New FAR Council Guidance: The ‘Teeth’ Behind the DEI Discrimination Ban for Federal Contractors

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Quick Hits

• New clause FAR 52.222-90 declares contractor compliance “material” to the government’s payment decisions, creating direct False Claims Act liability for contractors who maintain prohibited programs.
• Agencies must bilaterally modify existing contracts to include the new clause by July 24, 2026, and if a contractor refuses, agencies are told to consider whether the contract should be terminated for convenience.
• Prime contractors must flow the clause down to all tiers and report any subcontractor’s “known or reasonably knowable” violations to the contracting officer.

While EO 14398, issued in March 2026, set the policy stage, this new memorandum provides the technical architecture and aggressive deadlines that federal contractors and subcontractors must navigate immediately.

Below, we break down the most critical developments that move this from a policy statement to an active compliance requirement.

1. The ‘Materiality’ Trap: False Claims Act Exposure

Perhaps the most significant legal development in the FAR Council’s guidance is in the text of the new clause, FAR 52.222-90(b)(6). It states that compliance with the race-based diversity, equity, and inclusion (DEI) discrimination ban is “material to the Government’s payment decisions” for purposes of 31 U.S.C. 3729(b)(4).

By explicitly linking DEI activities to the False Claims Act (FCA), the government has created significant litigation risk. Any contractor that maintains programs that meet the broad definition of “racially discriminatory DEI activities” could face treble damages and significant civil penalties.

But the FAR guidance is only half the equation. The EO itself supercharged the enforcement mechanism by directing the attorney general not only to consider bringing affirmative FCA actions against noncompliant contractors, but also to ensure “prompt review” of civil actions brought by private persons under 31 U.S.C. 3730(b)(1). In practical terms, Section 4(d)(ii) of the EO instructs the government to render a decision on whether to proceed with a qui tam (whistleblower) suit within the sixty-day seal period “to the maximum extent practicable.”

2. Aggressive Implementation Deadlines

The timeline for implementation is remarkably short, yet the scope of coverage is massive. Government data from fiscal year (FY) 2025 shows 160,508 prime contracts awarded to more than 34,000 unique vendors that meet the new clause’s scope and geographic conditions, with a maximum estimated universe of more than 642,000 awards when subcontracts are included. All of those are potentially subject to these new requirements, and the deadlines leave little room for internal review of existing programs:

• April 24, 2026: Agencies must begin using the new clause in all new solicitations and resulting contracts.
• April 27, 2026: Agencies are required to update their class deviations for parts 9, 12, 22, and 52.
• July 24, 2026: Agencies must work to modify existing contracts to include the new clause.

Notably, open solicitations already in the pipeline are not grandfathered: agencies must amend them under FAR 1.107(d) to incorporate the new clause, meaning contractors currently in the middle of a bid process may find these requirements inserted during the procurement process.

3. The ‘Bilateral’ Ultimatum for Existing Contracts

The guidance takes a firm stance on existing work. Contracting officers “must make every effort” to bilaterally modify existing contracts to include the new clause.

Crucially, the guidance provides a roadmap for contractors that refuse. If a contractor will not agree to the modification, the contracting officer is instructed to consider whether the contract should be terminated for convenience because it no longer meets the agency’s needs. This effectively forces contractors to accept these new terms or risk losing their federal contract. Further, contractors weighing whether to request modifications to the clause language during a bid process may also want to note that the FAR Council’s memorandum notes that “agencies must request approval from the Council before adopting FAR text that differs from the Council’s model deviation text.” This provision seemingly decreases the likelihood that the government would negotiate the language. There is one narrow exception worth noting: modification of contracts with a final expiration date no later than December 31, 2026, is left to contracting officer discretion.

4. Scope and Geographic Boundaries

The scope of the new clause is broad in many respects, but it does contain meaningful boundaries that contractors may want to use to map against their operations.

The clause applies to contracts and subcontracts at any tier “for which the place of delivery or performance is in the United States.” This geographic limitation is significant. Contractors with overseas operations, international supply chains, or foreign subsidiaries performing work outside the United States are not covered by this clause for that work. For multinational contractors, this distinction creates a clear dividing line.

Similarly, the clause only applies to contracts valued over the micro-purchase threshold (currently $15,000). While this exception may not matter for many government contracts, it does mean that smaller procurements could fall outside the clause’s reach.

