Getting ready for Compliance with New Govt Order’s DEI-Associated Contract Clause for Federal Contractors and Subcontractors

by Christopher Kavanaugh, Jennifer Kennedy Park, and Matthew Yelovich

Left to Proper: Christopher Kavanaugh, Jennifer Kennedy Park and Matthew Yelovich (images courtesy of Cleary Gottlieb Steen & Hamilton LLP)

On March 26, 2026, President Trump signed a brand new Govt Order titled “Addressing DEI Discrimination by Federal Contractors” (the March 26 Order), which imposes vital new contractual obligations on federal contractors and subcontractors referring to range, fairness, and inclusion (DEI) packages and practices. The March 26 Order implements prior Govt Orders on DEI, directs federal businesses to include necessary contract clauses inside 30 days, directs the Legal professional Common to prioritize False Claims Act (FCA) enforcement in opposition to non-compliant contractors, and instructs the Federal Acquisition Regulatory Council (FAR Council) to amend the Federal Acquisition Laws to codify the brand new necessities.

The White Home concurrently launched a Reality Sheet (the Reality Sheet) offering vital extra context on the Administration’s enforcement priorities and rationale. The Reality Sheet makes clear that the Administration views sure contractor DEI packages as unlawful race- and ethnicity-based discrimination. It explicitly alleges that some contractors have tried to hide ongoing DEI actions.

This alert summarizes the important thing provisions of the March 26 Order and Reality Sheet and identifies essential motion objects for contractors and subcontractors making ready to satisfy these new necessities, together with conducting a privileged stock of DEI packages, assessing contractual publicity, and making a compliance plan addressing the March 26 Order’s necessities.

The March 26 Order is the newest in a sustained sequence of government actions focusing on DEI packages in each the federal authorities and the personal sector.  

On January 21, 2025, President Trump Signed Govt Order 14173, “Ending Unlawful Discrimination and Restoring Benefit-Primarily based Alternative.”[1] That Order directed federal businesses to incorporate of their contracts a clause offering that contractors agree that their compliance with federal anti-discrimination legal guidelines “is materials to the federal government’s fee selections” for functions of the FCA and additional directed businesses to require contractors to certify that they don’t function DEI packages that violate federal anti-discrimination regulation. Govt Order 14173 additionally directed the Legal professional Common and Director of the Workplace of Administration and Funds (OMB) to determine potential civil compliance investigations of private-sector entities, together with federal contractors, as a part of a broader effort to discourage DEI packages throughout the economic system.

Govt Order 14173 didn’t provide the particular contractual language essential to operationalize these commitments, however the March 26 Order does.[2]

Within the roughly fourteen months between Govt Order 14173 and the March 26 Order, federal businesses moved aggressively to discourage DEI packages within the personal sector:

• The EEOC issued formal requests for data to quite a few giant private-sector employers concerning their DEI packages, signaling heightened scrutiny of race- and ethnicity-conscious employment practices, filed or introduced investigations into DEI-related practices at a number of corporations, and moved for subpoena compliance for giant quantities of DEI-related knowledge in opposition to others.[3]
• The Division of Justice fashioned a devoted job drive to determine DEI-related enforcement targets throughout the personal sector and issued public statements warning that DEI packages involving differential therapy based mostly on race or ethnicity may violate Title VII and different federal anti-discrimination statutes.[4] The DOJ introduced a Civil Rights Fraud Initiative to make use of the FCA and pursue claims in opposition to corporations with DEI packages, and has energetic investigations underneath the FCA for DEI-related packages.[5]

1. Obligatory Contract Clause

The March 26 Order directs all federal departments and businesses to make sure that a brand new clause is included in all new and modified federal contracts and subcontracts inside 30 days (April 25, 2026). After that date, contracts and subcontracts should embrace the next clause:

In reference to the efficiency of labor underneath this contract, [the contractor/appropriate party (contractor)] agrees as follows:

