New DEI Compliance Requirements For Federal Contractors And Grant Recipients: What You Need To Know Before Key Deadlines Hit

Key Takeaways:

• On March 26, 2026, President Trump signed Executive Order 14398, “Addressing DEI Discrimination by Federal Contractors,” which requires federal agencies to insert a new clause into all covered contracts and subcontracts prohibiting “racially discriminatory DEI activities” by April 25, 2026.
• The Order includes new reporting and subcontractor oversight requirements that increase the risk of federal enforcement and may warrant updates to internal monitoring and recordkeeping policies and practices.
• Separately, the General Services Administration (GSA) has proposed a new annual certification requirement for all entities registered for federal financial assistance in SAM.gov, requiring them to certify that they do not operate programs promoting “illegal DEI” that violate federal anti-discrimination laws.
• Both developments carry significant enforcement consequences, including potential liability under the False Claims Act (FCA), contract termination, suspension, debarment, and even criminal penalties.
• Federal contractors, subcontractors, grant recipients, and institutions of higher education should act now to review their programs and prepare for compliance as these requirements take effect.

I. Executive Order 14398: “Addressing DEI Discrimination by Federal Contractors”

On March 26, 2026, President Trump signed Executive Order 14398, titled “Addressing DEI Discrimination by Federal Contractors” (the “Contractors Order” or the “Order”). The Contractors Order represents the latest and most operationally significant step in the administration’s ongoing effort to eliminate what it characterizes as unlawful diversity, equity, and inclusion (“DEI”) practices in connection with the federal procurement and contracting system. Whereas the administration’s earlier Executive Order 14173, issued in January 2025, directed agencies to require federal contractors to certify compliance with anti-discrimination laws without defining which DEI activities were prohibited, the Contractors Order goes further by defining the targeted conduct, prescribing specific mandatory contract language, and establishing a detailed enforcement framework.

Definition of Prohibited Conduct. The Contractors Order defines “racially discriminatory DEI activities” as “disparate 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.” The Order further defines “program participation” to include “membership or participation in, or access or admission to: training, mentoring, or leadership development programs; educational opportunities; clubs; associations; or similar opportunities that are sponsored or established by the contractor or subcontractor.” Notably, this definition does not cross-reference or incorporate any federal anti-discrimination statute, such as Title VII of the Civil Rights Act of 1964.

Mandatory Contract Clause. The Order directs all executive departments and agencies to insert a new clause into all contracts and contract-like instruments—including subcontracts at every tier—by April 25, 2026. The clause requires contractors to agree to the following six obligations:

1. The contractor will not engage in any “racially discriminatory DEI activities” as defined in the Order.
2. The contractor will furnish all information and reports, including access to books, records, and accounts, as required by the contracting agency to ascertain compliance.
3. Noncompliance with the clause may result in cancellation, termination, or suspension of the contract and ineligibility for future government contracts.
4. The contractor must report any subcontractor’s known or reasonably knowable conduct that may violate the clause and take any remedial actions directed by the contracting agency.
5. The contractor must inform the contracting agency if a subcontractor files suit against the contractor that puts the validity of the clause at issue.
6. The contractor must recognize that compliance with the clause is “material to the Government’s payment decisions for purposes of” the FCA.

Enforcement and Penalties. The language of the new contract clause expressly contemplates several enforcement mechanisms, including authorizing agencies to demand documentation at any time, threatening the termination of contracts, and incorporating a materiality provision for FCA action.

The Order contains additional mandates to other federal agencies in furtherance of this enforcement framework, directing the Office of Management and Budget (OMB) to issue guidance to contracting agencies on ensuring compliance and to identify, in coordination with the Department of Justice (DOJ), the Equal Employment Opportunity Commission, and the Assistant to the President for Domestic Policy, “economic sectors that pose a particular risk” of noncompliance. Consistent with prior DEI-related Executive Orders, the Contractors Order directs the Attorney General to consider bringing FCA actions against noncompliant contractors and to ensure prompt review of qui tam actions filed by private whistleblowers. Agencies are further directed to suspend or debar contractors and subcontractors that fail to comply with the clause.

Implementation Timeline. The Order sets three key deadlines: (1) within 30 days (by April 25, 2026), agencies must begin including the clause in federal contracts; (2) within 60 days (by May 25, 2026), the Federal Acquisition Regulatory Council (FARC) must issue deviation and interim guidance regarding implementation of the clause; and (3) within 120 days (by July 24, 2026), each agency head must review and report on implementation of the clause. The FARC is also directed to amend the Federal Acquisition Regulation (FAR) to formally incorporate the clause, though no specific deadline has been set for that rulemaking.

Subcontractor Monitoring Obligations. Significantly, the Order imposes an unusual monitoring and reporting obligation on prime contractors regarding their subcontractors. While most FAR flow-down clauses require only that higher-tier contractors include specified terms in lower-tier subcontracts, the Contractors Order requires prime contractors to affirmatively report subcontractor conduct that may violate the clause and to take remedial actions at the direction of the contracting agency. This obligation extends to “known or reasonably knowable” conduct, a standard that may impose considerable compliance burdens on prime contractors with extensive subcontracting relationships.

Legal Challenge Filed in Maryland Federal Court. On April 20, 2026, a coalition of plaintiffs filed a complaint for declaratory and injunctive relief in the U.S. District Court for the District of Maryland, seeking to block enforcement of the Contractors Order¹. See Diversity Officers in Higher Education, et al. v. Donald J. Trump, et al., Case No. 8:26-cv-01532 (D. Md.). The complaint alleges that the Order’s definition of “racially discriminatory DEI activities” is “both overbroad and imprecise,” reaching constitutionally protected expression and lawful activities. The complaint raises three counts: (1) the Order violates the First Amendment by chilling protected speech and association and is unconstitutionally overbroad; (2) the Order constitutes content-based discrimination and imposes an unconstitutional condition on the receipt of federal funds; and (3) the Order’s FCA provision exceeds the President’s authority under the Procurement Act. Plaintiffs describe the potential harm as severe: NAMC and NAMC-DMV allege that 70-90% of their operating funds come from federal contractor sponsors whose partnerships the Order threatens to destroy; NADOHE alleges its institutional members hold hundreds of open federal contracts worth over $2 billion; and individual members of AAUP and UAM-UMD allege that the Order has already chilled their speech in teaching and research on race-related topics.