5. Subcontractor Surveillance Obligations

The new guidance places an affirmative “policing” burden on prime contractors regarding their supply chains:

• Mandatory Flow-Down: The clause must be included in subcontracts at any tier, including those for commercial products and commercial services, for which the place of delivery or performance is in the United States.
• Duty to Report: Contractors are legally required to report a subcontractor’s “known or reasonably knowable” conduct that may violate the clause to the contracting officer, and to take any remedial actions directed by the contracting officer.
• Notice of Litigation: If a subcontractor sues a prime contractor and the validity of the DEI clause is at issue in any way, the prime contractor must inform the contracting officer.

6. Definitions: Adopted Wholesale, Not Interpreted

One thing the FAR Council notably did not do was narrow or clarify the EO’s definitions. The definitions of “racially discriminatory DEI activities” and “program participation” in FAR 22.2201 are adopted verbatim from Section 2 of the EO. That means “racially discriminatory DEI activities” continues to be defined as “disparate treatment based on race or ethnicity” across recruitment, employment, contracting (including vendor agreements), program participation, and resource allocation. “Program participation” includes training, mentoring, leadership development programs, educational opportunities, clubs, associations, and similar opportunities sponsored by the contractor or subcontractor.

7. Enforcement and Noncompliance: What Contractors Can Expect

The government’s own Paperwork Reduction Act (PRA) filings offer a nuanced picture of how it expects enforcement to play out in practice. The government estimates that approximately 1 percent of covered awards will trigger some form of enforcement activity in any given year. There are three distinct categories of activity, each with very different implications for contractors:

• Books and records requests under paragraph (b)(2): These are the most significant. The government can request information, reports, and access to a contractor’s books, records, and accounts related to compliance.
• Subcontractor violation reports under paragraph (b)(4): These are notifications a prime contractor must file when it becomes aware of a subcontractor’s known or reasonably knowable noncompliance.
• Litigation notices under paragraph (b)(5): These are notifications required when a subcontractor brings a lawsuit in which the validity of the clause is at issue.

Even before PRA approval, agencies may require contractors to submit existing records regarding compliance “in connection with individual investigations,” including investigations initiated by the U.S. Equal Employment Opportunity Commission (EEOC) or the U.S. Department of Justice (DOJ). The guidance also states that agencies “should expect” contractors to proactively alert contracting officers to potential violations or lawsuits relating to the clause.

Noncompliance with FAR 52.222-90 is now a formal basis for both debarment under FAR 9.406-2 and suspension under FAR 9.407-2. This transforms what might otherwise be a risk limited to a single contract into an existential threat across the contractor’s entire federal contracting portfolio.

8. Sector-Specific Scrutiny on the Horizon

Finally, contractors may want to note a provision in the executive order that has not yet been activated but could significantly raise the stakes for certain industries. Section 4(b) directs the director of the Office of Management and Budget (OMB), in coordination with the attorney general, the assistant to the president for domestic policy, and the EEOC chair, to “identify economic sectors that pose a particular risk” of entities engaging in racially discriminatory DEI activities and to issue additional guidance for those sectors. No sectors have been identified yet, but contractors in industries with historically prominent DEI programs may want to anticipate heightened scrutiny.

Contractor Takeaways

This guidance transforms DEI compliance from a corporate social responsibility consideration into a primary legal, financial, and debarment risk. Contractors may wish to consider action on several fronts.

• First, consider auditing internal programs, including reviewing DEI initiatives, mentorship programs, vendor diversity requirements, and resource allocation practices against the codified definition of “disparate treatment” based on race or ethnicity. The definitions are broad, and the FAR Council has declined to provide interpretive guardrails.
• Second, consider mapping exposure. The geographic limitation (U.S. place of performance) and the micro-purchase threshold exception mean the clause does not apply uniformly across all operations. Contractors with mixed domestic and international portfolios may want to identify precisely which contracts and subcontracts are covered.
• Third, consider evaluating supply chain readiness. The subcontractor flow-down and reporting obligations mean that a subcontractor’s violation could quickly become a prime contractor’s problem. Contractors may want to update subcontract templates and establish internal reporting protocols.
• Fourth, the whistleblower dimension is an important factor. The combination of the FCA materiality clause and the EO’s qui tam acceleration provisions creates a potent private enforcement mechanism that does not depend on government resources or priorities.

Ogletree Deakins’ Diversity, Equity, and Inclusion Compliance Practice Group, Government Contracting and Reporting Practice Group, and Workforce Analytics and Compliance Practice Group will continue to monitor developments and will provide updates on the Diversity, Equity, and Inclusion Compliance, Government Contracting and Reporting, and Workforce Analytics and Compliance blogs as additional information becomes available.

This article and more information on how the Trump administration’s actions impact employers can be found on Ogletree Deakins’ Administration Resource Hub.

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