On March 26, 2026, President Donald J. Trump signed an executive order (EO) titled, "Addressing DEI Discrimination by Federal Contractors." The order establishes new mandatory contract clause requirements for federal contractors and subcontractors at all tiers, creates reporting and monitoring obligations, and designates noncompliance as material under the False Claims Act (FCA). Federal agencies are required to incorporate the new clause into contracts and contract-like instruments by April 25, 2026. The EO applies to federal contracts, subcontracts, and contract-like instruments subject to the Federal Property and Administrative Services Act (40 U.S.C. § 101 et seq.).
Consultant Perspectives
Jamie M. Brabston, JD, Director & Legal Counsel
This new EO, combined with EO 14173 issued in 2025, reaffirms the government’s commitment to ensuring that federal government contractors and subcontractors do not make employment decisions based on discriminatory practices, including DEI initiatives. DOJ has made it clear that it will aggressively pursue contractors using existing tools, such as the False Claims Act. With the rise of whistleblower actions, contractors face a greater risk of exposure and must not delay taking measures to ensure that none of their practices run afoul of the prohibition on racially (and other) discriminatory DEI activities. Redstone GCI is uniquely equipped to assist you in evaluating your existing pro.
Sheri Buchanan, Director
EO 14173’s elimination of EO 11246 was quite a surprise to many and left federal government contractors and subcontractors in a state of uncertainty, as they faced unraveling long-term practices and the need to rewrite policies. This new EO is a follow-on to EO 14173 and serves as a stiff reminder to ensure that employment decisions are made with merit in mind and are free of unlawful discrimination. Of equal importance is the ability to prove compliance and confidently certify it.
Background
This EO is the latest in a series of executive actions taken by the Trump Administration to address what the administration characterizes as discriminatory diversity, equity, and inclusion (DEI) practices. Prior executive actions focused on eliminating DEI programs within the federal government and among federal contractors more broadly. The March 26th EO intensifies that focus by establishing enforceable contract-level obligations with direct consequences for noncompliance. This EO builds upon Executive Order 14173, issued January 21, 2025, which required federal contractors to certify that they do not operate DEI programs that violate anti-discrimination laws and that compliance is material under the False Claims Act.
The EO cites the Federal Property and Administrative Services Act as its authority, referencing the Act's provisions encouraging economy and efficiency in government contracting. The administration states that DEI activities that involve disparate treatment based on race or ethnicity impose artificial costs in hiring and operations, increase workforce turnover, and reduce the available labor pool. These costs, the EO contends, are passed on to the federal government through its contracts.
The EO also follows proposed updates to SAM.gov that would require federal contractors and federal assistance recipients to certify compliance with the EO's requirements.
Key Definitions
The EO establishes the following definitions relevant to contractor compliance:
- Racially Discriminatory DEI Activities: Disparate treatment based on race or ethnicity in recruitment, employment (e.g., hiring, promotions), contracting (e.g., vendor agreements), program participation, or allocation or deployment of an entity’s resources.
- Program Participation: Membership or participation in, or access or admission to, training, mentoring, leadership development programs, educational opportunities, clubs, associations, or similar opportunities sponsored by the contractor or subcontractor.
- FCA Materiality: Contractor compliance with the new clause is explicitly designated as material to the government's payment decisions under the False Claims Act.
The Mandatory Contract Clause
The centerpiece of the EO is a mandatory contract clause that federal agencies must incorporate into contracts, including subcontracts and lower-tier subcontracts, by April 25, 2026. The obligation to insert the clause rests with the contracting agency; however, the clause creates direct obligations for contractors and flows down to all subcontractor tiers. The clause contains six required elements:
- No Racially Discriminatory DEI Activities: The contractor will not engage in any racially discriminatory DEI activities, as defined in section 2 of the Executive Order.
- Access to Books and Records: The contractor must provide all information, reports, and access to books, records, and accounts required by the contracting agency to verify compliance.
- Remedies for Noncompliance: 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 future government contracts.
- Reporting of Subcontractor Conduct: The contractor must report any subcontractor's "known or reasonably knowable conduct" that may violate the clause to the contracting agency and take any remedial actions directed by the agency. The EO does not define "known or reasonably knowable conduct," leaving open questions regarding the scope of a prime contractor's monitoring obligations.
