Federal Contractors Set To Receive DEI-Related Contract Clauses

Key Takeaways 

• A new memorandum from the Federal Acquisition Regulatory Counsel directs federal agencies to insert a clause into contracts forbidding racially discriminatory DEI practices pursuant to Executive Order 14398.
• While many previous executive orders required contractor obligations to begin with new contracts, the guidance directs agencies to make efforts to add the clause to existing contracts, with deadlines for compliance fast approaching.
• Contractors must flow down the clause to subcontractors at all tiers.
• Contractors should be ready for information collection requests and potential audits. 

The Federal Acquisition Regulatory Counsel has issued a memorandum providing guidance for the implementation of Executive Order 14398, “Addressing DEI Discrimination by Federal Contractors.” The guidance directs federal agencies to insert a new Federal Acquisition Regulation (FAR) clause into contracts to prohibit racially discriminatory DEI practices pursuant to the Executive Order. Contractors will need to ensure compliance quickly as the guidance directs agencies to incorporate the new clause in contracts and solicitations beginning April 24, 2026, and to seek inclusion of the clause through modifications of existing contracts by July 24, 2026. 

Overall, the guidance echoes many of the elements of EO 14398, but it also clarifies coverage and other issues that arose after the administration issued EO 14398. The guidance directs agencies to include the clause from EO 14398 in federal contracts and solicitations and provides additional guidance related to implementation of the clause. However, the guidance does not shed light on the substantive obligations of EO 14398. Specifically, the guidance addresses the following: 