1. 1. 1. The contractor is not going to have interaction in any racially discriminatory DEI actions, as outlined in part 2 of the Govt Order of March 26, 2026 (Addressing DEI Discrimination by Federal Contractors);
      2. The contractor will furnish all data and reviews, together with offering entry to books, data, and accounts, as required by the contracting company pursuant to the Govt Order of March 26, 2026 (Addressing DEI Discrimination by Federal Contractors), for functions of ascertaining compliance with this clause;
      3. Within the occasion of the contractor’s or a subcontractor’s noncompliance with this clause, this contract could also be canceled, terminated, or suspended in complete or partly, and the contractor or subcontractor could also be declared ineligible for additional authorities contracts;
      4. The contractor will report any subcontractor’s recognized or moderately knowable conduct that will violate this clause to the contracting division or company and take any applicable remedial actions directed by the contracting division or company;
      5. The contractor will inform the contracting division or company if a subcontractor sues the contractor and the go well with places at difficulty, in any means, the validity of this clause; and
      6. The contractor acknowledges that compliance with the necessities of this clause are [sic] materials to the federal government’s fee selections for functions of part 3729(b)(4) of title 31, United States Code (False Claims Act).

Notably, the March 26 Order expressly extends protection to “contractors’ subcontracts and subcontractors’ lower-tier subcontracts,” giving it broad attain all through the federal contracting provide chain.

2. Scope of “Racially Discriminatory DEI Actions”

The March 26 Order defines “racially discriminatory DEI actions” to imply disparate therapy based mostly on race or ethnicity within the following contexts:

• Recruitment and employment (together with hiring and promotions);
• Contracting (together with vendor agreements);
• Program participation; and
• Allocation or deployment of an entity’s sources.

“Program participation” is additional outlined to incorporate membership or participation in, or entry or admission to, coaching, mentoring, or management growth packages; academic alternatives; golf equipment; associations; or related alternatives sponsored or established by the contractor or subcontractor.

Importantly, the March 26 Order’s prohibitions are restricted to race and ethnicity. They don’t lengthen to intercourse or every other protected attribute.  

3. Enforcement Framework

The March 26 Order establishes a considerably expanded and multi-layered enforcement framework:

• Legal professional Common enforcement prioritization: The March 26 Order directs the Legal professional Common to prioritize potential FCA claims in opposition to contractors or subcontractors in violation of the brand new contract clause, and to make sure the immediate evaluation of associated civil actions introduced by personal individuals (e., qui tam relators). The Legal professional Common’s energetic prioritization of FCA claims is according to the administration’s method during the last yr.[6]
• OMB steering and sector focusing on: The Workplace of Administration and Funds is directed to difficulty implementation steering to contracting businesses and to determine “financial sectors that pose a specific danger of entities participating in racially discriminatory DEI actions based mostly on present or previous conduct.”

4. The Administration’s Acknowledged Rationale

The Reality Sheet articulates the administration’s financial and authorized justifications for the March 26 Order, that are related to understanding the administration’s enforcement posture:

• DEI packages “artificially prohibit[] the labor pool, driv[e] up hiring and operational prices, and creat[e] workforce inefficiencies which are finally handed on to federal businesses and American taxpayers.”
• DEI packages “improve workforce turnover by elevating immutable traits over job efficiency and jeopardize worker collaboration and problem-solving important to fostering environment friendly and high-quality work.”
• “Some entities, together with authorities contractors, have tried to hide ongoing DEI actions even because the administration has labored to finish them,” and the March 26 Order “establishes robust accountability mechanisms to make sure compliance is real and verifiable.”

This final level is especially vital for compliance functions. The administration has explicitly designed the March 26 Order’s audit, recordkeeping, and self-reporting mechanisms to detect and deter what it considers concealment efforts.

5. Enforcement Penalties

The March 26 Order specifies the next penalties for non-compliance:

• Contract cancellation or termination in complete or partly;
• Suspension and debarment for future authorities contracts; and
• FCA legal responsibility, together with Legal professional Common-prioritized authorities enforcement and actively supervised personal qui tam fits.

In response to the March 26 Order and Reality Sheet, federal contractors and subcontractors ought to contemplate taking the next actions:

1. Conduct a Privileged Assessment of DEI Packages

Conduct a radical, attorney-client privileged audit of all present DEI-related packages, insurance policies, and initiatives. The March 26 Order’s definition of “program participation” mixed with the administration’s assertion that it’ll scrutinize makes an attempt to hide or repackage race-conscious packages demonstrates a necessity for a detailed, substantive evaluation. Coaching packages, mentoring and sponsorship initiatives, management growth alternatives, provider range packages, affinity or worker useful resource teams and funding thereof, and DEI-linked government compensation preparations ought to all be examined.