- Notification of Litigation: The contractor must inform the contracting agency if a subcontractor brings a lawsuit that puts the validity of the clause at issue in any way.
- FCA Materiality: The contractor acknowledges that compliance with the clause is material to the government's payment decisions under the False Claims Act.
Penalties and Enforcement
The EO establishes several enforcement mechanisms and penalties for contractors found in violation of the mandatory clause:
- Contract cancellation, termination, or suspension in whole or in part.
- Suspension and debarment, which would render a contractor ineligible for federal contracts and all forms of federal assistance, including grants, loan guarantees, and other federal benefits. Suspended or debarred entities are listed in SAM.gov.
- False Claims Act liability, including treble damages and civil penalties. The EO directs the U.S. Attorney General to consider whether to bring FCA actions against noncompliant contractors and to ensure prompt review of qui tam actions filed by private whistleblowers.
- The Attorney General is directed to prioritize potential claims under the False Claims Act against noncompliant contractors and to ensure prompt review of qui tam actions filed by private whistleblowers.
Recent False Claims Act Resolution by DOJ of Alleged Violations
On April 10, 2026, the Department of Justice announced that International Business Machines Corporation (IBM) agreed to pay $17,077,043 to resolve allegations that it violated the False Claims Act by failing to comply with anti-discrimination requirements incorporated into its federal contracts due to certain DEI-related practices used by IBM in employment decisions including hiring and bonus practices. This resolution constitutes the first settlement secured under the Civil Rights Fraud Initiative, which the Department of Justice launched in May 2025.
Further Directives Under the Executive Order
The EO further directs the Office of Management and Budget, in coordination with the White House, the Department of Justice, and the U.S. Equal Employment Opportunity Commission, to identify high-risk economic sectors and issue compliance guidance for those sectors. The Federal Acquisition Regulatory Council is directed to amend the Federal Acquisition Regulation to incorporate the new clause.
Regarding FCA enforcement specifically, the Department of Justice has signaled that it intends to seek financial penalties in DEI-related cases, which represents a departure from its common practice during settlement. The calculation of damages will depend on the nature and breadth of the alleged violations and the legal theory pursued by the DOJ.
Subcontractor Monitoring Obligations
Under the EO, prime contractors bear a monitoring obligation with respect to their subcontractors. The clause requires contractors to report subcontractor conduct that is "known or reasonably knowable" and that may violate the clause. Because this phrase is not defined in the EO and could be interpreted broadly, it appears to place the burden on prime contractors to make a reasonable effort to determine whether a subcontractor is engaged in racially discriminatory DEI activities.
This provision may mean that a prime contractor cannot claim ignorance of a subcontractor's noncompliant conduct if that conduct could have been identified through normal business processes and the exercise of ordinary diligence. Prime contractors should review their subcontract terms and oversight processes to ensure they have adequate mechanisms in place to comply with this requirement.
Additional Considerations
The EO prohibits "racially discriminatory DEI activities" as specifically defined. A DEI program, standing alone, is not declared unlawful by the EO. The prohibitions are directed at programs or practices that involve disparate treatment based on race or ethnicity.
Because the EO deadline of April 25, 2026, is near, federal contractors should expect to see new contract language appearing in solicitations, new awards, and potentially in modifications to existing contracts in the coming weeks. Contractors at all tiers should review the exact language of the new clause carefully before signing. The EO also requires each agency head to review implementation of the contract clause within 120 days of the EO's signing.
Compliance Areas Contractors Should Review
Federal contractors may need to review a range of internal practices in response to this executive order, including employment related policies, subcontract oversight, internal reporting processes, documentation standards, and the ability to support certifications and demonstrate compliance. Redstone GCI provides related services across Compliance Consulting, Human Resources Consulting, Operational Support Services, and Training Services to help contractors assess how new government requirements may affect their contracts, policies, workflows, and supporting records. This can include reviewing hiring and employment practices, evaluating subcontract monitoring processes, strengthening internal oversight, updating written policies and procedures, improving compliance documentation, and providing training to support consistent implementation across the organization.
*This Client Alert is provided for general informational purposes only and does not constitute legal advice.