White House Executive Order Imposes New Anti-DEI Clause in Federal Contracting

President Donald Trump issued the EO “Addressing DEI Discrimination by Federal Contractors,” which requires federal agencies, beginning on or before April 25, 2026, to ensure that all federal contracts incorporate a new clause whereby a contractor commits not to engage in “racially discriminatory DEI activities” and adheres to new reporting and compliance obligations for itself and its subcontractors and lower tier suppliers.

Although prior EOs and policy directives have restricted or discouraged DEI practices in government agencies, this EO differs in requiring inclusion of a contractual clause, including material consequences for breach, in all federal contracts.

Section 1 of the EO outlines the rationale, asserting the administration’s view that certain DEI activities are unethical or unlawful and contribute to “inefficiencies, waste, and abuse” within contracting entities.

Section 2 defines “racially discriminatory DEI activities” to include “disparate treatment based on race or ethnicity” in recruitment, employment (e.g., hiring, promotions), contracting (e.g., vendor agreements), program participation, or allocation of organizational resources. The EO specifies that the definition extends to training, mentoring, and development programs offered by contractors and subcontractors.

Section 2 does not address whether this prohibition on broadly defined “racially discriminatory DEI activities” conflicts with long-standing federal subcontracting goals for small disadvantaged and women-owned businesses, which have historically informed proposal evaluations in federal contracting.

Section 3 mandates that federal agencies ensure the clause is added to contracts within 30 days, and that contractors flow down the requirement to their subcontractors and subcontractors’ lower-tier subcontracts. Among other things, the new clause must do the following:

1. Affirm that contractors and subcontractors “will not engage in any racially discriminatory DEI activities,” as defined in Section 2 of the EO.
2. Provide information, reports, and access to books and records as required by the contracting agency to verify compliance.
3. Acknowledge that noncompliance may result in contract cancellation, termination, or suspension, as well as possible ineligibility for future government contracts.
4. Report “known or reasonably knowable” subcontractor conduct that may violate the clause and take remedial actions as directed.
5. Notify the agency if a subcontractor challenges the validity of the clause in court.
6. Recognize that compliance with the clause is “material to the Government’s payment decisions” under the False Claims Act (31 U.S.C. § 3729(b)(4)).

Section 4, titled “Penalties,” expands on the DOJ’s enforcement role, directing it to consider whether noncompliance constitutes a violation of the False Claims Act and to promptly review qui tam actions filed under 31 U.S.C. § 3730(b)(1).

Practical Considerations for Government Contractors

Agencies are expected to fast-track implementation of this new clause. Contractors should begin assessing and preparing for potential obligations in advance of the rollout. Key considerations include:

1. Subcontractor Oversight – To track and report “known or reasonably knowable” subcontractor conduct constituting “racially discriminatory” DEI practices, contractors may need to develop oversight mechanisms, such as requiring subcontractor certifications of compliance.
2. Supplier Diversity Practices – Contractors should review existing supplier diversity initiatives and evaluate potential conflicts between mandated subcontracting goals (e.g., small disadvantaged and women-owned business programs) and the EO’s prohibitions. Clarification should be sought from contracting officers where conflicts appear likely.
3. Internal DEI Programs – Given the EO’s broad definition of DEI activities, including employment, contracting, program participation, and internal resource allocation, contractors should audit HR, mentoring, leadership, and employee resource group activities for compliance. The White House fact sheet on the EO cautions contractors against “concealing” DEI programs, signaling there will be close scrutiny by agencies.
4. Recordkeeping and Agency Requests – Agencies are expected to expand reporting and record-access demands to assess contractor compliance with the new contract clause. Contractors should develop internal procedures for coordinated responses to such requests across departments (e.g., human resources, legal, contracts, supply chain).
5. Internal Compliance Culture – With the DOJ encouraged to pursue False Claims Act actions against contractors for breach of the expected contract clause, contractors should review and, if necessary, improve their compliance structure by implementing and training employees on a strong code of conduct and ethics, and by creating anonymous reporting channels for employee complaints.