New Executive Order Mandates Addition of Anti-DEI Clause to Federal Contracts

On March 26, 2026, the Trump Administration issued Executive Order 14398, "Addressing DEI Discrimination by Federal Contractors" ("EO 14398"), whose stated goal is to "promote economy and efficiency in Federal contracting by preventing racial discrimination" and eliminating diversity, equity, and inclusion ("DEI") activities. EO 14398 directs federal agencies to ensure, within 30 days of its issuance, that federal contracts, subcontracts and "contract-like instruments" include a clause prohibiting federal contractors and subcontractors from engaging in "any racially discriminatory DEI activities."

EO 14398 follows Executive Orders 14151 and 14173, discussed here, which required federal agencies to terminate all DEI-related grants and contracts and remove DEI principles from federal contracting procedures. As we discussed here, the Department of Justice ("DOJ") issued a Memorandum on July 29, 2025, to all federal agencies that sought to clarify which DEI practices the DOJ considers presumptively unlawful under EO 14173 and warned contractors that facially neutral policies can violate the law if they function as proxies for protected characteristics, such as race and sex.

The DEI Clause

EO 14398 requires that federal procurement contracts, subcontracts and "contract-like instruments" include a new clause (the "DEI Clause") requiring contractors and subcontractors to agree that they "will not engage in any racially discriminatory DEI activities."

Federal agencies have 30 days from March 26 to include the DEI Clause in all federal contracts "to the extent permitted by law." It is not yet clear whether agencies will implement the DEI Clause only prospectively, in connection with new contracts, or whether agencies also will seek to modify existing contracts to include the DEI Clause.

Relevant Definitions

EO 14398's definition of "racially discriminatory DEI activities" includes "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."

EO 14398 further defines "program participation" 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."

Notably, the definition of "program participation" extends beyond a contractor's own activities and purports to apply to third-party activities that are "sponsored" by the contractor or subcontractor.

Compliance Procedures and Penalties

The new DEI Clause will require contractors and subcontractors, at the contracting agency's discretion, to "furnish all information and reports, including providing access to books, records, and accounts." Contactors also will be obligated under the DEI Clause to report any "known or reasonably knowable" violations by subcontractors and to take any remedial steps directed by the contracting agency or department.

Non-compliance with any aspect of the DEI Clause may result in: (1) termination of the contract at issue or portions thereof; (2) suspension and debarment of a contractor or subcontractor; and (3) possible liability under the False Claims Act ("FCA").

EO 14398 suggests that termination and suspension or debarment may be mandatory for contractors who violate the DEI Clause. Indeed, Section 4's directive that contracting agencies "shall" enforce these penalties appears to contradict certain discretionary features of the procedures set forth in parts 9 and 49 of the Federal Acquisition Regulation ("FAR"). The Office of Management and Budget ("OMB") may clarify these issues when it releases forthcoming guidance, as instructed by EO 14398.

Future Regulations and Guidance

Under EO 14398, OMB is required to identify economic sectors "that pose a particular risk of entities engaging in racially discriminatory DEI activities" and issue additional guidance to contracting agencies in those sectors.

In addition, the Federal Acquisition Regulatory Council ("FAR Council") is directed to amend the FAR to incorporate the DEI Clause and "remove any provisions that are inconsistent with" the DEI Clause. The FAR Council has 60 days to issue deviations and interim guidance regarding agency implementation of the DEI Clause while the FAR amendments are being finalized.

Increased FCA Risk

Notably, the new DEI Clause may increase FCA exposure for federal contractors by requiring them to acknowledge "that compliance with the requirements of this clause are material to the Government's payment decisions for purposes of the [FCA]."[1]

Building upon the Trump Administration's Civil Rights Fraud Initiative (the "Initiative"), EO 14398 directs the Attorney General to "consider whether to bring actions under the [FCA] against any contractors or subcontractors that violate the" DEI Clause. As we discussed here, the Initiative's novel use of the FCA to enforce anti-discrimination and civil rights laws is untested.

Indeed, EO 14398 sets forth its own definition of "racially discriminatory DEI activities," as "disparate treatment based on race or ethnicity" in various enumerated areas of a contractor's operations. Although the earlier EO 14173 mandated that all government contracts and grants include a term requiring each awardee "to certify that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws," EO 14398 tethers the new DEI Clause to EO 14398's own definition of what constitutes "racially discriminatory DEI activities."

Previously, federal contractors could potentially rely on their understanding of applicable federal anti-discrimination laws to negate the knowledge requirement for FCA liability. Under EO 14398, federal contractors may have a more difficult time asserting that they did not "knowingly" make a false statement under the FCA regarding racially discriminatory DEI activities.

Recommended Actions

1. Perform a DEI Audit. All federal contractors (including lower-tier contractors) should review their programs and policies for DEI-related material. This review should also encompass any subcontractors, second-tier subcontractors, and third parties "sponsored" by the contractor.
2. Update Recordkeeping Policies. Federal contractors should ensure that their record retention policies are current and effective in the event a contracting agency requests access to "books, records, and accounts" in connection with a potential violation of the DEI Clause.
3. Educate Employees. Federal contractors should train employees on what DEI activities are prohibited under EO 14398 and how to organize programs that do not racially discriminate, even in facially neutral ways.

Members of Fried Frank's Government Contracts and White Collar practices are available to provide guidance to contractors and grantees regarding their compliance obligations, best practices, and responses to FCA investigations in light of EO 14398 and the new DEI Clause.

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