2. Assess Contractual Publicity

Accumulate and evaluation all prime contracts, subcontracts, and vendor agreements related to federal authorities work. The March 26 Order’s specific extension to lower-tier subcontracts means  corporations that don’t maintain federal contracts immediately (together with subcontractors, distributors, and repair suppliers) are probably inside scope. This supply-chain dimension of the March 26 Order has essentially the most sensible significance, and it’s important to grasp the total perimeter of contractual publicity earlier than the 30-day implementation window closes. 

3. Develop a Compliance Plan

Start growing a compliance framework that addresses the March 26 Order’s recordkeeping and reporting necessities:  

• Design procedures for incorporating, executing, and flowing down the brand new necessary contract clause to subcontractors;
• Determine and set up books, data, and accounts which may be topic to company evaluation and assess record-retention associated thereto;
• Contemplate growing a stand-alone report that may be supplied to display compliance;
• Decide who will signal any certification request and set up procedures for making certain the signer has a good-faith foundation attest to compliance;
• Assessment inner and external-facing statements, together with web sites, ESG and sustainability disclosures, proxy statements, and advertising supplies, for consistency with inner packages and insurance policies and the March 26 Order’s necessities; and
• Create protocols for fulfilling the contractor’s obligation to report subcontractor conduct that will violate the brand new clause, together with collaboration between federal procurement enterprise items and any supervisory unit over the corporate’s whistleblower hotline.

The March 26 Order is essentially the most operationally vital DEI-related government motion so far for the federal contracting neighborhood. As a result of the administration is more likely to take steps shortly to make sure enforcement of the March 26 Order after the 30-day implementation window, corporations needs to be shifting swiftly to organize.

[1] The White Home, “Ending Unlawful Discrimination and Restoring Benefit-Primarily based Alternative” (January 21, 2025), out there right here.

[2] DEI Developments: Govt Order Litigation and the Administration’s Newest Bulletins, Cleary Gottlieb Steen & Hamilton LLP (March 24, 2025), out there right here; Concerns in Advising Boards of Administrators on DEI-Associated Dangers, Cleary Gottlieb Steen & Hamilton LLP (January 15, 2026), out there right here.

[3] Press Launch, U.S. Equal Emp. Alternative Comm’n, EEOC Chair Points Reminder Letter to Fortune 500 Relating to Title VII Compliance Associated to DEI (Feb. 26, 2026), out there right here; Press Launch, U.S. Equal Emp. Alternative Comm’n, EEOC Recordsdata Subpoena Enforcement Motion In opposition to Nike (Feb. 4, 2026), out there right here; Press Launch, EEOC Sues Coca-Cola Drinks Northeast for Intercourse Discrimination, U.S. Equal Emp. Alternative Comm’n  (Feb. 18, 2026), out there right here.

[4] Govt Orders & Memoranda Concentrating on Range, Fairness, and Inclusion, Cleary Gottlieb Steen & Hamilton LLP (Feb. 10, 2025), out there right here.

[5] Justice Division Utilizing Fraud Regulation to Goal Firms on DEI, Wall St. J. (Dec. 28, 2025), out there right here; U.S. Division of Justice Workplace of the Deputy Legal professional Common “Civil Rights Fraud Initiative” (Might 19, 2025), out there right here.

[6] See Govt Orders & Memoranda Concentrating on Range, Fairness, and Inclusion, Cleary Gottlieb Steen & Hamilton LLP (Feb. 10, 2025); DEI Developments: Govt Order Litigation and the Administration’s Newest Bulletins, Cleary Gottlieb Steen & Hamilton LLP (March 24, 2025); Concerns in Advising Boards of Administrators on DEI-Associated Dangers, Cleary Gottlieb Steen & Hamilton LLP (January 15, 2026).

Christopher Kavanaugh, Jennifer Kennedy Park, and Matthew Yelovich are Companions at Cleary Gottlieb Steen & Hamilton LLP. This publish first appeared as an alert memorandum for the agency.

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