On March 26, 2026, the White House issued an Executive Order (2026 DEI Executive Order) imposing new obligations on federal contractors to provide evidence of the elimination of racially discriminatory Diversity, Equity, and Inclusion (DEI) activities.

The stated justification for the 2026 DEI Executive Order is to prevent “artificial” and “unnecessary” DEI program costs from being passed on to the Government in federal contracts. Within 30 days of the directive, federal agencies are required to include a new clause(s) in federal contracts and contract-like instruments similar to the clause required under Executive Order (EO) 14173, Ending Illegal Discrimination and Restoring Merit Based Opportunity, issued on January 21, 2025. However, there are additional obligations including record keeping and an audit type enforcement mechanism.

Adding to contractor’s compliance concerns is that the 2026 DEI Executive Order decentralizes oversight by directing each federal agency to adopt enforcement measures to ensure compliance. Finally, the Federal Acquisition Regulatory Council is required to amend the Federal Acquisition Regulation (FAR) to include the new contracting clause dictated by the 2026 DEI Executive Order and take other appropriate interim actions to ensure compliance with the 2026 DEI Executive Order.

Definition of Racially Discriminatory DEI Activities

The 2026 DEI Executive Order limits the definition of racially discriminatory DEI activities to employment decisions, contracting activities such as vendor agreements, program participation, or allocation or deployment of entity resources that results in disparate treatment based on race or ethnicity. The phrase “allocation or deployment of entity resources” is undefined and could be broadly interpreted by the administration as applicable to activities beyond those described in previous guidance.

Program participation encompasses “membership, 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.”

Terms of Contract Clause(s)

The 2026 DEI Executive Order applies not only to executive departments and agencies but also to independent agencies subject to the Federal Property and Administrative Services Act.

By April 25, 2026, covered departments and agencies must ensure that their contracts and “contract-like instruments[1]” (such as cooperative, service, or concession agreements, and some grants) include the new clause(s), and flow down the clause(s) to subcontractors. Under the new clause(s) contractors and subcontractors must:

1. Not engage in racially discriminatory DEI activities.
2. Furnish data and provide access to books, records, and accounts to the contracting agency to demonstrate compliance with the 2026 DEI Executive Order.
3. Be subject to termination, suspension, or debarment of federal contracts in the event of noncompliance.
4. Report on subcontractors’ noncompliance with the clause(s) to the extent of subcontractors “known or reasonably knowable conduct” that may violate the clauses, or who sue the contractor and put the “validity of the clause” at issue.
5. Acknowledge that compliance with the clause(s) is material to the government decision to pay and subjects the contractor to liability under the False Claims Act.

The Federal Acquisition Regulatory Council is directed to amend the Federal Acquisition Regulation within 60 days of March 26, 2026 to 1) permit the inclusion of the above-described provisions in federal contracts and solicitation; 2) remove any current conflicting provisions; and 3) publish interim guidance, consistent with the 2026 DEI Executive Order.

Penalties, New Enforcement Threat Provision, False Claim Act Liability

The Office of Management and Budget (OMB) is directed to issue guidance permitting agencies 1) to cancel, terminate, or suspend existing contracts or portions thereof for noncompliance with the 2026 DEI Executive Order, and 2) to suspend and debar contractors from future contracts for noncompliance.

Reminiscent of Executive Order 14173, OMB, the Attorney General, the Assistant to the President for Domestic Policy, and the Chair of the EEOC are directed to identify “economic sectors that pose a particular risk of entities engaging in racially discriminatory DEI activities,” and provide guidance to contracting agencies on best practices to achieve compliance in those sectors.

Finally, the Attorney General is directed to “consider whether to bring actions under the False Claims Act against any contractors or subcontractors that violate the clause” required by the 2026 DEI Executive Order as well as to actively monitor qui tam relator suits under the False Claims Act against contractors and subcontractors and determine whether to intervene in such federal litigation.

What This Means for Contractors

The 2026 DEI Executive Order intensifies the compliance obligations and enforcement risks for federal contractors and subcontractors. Contractors, if they have not done so already after the issuance of EO 14173, should conduct a comprehensive internal audit of their programs, policies, and practices across all departments, including human resources, community investment, procurement, and vendor management.

Criteria based on race, ethnicity, or potential proxies for race and ethnicity may be scrutinized by the government as unlawful DEI. Contractors should pay particular attention to the impact of the 2026 DEI Executive Order on compliance with federal small business and disadvantaged business enterprise requirements that relate to race or ethnicity, and state and local government affirmative action or diversity requirements based on race or ethnicity, as established by state statutes or local ordinances. Such diversity requirements may conflict or potentially conflict with the provisions of the 2026 DEI Executive Order.

Another risk factor is that the 2026 DEI Executive Order decentralizes enforcement across multiple federal agencies, with each potentially developing agency-specific compliance standards and framework. Contractors, working with counsel, should establish robust recordkeeping to demonstrate compliance with federal anti-discrimination laws, document legal bases for all programs, and prepare for agency specific audit requests.

The 2026 DEI Executive Order signals further coordinated, industry targeted enforcement by both OMB and the Attorney General. The administration has already pursued investigative and enforcement actions in financial services (Northwestern Mutual), higher education (Harvard University); technology (Google, Verizon); retail (Nike), healthcare (CID issued by FTC against American Academy of Pediatrics focused on gender affirming care). Companies in these and other identified high-risk sectors should anticipate heightened scrutiny and consider proactive engagement with legal counsel.

Significant legal and procedural uncertainties exist regarding the 2026 DEI Executive Order implementation including rulemaking requirements, legal challenges, inconsistency of agency requirements, and subcontractor reporting obligations. These uncertainties combined with potential False Claims Act liability resulting from the Department of Justice and/or qui tam relators creates a complex evolving compliance landscape. Contractors should prioritize legal review and systematic compliance efforts while monitoring forthcoming agency guidance and judicial developments.

Contact us

If you have questions or would like to discuss best practices to implement given the high level of scrutiny faced by contractors and subcontractors potentially subject to the 2026 DEI Executive Order, please contact Tracey O’Brien, Erik Eisenmann, Michael Schrier, or your Husch Blackwell attorney.

[1] This language was used in Executive Orders 13658 (federal contactor minimum wage) and 13706 (paid sick leave) issued during the Obama administration.