OMB proposes major overhaul of Uniform Guidance

The impact of the proposed rule on grants and other forms of Federal financial assistance will be significant. The proposed rule affects not only the review and approval process, inserting additional review from political appointees before the award of any grant, but also provides Federal agencies with significant discretionary authority to terminate a grant at any time. The proposed rule, which spans more than 400 pages, contains other particularly notable provisions, which we cover in detail below.

Implementing executive orders

As we outlined in our previous alert, EO 14332 directed OMB to revise the Uniform Guidance to provide for termination for convenience and to provide senior appointees to review and approve all new grant awards. As directed, OMB has incorporated both of these directives into the proposed rule.

Termination of grants

The proposed rule amends 2 C.F.R. § 200.340, Termination and Suspension, to provide Federal agencies the allowance to terminate a Federal award at its discretion, including “if a Federal award does not effectuate program goals, Federal agency priorities, or the national interest as they exist at the time of termination.” In a response to the multitude of lawsuits that followed the Trump administration’s attempt to mass terminate grants in 2025 and 2026, the proposed rule specifically addresses “discretionary termination,” separate from “termination for noncompliance,” expanding 2 C.F.R. § 200.430. The proposed rule further amends 2 C.F.R. § 200.341 to provide notice requirements for termination. The revision does not provide a minimum amount of notice required or an appeal process but does require written notice by the Federal awarding agency outlining the reasons that termination is in the interest of the Federal agency, which “may apply to an individual award or class of awards.” Comparable to the termination for convenience clause included in many government contracts (as set forth in the Federal Acquisition Regulation), the proposed changes would provide broad discretionary termination rights to the Federal agency at any point during the grant’s period of performance.

Pre-issuance review

The proposed rule provides significant amendments to 2 C.F.R. § 200.205 (Federal agency review of merit of proposals) which, if finalized, would include a “pre-issuance review” that requires all Federal agencies to designate a senior political appointee to conduct a pre-issuance review of all discretionary awards. The revisions further list the principles that must be considered as part of the pre-issuance review, including:

• Discretionary awards must “demonstrably advance the President’s policy priorities.”
• Discretionary awards may not be used to fund, promote, encourage, subsidize, or facilitate “racial preferences or other forms of racial discrimination,” “denial by the recipient of the sex binary in humans or the notion that sex is a chosen or mutable characteristic,” “illegal immigration,” or, broadly, “other initiatives that compromise public safety or promote anti-American values.”
• Applicants should “commit to complying with administration policies, procedures, and guidance respecting Gold Standard Science.”

Prior to the proposed rule, 2 C.F.R. § 200.205 outlined a requirement for all Federal awarding agencies to establish a merit review process for reviewing applications; the discretion for selecting awards rested in the agency. The proposed rule, if finalized, would not only eliminate a substantial amount of Federal agency discretion, but also insert a political position into the grant review process and an explicit requirement to award grants with political priorities in mind.

Indirect costs

EO 14332 also directed Federal agencies to prioritize discretionary awards to institutions with lower indirect cost rates. Other attempts by this administration to cap indirect rates at a designated percentage have largely been enjoined by various courts (and raised significant opposition from members of Congress from both sides of the aisle). Likely in an attempt to emphasize that this action is different, OMB directly notes in its proposed rule that it is not proposing updates to the indirect cost rate negotiation system. Rather, the pre-issuance review noted above includes, as a required principle, that “all else being equal, preference for discretionary awards should be given to institutions with lower indirect cost rates.”