This lawsuit is part of a broader pattern of legal challenges to the administration’s anti-DEI executive actions. In prior litigation challenging Executive Order 14173, the U.S. District Court for the District of Maryland initially granted a nationwide preliminary injunction against key provisions of that order, though the Fourth Circuit vacated the injunction. The Fourth Circuit, reviewing the earlier certification provision (which required certification that a contractor comply with federal antidiscrimination laws), rejected the facial challenge to the order on the basis that there is no First Amendment protection for unlawful speech. The lawsuit alleges that the Contractors Order goes further, using language that is “overbroad and imprecise” such that policies and practices that are legal under federal anti-discrimination law would be targeted as violating the Order.

As of this publication, the plaintiffs in the lawsuit have not sought preliminary injunctive relief.

II. Proposed SAM.gov Certification Requirement for Federal Financial Assistance Recipients

In a parallel but distinct initiative, the General Services Administration (GSA) published a request for comments on January 28, 2026, proposing a new annual certification requirement for entities registered for federal financial assistance in SAM.gov. The proposal would update the Financial Assistance General Representations and Certifications—which all current and prospective federal financial assistance awardees must complete to be eligible for grants, cooperative agreements, loans, and government-sponsored insurance—to include a new DEI-related certification.

The proposed certification would require entities to affirmatively certify that they will “comply with the U.S. Constitution, all Federal laws, and relevant executive orders prohibiting unlawful discrimination on the basis of race or color in the administration of federally funded programs,” and that federal anti-discrimination laws “apply to programs or initiatives that involve discriminatory practices, including those labeled as Diversity, Equity, and Inclusion (DEI) or ‘diversity, equity, inclusion, and accessibility’ (DEIA) programs.”

The proposed certification includes a non-exhaustive list of examples of practices that “may” violate federal anti-discrimination laws, including:

1. granting preferential treatment based on race or color, such as race-based scholarships, preferential hiring or promotion practices, or the use of “cultural competence” requirements, “overcoming obstacles” narratives, or “diversity statements”;
2. segregation based on race or color in training sessions, facilities, or program eligibility;
3. the use of race-based “diverse slate” policies in hiring, race-based contract selection, or race-based resource allocation; 
4. training programs that stereotype, exclude, or single out individuals based on protected characteristics; and 
5. retaliation against individuals who raise concerns about or oppose discriminatory DEI practices. 

The proposed certification also includes an acknowledgment that the authorized official signing the certification may face criminal liability under 18 U.S.C. § 1001 (the false statements statute) and civil liability under the FCA for misrepresentations. GSA estimates that approximately 222,760 entities registered in SAM.gov for financial assistance may be affected by the revised certification requirements.

Public comments on the proposal were due by March 30, 2026, and these updates are expected to take effect soon.

Although the Contractors Order and the SAM.gov certification are distinct mechanisms—one targeting procurement contractors through a mandatory contract clause and the other targeting financial assistance recipients through the SAM.gov registration process—they reflect a coordinated effort by the administration to extend DEI compliance requirements across the full spectrum of federal funding relationships.

III. Practical Considerations and Recommended Actions

With the April 25, 2026 deadline for the mandatory contract clause imminent, and the SAM.gov certification requirement expected to take effect in the near term, federal contractors and subcontractors, grant recipients, or institutions receiving other federal financial assistance should take the following steps:

• First, organizations should conduct a thorough review of their DEI-related employment and business practices. This includes policies, programs, and activities that may fall within the Contractors Order’s definition of “racially discriminatory DEI activities” or the SAM.gov certification’s examples of potentially problematic conduct, such as diversity modifiers tied to compensation, diverse slate policies in hiring, demographic goals for business units, race-based scholarships, and limited-access training or mentoring programs. As the IBM settlement illustrates, the DOJ is interpreting actionable conduct broadly.
• Second, organizations should assess their current federal contract certifications and representations to understand what they are attesting to and whether those attestations are accurate.
• Third, organizations should work with counsel to maintain appropriate documentation and records, with an eye toward both compliance and the ability to respond to potential federal investigations or inquiries. Notably, the Contractors Order requires contractors to “furnish all information and reports” to allow federal agencies “to ascertain compliance” with the Order’s mandates. Organizations should anticipate that the federal government will issue broad records requests (and use AI-review tools targeting key words) aimed at identifying enforcement targets.
• Fourth, prime contractors should evaluate their subcontractor oversight and supply chain exposure. The Contractors Order’s requirement that prime contractors report “known or reasonably knowable” subcontractor violations creates a new monitoring obligation that goes beyond traditional flow-down requirements. Organizations should work with counsel to update flow-down clauses, supply chain monitoring protocols, and internal reporting mechanisms accordingly.

The legal landscape in this area continues to shift rapidly. We will continue to monitor developments and provide additional updates as law and policy evolve. Please reach out to our team if we can help assess any potential impact to your organization.

Footnote

1. Plaintiffs include the National Association of Diversity Officers in Higher Education (NADOHE), the American Association of University Professors (AAUP), United Academics of Maryland–University of Maryland, College Park (UAM–UMD), the National Association of Minority Contractors (NAMC), and the NAMC DMV Chapter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.