Given the slew of Executive Orders (EOs) last year focusing on diversity, equity, and inclusion (DEI) and roiling the funding and operations of recipients of federal financial assistance such as universities and nonprofits, recipients may be forgiven for passing over EO 14398, dated March 26, 2026. As we’ve been covering (here and here), EO 14398 marks a second phase of the administration’s focus on “racially discriminatory DEI activities.” Where EOs from 2025 focused on broad policy shifts and internal agency operations, 2026 EOs seek prospective operationalization of the administration’s policy preferences by baking restrictions on DEI activities into federal contracts.

While recipients are not mentioned in EO 14398, and the legal authority it invokes—the Federal Property and Administrative Services Act—applies exclusively to contracting and not federal financial assistance, recipients should take note of the EO’s introduction of a new contract clauseforbidding “racially discriminatory DEI activities.” This clause emphasizes themes and priorities of the administration, auguring where provisions of awards for federal financial assistance may be headed.

Specifically, the clause, to be set forth at FAR 52.220-90 as “Addressing DEI Discrimination by Federal Contractors,” provides several notable terms:

  • Contractors are forbidden from engaging “in any racially discriminatory DEI activities.” Rather than all DEI activities, the clause uses the modifier “racially discriminatory.” The clause defines the term 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.” We expect that over time, organizations, whether they’re performing procurement contracts or recipients, will parse this clause closely to ensure compliance. Key issues will turn on whether race or ethnicity drives preferences, access, selection, and/or funding. An organization that has a program centered on other criteria, such as geography, socioeconomic status, veteran status, disability, etc., may generate a different risk assessment.
  • Noncompliance with the clause, including that of a subcontractor, is grounds for cancellation, termination, or suspension of the entire contract and ineligibility for further government contracts. This provision makes “racially discriminatory DEI activities” a land mine that could not only ruin a contract but also exclude a contractor from all federal business. Actual invocation of this clause would probably be rare, but its inclusion signals how the government could approach a contractor’s operations. Recipients should take note because federal financial assistance awards could include analogous language.
  • The contractor will report both on a subcontractor’s conduct that may violate the clause and if a subcontractor sues the contractor regarding the validity of the DEI clause. With these terms, the government is seeking transparency into a contractor’s subcontract management practices and explicit communication regarding any challenge to the clause. For recipients, this shows the extent to which federal agencies will be seeking to intrude into organizational operations. If the federal government wants contractors to be its eyes and ears in the hunt for “racially discriminatory DEI activities,” we don’t see why it wouldn’t also want to enlist recipients at some point.
  • Compliance with the contract is material for payment with explicit reference to the False Claims Act (FCA). By making the government’s most powerful enforcement tool an explicit part of a contract, the government is signaling to the industrial base the importance of policing “racially discriminatory DEI activities.” Recipients should already be familiar with the FCA, but this is noteworthy because it seeks to make litigation around FCA cases easier for the government. By baking this term into a contract, the government obtains more leverage when investigating FCA allegations. For recipients, we would not be surprised if a similar provision starts appearing in agencies’ standard award provisions.

Steps Recipients Can Take to Prepare Now

In our previous commentary, we urged contractors to treat the “DEI clause” as a multifaceted compliance requirement. Recipients should continue monitoring developments and enhancing their understanding of what kinds of risks their awards may pose. Now is a good time to map their activities and the activities of their subawardees, know the precise terms of their awards, and understand how claims for reimbursement or payment from their awarding agencies are made.