Federal contractors have been anticipating a new mandatory contract clause addressing the Trump Administration’s focus on “illegal DEI” since the issuance of Executive Order 14173, Ending Illegal Discrimination and Restoring Merit-Based Opportunity, on January 21, 2025. The wait is over.
On March 26, 2026, President Trump issued a new Executive Order titled Addressing DEI Discrimination by Federal Contractors (Order), providing the text of the new contract clause. The Administration also issued a related Fact Sheet.
The Order states that “DEI activities are unethical, illegal” and lead to inefficiencies, waste, and abuse driving up contracting costs for the federal government by “precluding the implementation of merit-based principles” and “jeopardizing the sort of employee collaboration and problem-solving that is essential to fostering efficient and high-quality work.”
Prohibited DEI activities (previously referred to as “illegal DEI”) are defined as “intentional disparate treatment based on race or ethnicity in the recruitment, employment (e.g., hiring, promotions), contracting (e.g., vendor agreements), program participation, and allocation or deployment of an entity’s resources.”
“Program participation” includes membership in, access, or admission to training mentoring, leadership or developmental programs, opportunities; clubs; associations or similar opportunities for sponsorship by contractors or subcontractors.
The reference to “vendor agreements” likely refers to prime contractors’ obligation to consider women- and minority-owned businesses when sourcing subcontractors.
The Order also includes a few surprises. First, it prohibits “racially discriminatory DEI activities” only. There is no mention of gender or other protected characteristics. Second, contractors must provide contracting officers with access to information and documents necessary to confirm compliance with the terms of the clause. Compliance with the previous contract clause was the responsibility of the OFCCP.
Key Elements of the Clause
- Contractors and subcontractors agree to not engage in any racially discriminatory DEI activities as defined in the Order.
- Contractors must provide contracting officers with access to information and documents necessary to confirm compliance with the terms of the clause.
- Noncompliance with the terms of the Order may result in the cancellation, termination, or suspension of current contracts and debarment from future contracts.
- Prime contractors must report “known or reasonably knowable” violations of the clause by their subcontractors to the contracting agency and take any “appropriate remedial actions directed by the contracting department or agency.”
- Contractors must inform the contracting agency if a subcontractor initiates litigation challenging the validity of the clause.
- Compliance with the clause is a material term of the contract and non-compliance may result in the Government seeking monetary remedies pursuant to the False Claims Act.
Next Steps:
- Every federal contractor should review Attorney General Pam Bondi’s July 19, 2025 Memorandum on Illegal DEI. It provides a checklist of DEI strategies the Department of Justice considers unlawful. The discussion of “proxy discrimination” is particularly helpful.
“Proxy Discrimination” defined as the use of neutral criteria that has a discriminatory effect. Examples include preferencing “first generation” college students, relying on geographic or zip-code preferences designed to target certain racial or ethnic groups, and scoring applicants based on demographic factors.
- Partner with legal counsel to conduct a privileged review of current diversity programs, scholarship and internship opportunities, workplace policies, training materials, recruiting efforts, and subcontractor selection processes, to ensure they align with the current Administration’s executive orders and legal precedent.
- Alert your contracting team to upcoming changes to active federal contracts and the obligation to insert the new clause in existing and future subcontracts.
- Stay up to date on additional changes to compliance obligations and any enforcement actions.
