New DEI Executive Order: What Federal Contractors Need to Watch and How to Plan Moving Forward

Article by: Rory Hatch, Associate

New Compliance Requirements Are Already Moving

On March 26, 2026, President Trump signed a new Executive Order titled “Addressing DEI Discrimination by Federal Contractors,” directing federal agencies to incorporate new DEI-related compliance obligations into federal contracts. Agencies have 30 days to begin adding a mandatory compliance clause, and the consequences for non-compliance including contract termination, suspension, debarment, and potential False Claims Act liability.

At the same time, the order leaves a number of implementation questions unanswered. New contract terms are coming. Costs may be associated with complying. This post is intended to help you understand what is required, what remains unclear, and how to protect your contracts and compliance as this rolls out.

What the Executive Order Does

The order explains the policy of the government to promote economy and efficiency in federal contracting by preventing racial discrimination, including what the administration characterizes as diversity, equity, and inclusion (DEI) activities. It defines “racially discriminatory DEI activities” as disparate treatment based on race or ethnicity in:

• Recruitment and employment decisions (hiring, promotions)
• Contracting decisions (vendor agreements, supplier selection)
• Program participation including access to training, mentoring, leadership development, educational opportunities, clubs, and associations sponsored by the contractor
• Allocation or deployment of an entity’s resources

The order directs all executive departments and agencies to include a new compliance clause in federal contracts and contract-like instruments within 30 days. That clause also flows down to subcontractors and lower-tier subcontractors.

What the New Contract Clause Requires

Once incorporated into a contract, the mandatory clause obligates your company to:

1. Refrain from any racially discriminatory DEI activities as defined by the order, in connection with contract performance.
2. Furnish all information and reports required by the contracting agency for compliance purposes, including access to books, records, and accounts.
3. Accept contract cancellation, termination, or suspension and potential debarment in the event of noncompliance.
4. Report known or reasonably knowable subcontractor violations to the contracting agency and take remedial action as directed.
5. Notify the agency if a subcontractor sues you in a way that puts the validity of this clause at issue.
6. Acknowledge that compliance is material to the government’s payment decisions under the False Claims Act.

The False Claims Act Risk: Exposure for Contractors

Perhaps the most significant enforcement mechanism in this order is its explicit invocation of the False Claims Act (FCA) (31 U.S.C. § 3729 et seq.). The contract clause requires contractors to acknowledge that compliance is “material to the Government’s payment decisions” under the FCA. This framing creates legal exposure that extends well beyond ordinary contract termination.

Specifically, the order directs the Attorney General to:

• Consider bringing FCA actions against any contractor or subcontractor that violates the clause meaning the federal government itself may pursue treble damages and civil penalties against your company.
• Ensure prompt review of qui tam whistleblower suits filed by private parties. Under the FCA’s qui tam provisions, private individuals can file suit on behalf of the government and share in any recovery. The order directs DOJ to decide whether to intervene in these cases within the 60-day statutory period, signaling that the government intends to move quickly.

The practical implication: DEI-related conduct that was once primarily an internal HR or policy matter is now a potential basis for federal fraud liability. Contractors should treat this not merely as a procurement compliance issue, but as a False Claims Act risk management issue.

What Contractors Should Be Doing Now

1. Audit Your Programs and Policies, Then Update Your Compliance Programming

Begin with an internal review of your current potentially DEI-related programs, policies, and practices including recruiting initiatives, mentorship programs, supplier diversity programs, and training or development opportunities structured around the Executive Order’s new definitions for DEI. Identify any programs that could constitute “disparate treatment” under the order’s definition and assess whether adjustments are warranted.

Once you have identified any gaps or areas of exposure, the next step is to review and update your written compliance policy to reflect the order’s new definitions and prohibitions. A well-maintained compliance policy serves two purposes: it guides your team’s day-to-day conduct, and it demonstrates good faith in the event of a government audit, an agency compliance review, or a False Claims Act inquiry.

The audit tells you where you stand. The updated compliance policy and its documentation show that you took the order seriously and acted on it.

2. Pay Close Attention to Whether New Clauses Are Being Added to Existing Contracts

The Executive Order does not clearly specify whether the new compliance clause will apply only to future contracts or also to contracts already in place. That distinction matters. If agencies attempt to incorporate this clause into existing contracts, that would constitute a contract modification and not all modifications can be imposed unilaterally by the government.

Under the standard Changes clause in government contracts, the government has authority to direct certain changes within the general scope of the contract. However, imposing entirely new compliance obligations that may require contractors to maintain auditable records, revise internal programs, and dedicate staff and resources to oversight goes beyond what the Changes clause typically permits the government to impose without additional compensation. If complying with a newly added clause generates real costs for your company, you may be entitled to an equitable adjustment.

If you find yourself in that situation, documentation is everything. Begin tracking any costs, time, and resources associated with compliance from the moment new obligations appear. A well-documented record from the outset is essential to making a successful claim for an equitable adjustment or contract modification. The window to start documenting opens the moment the clause lands in your contract.

3. Review Your Subcontractor Relationships

The order strongly implies, but does not state outright, that the compliance clause must flow down to subcontractors at every tier. Prime contractors have an affirmative obligation to report known or reasonably knowable subcontractor violations to the contracting agency. That means your compliance exposure does not stop at your own front door.

Review your existing subcontract agreements. If flow-down of the new clause is required, you will need to negotiate modifications to your subcontract terms and conditions. That process takes time, and not every subcontractor will readily agree to new terms. In some cases, a contractor may need to find an alternative subcontractor if a current one will not accept the modification. Renegotiation or replacement may carry real costs.

4. Watch How Individual Agencies Implement This Order

The order establishes a framework, but it leaves considerable discretion to individual agencies in how they draft and incorporate the required clause. Agencies may develop their own unique language to satisfy the order’s requirements. Some agencies may attempt to impose additional obligations beyond what the order itself requires.

Carefully review any new clause language before signing. If proposed clause terms go beyond what the order mandates, or if they are inserted into an existing contract in a manner that appears questionable, contractors have the right to raise those concerns.

5. Assess Your False Claims Act Exposure with Counsel

Given the order’s explicit FCA framing, contractors should evaluate their exposure with legal counsel. This means considering both the risk of government-initiated enforcement and the potential for qui tam suits brought by employees or others with knowledge of your practices. Train your contracts, HR, and compliance teams on what the order prohibits, what the new clause requires, and what the whistleblower risk looks like under the FCA’s qui tam provisions.

An Evolving Compliance Landscape for Federal Contractors

This Executive Order builds on the January 2025 Executive Order on “Ending Illegal Discrimination and Restoring Merit-Based Opportunity” and reflects the administration’s broader use of federal contracting law to enforce its DEI-related priorities. Further regulatory guidance from the FAR Council and individual agencies is expected in the coming weeks, and some of the open legal questions raised by this order’s implementation may be tested as that guidance develops.

The common thread for federal contractors remains the same: staying ahead of compliance developments, understanding your contractual rights, and documenting your costs and concerns from the start is far less costly than trying to recover ground after the fact.

For federal contractors with questions about how this order affects their existing contracts, their subcontractor relationships, or their exposure under the False Claims Act, the attorneys at Ward & Berry are here to help you stay compliant and protected.