• Revisions to the FAR. The guidance includes a new FAR clause at FAR 52.222-90, titled, “Addressing DEI Discrimination by Federal Contractors (APR 2026).”  The guidance includes other FAR revisions, including revisions to Part 9 to include noncompliance with the new FAR clause as a cause for suspension or debarment and revisions to Parts 12 and 22 to prescribe the use of the new FAR clause.
• Application of the new FAR clause. The guidance requires agencies to include the clause in all new contracts and solicitations and potentially existing contracts valued above the micro-purchase threshold, including those for commercial products and services, where the place of delivery or performance is in the United States. The micro-purchase threshold currently stands at $15,000.
• Use in new solicitations and contracts—April 24, 2026. The guidance directs agencies to include FAR 52.222-90 in new solicitations and resulting contracts beginning April 24, 2026.
• Use in existing contracts clause—July 24, 2026. Notably, and distinct from previous executive orders, the guidance directs that agencies “must make every effort to bilaterally modify existing contracts” by July 24, 2026. If bilateral negotiations are unsuccessful, the contracting officer “should consider” terminating the contract for convenience if the contract no longer meets the agency’s needs without the clause. Contracting officers have the discretion to include the clause in contracts that have a final expiration date of December 31, 2026 or earlier. Notwithstanding the July deadline, we expect some contracting officers to attempt to add the clause as early as April 24, 2026.  
• Flow-down obligations. Although the guidance itself only explicitly addresses flow-down of the EO’s requirements to subcontractors under new contracts, FAR 52.222-90(c) requires contractors to flow down the substance of the clause to subcontractors at all tiers, including subcontracts for commercial products and commercial services, where the place of delivery or performance is in the United States. Therefore, this flow-down obligation will apply to existing contracts that are bilaterally modified to include the clause.  Further, the prescribed flowdown of the clause arguably expands the universe of subcontractors to whom these requirements flow down from the obligations imposed by DOL's OFCCP, whose regulations limited the application to those subcontractors assuming obligations under a prime contract or whose performance was necessary under a prime contract.
• Information collection request. The guidance references a separate effort by the FAR seeking an “emergency” information collection request process under the Paperwork Reduction Act (PRA). Pursuant to the PRA, federal agencies must obtain approval from the Office of Management and Budget (OMB) before seeking to collect information from the public. Prior to the rescission of EO 11246, OFCCP consistently used this process (on a nonemergency basis) to update its scheduling letter for contractor audits. However, the guidance indicates that agencies themselves, not just the Equal Opportunity Commission and DOJ, will be able to request documentation regarding compliance with the clause. Contractors should be aware of the potential breadth of the requests, as categories of documents include records “ascertaining compliance with the clause,” reporting documents related to subcontractors’ violations of EO 14398, and information related to any lawsuit regarding the validity of the clause.
• Overlapping investigation potential. As noted above, the guidance indicates that agencies could request broad categories of information regarding compliance with EO 14398, including information related to racially discriminatory DEI programs. The guidance also specifies that such records could include information requested by the EEOC and DOJ. This should raise significant concerns for contractors, as it could mean that at least three government agencies could be reviewing a contractor’s DEI program and could potentially reach three different or inconsistent conclusions regarding those programs. This contrasts significantly with the former practice, under which OFCCP and the EEOC typically maintained different investigative lanes pursuant to a Memorandum of Understanding (MOU). Under this MOU, OFCCP would generally evaluate federal contractor class or systemic issues, while the EEOC would evaluate individual claims. That division of labor between EEOC and OFCCP no longer exists because now agencies and EEOC can cover the same ground. In addition, DOJ now has the ability to enter the fray.
• Agency reporting and annual reviews. The guidance reiterates the direction of EO 14398 that agencies must report specific information relating to implementation of the guidance, including whether an agency’s deviation and approach to applicability deviate from the guidance. Annual reporting of compliance and implementation of corrective measures is also required.
• Status of Executive Order 14173. EO 14173, issued in January 2025, targeted DEI programs broadly. We discussed that EO here and the differences between that EO and 14398 here. The guidance strongly indicates that EO 14173 has, at best, taken a back seat or has been effectively rescinded. The administration has withdrawn rulemaking related to EO 14173, and the guidance makes no mention of the previous EO. In the face of the narrow focus of EO 14398 on racially discriminatory DEI programs, EO 14173’s demise creates a complex landscape. For example, the EEOC appears to disagree with a narrow focus on racially discriminatory DEI programs, as it has taken actions on a wide range of DEI programs, including a recent lawsuit against a Coca-Cola bottling plant for gender discrimination based on a women-only retreat. While it is expected that prudent federal contractors will not have programs that result in gender bias on the grounds that such programs are not covered by EO 14398, this presents a patchwork of mismatched obligations that contractors will find puzzling.
• Racially discriminatory DEI programs. The guidance does not provide any additional insight into what would be considered racially discriminatory DEI. Rather, the guidance repeats the definitions included in EO 14398. However, a recent announcement of a DOJ settlement with IBM provides some insight into practices that the government appears to be targeting. To quote the allegations from the agreement, DOJ accused IBM of:
  • Modifications or adjustments to pay, bonuses, or other compensation that caused employees to take race, color, national origin, or sex into account when making employment decisions, including the use of diversity modifiers that tied bonus compensation to achieving demographic targets.
  • Taking race, color, national origin, or sex into account as part of decisions to hire, transfer, or promote through the use of “diverse interview slates,” “diverse sourcing,” and other related employment practices, including altering interview eligibility criteria based on protected characteristics.
  • Establishing race- and sex-based demographic goals for business units and taking race, color, national origin, or sex into account when making employment decisions to achieve progress toward those demographic goals.
  • Offering certain training, partnerships, mentoring, leadership development programs, educational opportunities, or resources, and similar opportunities only to certain employees, with eligibility, participation, access, or admission limited on the basis of race, color, national origin, or sex.
• Potential audit activity. The documentation supporting the ICR includes, in its burden estimate, a projection of 6,825 audits by more than 500 federal agencies. Because the administration rescinded OFCCP’s nondiscrimination audit authority, it remains unknown who within federal agencies would be conducting these audits. Moreover, government investigations and audits often require adherence to Fourth Amendment access requirements. While the ICR process provides some authority for the government to collect some information, broader, wide-ranging requests and other audit activity (e.g., onsite reviews, interviews, etc.) would likely need to meet constitutional requirements.  

Next Steps for Contractors 

1. Review company policies. First and foremost, contractors should ensure compliance with EO 14398 by confirming that they are not engaging in racially discriminatory DEI programs. The IBM settlement provides some indication of where the government has set its priorities.
2. Anticipate clause activity as early as April 24, 2026. Contractors should be prepared to see the clause in new solicitations and contracts. As for existing contracts, agency contracting officers should begin seeking inclusion of the clause through bilateral modifications. Contractors potentially have the option of objecting to the clause; however, this could result in termination for convenience if the contracting officer determines that the contract without the clause no longer meets the agency’s needs.
3. Flow-down obligations to all subcontractors at any tier. Contractors should be prepared to flow down FAR clause 52.222-90 to its subcontractors at all levels, including those for commercial products and commercial services, where delivery or performance is in the United States.
4. Prepare for potential audits. Finally, audit activity and how it will proceed remain significantly up in the air. To the extent such activity starts, contractors should ensure that they have a full understanding of the law and the government’s reach.