DEI

In addition to the limitations on discretionary awards outlined in the pre-issuance review, the proposed rule also advances a series of new provisions or modifications to existing provisions aimed at DEI, gender ideology, and “disparate-impact liability”:

• 2 C.F.R. § 200.218: A prohibition against using Federal awards to promote or support theories of disparate-impact liability, which also prohibits Federal agencies, as well as recipients and subrecipients, from using disparate-impact liability in connection with the Federal award or adopting, issuing, or enforcing policies that promote or support disparate-impact liability. Disparate-impact liability is defined in the provision as “a theory under which a facially neutral policy or practice (for example, a merit-based employment policy or practice) gives rise to an automatic or near-insurmountable presumption of the existence of unlawful discrimination on the basis of federally protected characteristics (such as race or sex) where there are any differences or disparities in outcomes (for example, disproportionate effects) among different races, sexes, or similar groups.”
• 2 C.F.R. § 200.219: A prohibition against discriminatory event services, which also prohibits public entities from discriminating “on the basis of the viewpoint, content, or subject matter of speech” in providing services for events, meetings, or other expressive activities.
• 2 C.F.R. § 200.300: Covers statutory and national policy requirements and is amended to include additional limitations on authorized use of Federal award funds, including a prohibition on using Federal awards and subawards to fund, promote, encourage, subsidize, or facilitate the following: DEI, gender ideology as defined by EO 14168, or “transition” of a child under 19 years of age from one sex to another as defined in EO 14187.

Additional proposed changes

In addition to the provisions intended to enforce the EOs issued since inauguration, the proposed rule includes amendments intended to enforce other priorities of the current administration, including:

• Eliminating fixed-amount awards and fixed-amount subawards through revisions to definitions found at 2 C.F.R. § 200.201 (awards) and 2 C.F.R. § 200.333 (subawards).
• Underscoring domestic preference; 2 C.F.R. § 200.322 directs agencies “to the greatest extent practicable and consistent with law, to maximize use of goods, products, and materials produced in the United States.”
• Revising the cost principles found at 2 C.F.R. § 200 Subpart E to make certain types of costs unallowable, such as advertising or public relations costs, conferences, or publication costs, without pre-approval from the awarding agency.
• Clarifying that the Uniform Guidance (soon to be renamed the Uniform Grants Regulation) will have “regulatory effect in their own right” such that future notice and comment rulemaking by OMB will have automatic agency-wide application on the date of OMB’s final rule, negating the need for agencies to implement OMB requirements through secondary rulemaking procedures.

Next steps

The proposed rule has an established 45-day comment period, with public comments due July 13, 2026. The rule has already solicited an incredibly strong public response, with more than 14,800 comments to date. Under the Administrative Procedure Act (APA), an agency must generally respond to all “significant comments” received during the rulemaking process. Rules concerning “grants,” however, are exempt from this general procedural requirement. If OMB does not seek to take advantage of this exemption, the agency will not respond individually but the preamble of its final rule will group the comments together by the relevant material points raised by commenters and present the agency’s responses. Even if the rule is generally exempt from notice and comment procedures, OMB cannot completely disregard the comments it solicited. Instead, the general obligation to consider all important aspects of the problem and address relevant material still applies in judicial review. Thus, interested organizations are strongly encouraged to submit comments expressing their views. Judicial review under the APA and standing may be available even to those who have not submitted comments. But an agency’s obligation to respond to or consider comments is limited to the issues raised by commenters. If existing commenters have not adequately presented the issue on which an organization later wishes to base a legal challenge to the rule, it is possible that issue could be foreclosed. Filing a specific, well-supported comment is the best way to reliably ensure that your arguments are preserved and that a record exists to support them.

Conclusion

The proposed rule, if finalized, will have a significant impact on how grants are awarded, terminated, and managed. The proposed rule expands Federal oversight and increases political control over the grant process, both prior to award and during the period of performance. The Trump administration’s priorities focused on prohibiting “illegal DEI” and policies around gender ideology and gender-affirming care will be incorporated into every grant in an expansive way.

Whether the rule will be finalized as written remains a question. The rule has elicited a strong public response, and OMB cannot disregard the large volume of comments to date. Many changes proposed by the current administration have faced legal challenges as well, and given the substantial overhaul proposed, this proposed rule is likely to face similar challenges.

McDermott Will & Schulte’s Government Contracts Group can assist recipients in navigating the impact of the EO and the various changes that it directs to existing rules, terms, and conditions. For more information, reach out to the authors or your regular McDermott lawyer(s).