contractors with immediate implications not only across employment and procurement, but also for broader organizational operations, including how contractors allocate and deploy internal resources.

On March 26, 2026, President Trump issued a new Executive Order, “Addressing DEI Discrimination by Federal Contractors” and a Fact Sheet, using federal procurement as a vehicle to restrict race‑conscious practices among government contractors. The Order calls for the rapid incorporation of a detailed compliance clause into federal contracts and subcontracts, expressly links compliance to contracting eligibility, and squarely frames violations as potential False Claims Act (“FCA”) exposure.

The Executive Order builds on and operationalizes the Administration’s earlier recission of the prior federal affirmative action framework under Executive Order 14173. Taken together, these actions reinforce a shift toward a contract-based enforcement model to eliminate “racially discriminatory DEI activities.”

Defining “Racially Discriminatory DEI Activities”

The Order begins by defining the conduct it seeks to regulate. For purposes of federal contracting, “racially discriminatory DEI activities” means “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.”  In addition, “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 scope of the definition is broad and extends beyond traditional employment or contracting contexts governed by antidiscrimination laws such as Title VII of the Civil Rights Act of 1964 or 42 U.S.C. § 1981. The inclusion of the “allocation or deployment” of an entity’s resources is particularly notable, as it appears to reach beyond discrete employment or contracting actions to encompass broader decisions regarding how an organization allocates time, funding, and other internal resources.

Mandatory Contract Clauses and Flow‑Down Obligations

The central enforcement mechanism of the Order is based on contracting requirements. Within 30 days, executive agencies are directed to ensure that federal contracts and “contract‑like instruments” include a standard clause imposing specific obligations on contractors and requiring those obligations to be flowed down to subcontractors and lower‑tier subcontractors.

Under that clause, contractors must agree that they will not engage in any racially discriminatory DEI activities as defined in the Order. They must also agree to furnish all information and reports, including providing access to books, records, and accounts as requested by contracting agencies for purposes of assessing compliance. Contractors are also required to report known or reasonably knowable violations by its subcontractors and to take remedial action as directed by the contracting department or agency.

A violation by the contractor or a subcontractor may result in cancellation, termination, or suspension of the contract, in whole or in part, and may render the entity ineligible for future government contracts.

The Executive Order further requires contractors to notify the government if a subcontractor sues the contractor and places the validity of the new contract terms at issue. This reporting obligation signals the Administration’s intent to ensure early visibility into legal disputes that could undermine or call into question the enforceability of the clause.

False Claims Act Exposure, Penalties, Oversight, and Targeted Enforcement

The required new contract clause expressly provides that contractor compliance is material to the Government’s payment decisions for purposes of the False Claims Act. This provision builds on Executive Order 14173 (January 2025), which first embedded payment materiality and False Claims Act risk into federal contractors’ anti‑discrimination compliance obligations.

The Order directs the Director of the Office of Management and Budget (“OMB”) to issue guidance to ensure agency compliance and mandates that contracting agencies cancel, terminate, suspend, or refer contracts for suspension or debarment where contractors or subcontractors fail to comply.

In addition, OMB, in coordination with the Attorney General, the Assistant to the President for Domestic Policy, and the “Chairman” of the EEOC, is tasked with identifying industries deemed to present heightened risk of engaging in racially discriminatory DEI activities based on current or past conduct. Additional sector‑specific guidance is expected, signaling that enforcement may be targeted rather than uniform across industries.

Agency heads must also conduct formal reviews of their implementation of the Order within 120 days and continue ongoing oversight thereafter. This reporting structure reinforces that the Administration views the Order as an active compliance mandate, not a transitional policy statement.

The Order further directs the Attorney General to consider bringing FCA actions against contractors and subcontractors that violate the clause and to ensure prompt review of qui tam actions brought by private individuals concerning government contracts, including timely decisions on whether the government will intervene in such actions.

FAR Amendments and Interim Guidance

Finally, the Order directs the Federal Acquisition Regulatory Council to amend the Federal Acquisition Regulation (“FAR”) to incorporate the new clause into federal procurement, solicitations, and contracts and to remove any inconsistent provisions. Pending completion of those amendments, the Council must issue deviation and interim guidance within 60 days to facilitate immediate agency implementation.

Contractors should therefore expect to see efforts by contracting agencies to implement the new required clauses well before the FAR is formally revised.

What Contractors Should Be Doing Now

The combined effect of these provisions puts all race-conscious programs, activities or resource allocations squarely within the scope of federal contract administration efforts. For many contractors, the new Executive Order will have no material impact as they do not engage in “racially discriminatory DEI activities.” However, contractors should still review their programs to ensure that all initiatives, including volunteer efforts, community-based sponsorships, and related activities, are free from any differing treatment on the basis of race.

Contractors should also consider how programs are described, both internally and externally. Public statements or internal messaging that suggest race‑based preferences or restricted access may heighten the risk of audits, enforcement actions, or potential False Claims Act litigation.

Federal contractors should approach this issue as an integrated compliance matter requiring coordination across legal, HR, government contracts, procurement, and compliance functions. A siloed approach that focuses only on traditional employment decisions is unlikely to address the full scope of exposure created by the new Executive Order.

Closing Observations

The March 26, 2026 Executive Order represents a significant escalation in the Administration’s effort to regulate DEI‑related practices through its federal procurement arm. Its significance lies not only in its substantive prohibitions, but in the way it operationalizes those restrictions through contractual obligations and its reach into the “allocation or deployment” of contractor resources, effectively regulating how contractors direct time, money, and internal investments. In addition, the Order authorizes contracting agencies to cancel, terminate, or suspend contracts, and to suspend or debar contractors for noncompliance, placing significant enforcement authority at the agency level to make direct determinations regarding a contractor’s eligibility to continue performing federal work.

Federal contractors and subcontractors should promptly assess whether existing programs or practices could be characterized as “racially discriminatory DEI activities” under the Order’s definitions, and prepare for rapid implementation through new contract clauses and guidance in the weeks ahead.

In the meantime, Seyfarth will continue to monitor agency guidance and implementation of this Executive Order. For questions regarding potential impact or compliance considerations, please contact the authors of this alert or your Seyfarth attorney.