Executive Order 14398 imposes new DEI restrictions on Federal contractors

The EO follows a series of executive orders focused on “racially discriminatory DEI activities,” including Executive Order No. 14173, Ending Illegal Discrimination and Restoring Merit Based Opportunity, 90 Fed. Reg. 8633 (Jan. 31, 2025), which we have previously discussed here and here. The EO also follows changes issued by the General Services Administration to the representations and certifications that Federal financial assistance recipients are required to make related to DEI, which changes we discussed here. EO No. 14398 is specifically aimed at Federal contractors and subcontractors, and directs the FAR Council to amend the FAR to incorporate the proposed provision.

Notably, the clause applies only to work performed in connection with performance under the Federal contract. The draft clause, to be incorporated into all contracts within 30 days, requires the contractor to agree to the following:

In connection with the performance under this contract, [the contractor/appropriate party (contractor)] agrees as follows:

1. The contractor will not engage in any racially discriminatory DEI activities, as defined in section 2 of the Executive Order of March 26, 2026 (Addressing DEI Discrimination by Federal Contractors);

2. The contractor will furnish all information and reports, including providing access to books, records, and accounts, as required by the contracting agency pursuant to the Executive Order of March 26, 2026 (Addressing DEI Discrimination by Federal Contractors), for purposes of ascertaining compliance with this clause;

In contrast to prior executive orders which broadly reference “illegal” DEI activities, the EO defines “racially discriminatory DEI activities” as:

[D]isparate treatment based on race or ethnicity in the recruitment, employment (e.g., hiring, promotions), contracting (e.g., vendor agreements), program participation, or allocation or deployment of an entity’s resources.

Consequences for noncompliance

Consistent with the representations made for Federal financial assistance recipients, the clause notes that compliance with the requirements of the clause are material to the Government’s payment decisions, setting up the possibility of liability under the False Claims Act (FCA), 31 U.S.C. § 3729, for failure to comply. The EO, however, also explicitly directs the Attorney General to consider bringing FCA claims against contractors that violate this clause, and instructs the Attorney General and relevant contracting agencies to promptly review actions brought by private persons under the FCA.

In addition to FCA liability, the clause also provides that failure to comply with the clause may result in the contract being “canceled, terminated, or suspended in whole or in part, and the contractor or subcontractor may be declared ineligible for further Government contracts.”

What is unique to this clause is the utilization of contractors as part of the enforcement mechanisms. Specifically, the clause places reporting requirements on the contractor, for violations made by the subcontractor:

4. The contractor will report any subcontractor’s known or reasonably knowable conduct that may violate this clause to the contracting department or agency and take any appropriate remedial actions directed by the contracting department or agency;

5. The contractor will inform the contracting department or agency if a subcontractor sues the contractor and the suit puts at issue, in any way, the validity of this clause;

Path to implementation

The EO requires that the new contracting clause be included in all executive department and agency contracts and subcontracts within 30 days of March 26, 2026. It also requires that the Office of Management and Budget issue guidance to contracting agencies to ensure compliance.

This is to be implemented in a new Federal Acquisition Regulation (FAR) provision, and the FAR is to be revised to remove conflicting provisions. To ensure compliance prior to its amendment of the FAR, the Federal Acquisition Regulatory Council is required to issue deviation and interim guidance on implementation of this new clause.

Key Considerations

Although implementation is not immediate, the timeline is swift: Federal contractors and subcontractors should therefore carefully review their existing hiring, promotion, and compensation programs, as well as their purchasing and subcontracting programs, and work with legal counsel to ensure compliance with this new clause.