Federal Contractor DEI Compliance: What EO 14398 and the FAR Council’s New Guidance Mean

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Lauren Hicks: Hello, I’m Lauren Hicks, a shareholder in Ogletree’s Indianapolis office, and I’m here today with my colleague, Chris Near, a shareholder in our Columbia office.

Today we’re diving into a topic that most certainly catches the attention of our federal contractors and subcontractors. That is Executive Order 14398 and the FAR Council’s recent guidance implementing it. Executive Order 14398, which was titled, Addressing DEI Discrimination by Federal Contractors, came out March 26th, 2026, and the FAR Council’s guidance followed a little bit over three weeks later. Chris and I are aiming to break this down into a couple of parts today.

First, we will cover the executive order briefly and second, the FAR Council’s guidance, and we’ll conclude with some practical things that contractors and subcontractors should pay attention to or take away. Chris, how about first walk us through the executive order?

Chris Near: Sure. Thanks so much, Lauren. Well, like some previous executive orders, Executive Order 14398 is, again, aimed at diversity, equity, and inclusion activities of federal contractors and subcontractors. After briefly addressing the executive order’s policy and purpose, 14398 has a definitional section where it addressed two specific things.

First, racially discriminatory DEI activities and second, program participation. So first, racially discriminatory DEI activities is written in the EO to mean disparate treatment based on race or ethnicity in the recruitment, employment, contracting, program participation, or allocation or deployment of an entity’s resources. The reference to employment could include things like hiring or promotions and the reference to contracting could include things like vendor agreements.

Now, it’s worth noting that disparate treatment is not separately defined in this executive order. The second term, program participation, is written to mean membership or participation in or access or admission to things like training, mentoring, or leadership development programs, educational opportunities, clubs or associations, and similar opportunities that are sponsored or established by a contractor or subcontractor.

So, I realize there’s a lot there. The definitions have a lot of substance in them but good to have that background right off the bat.

So, after the definitions, EO14398 includes a section addressing requirements for federal contractors. The EO includes addressing requirements for the government as it engages with federal contractors. For example, it explains that within 30 days of the executive order, which, at the time we’re recording this podcast, has already passed, and Lauren, you’ll be telling us a little bit more about that shortly, executive departments and agencies were instructed to include a particular clause in its contracts and contract-like instruments, including subcontracts and subcontractors’ lower tier subcontracts. So, I realize that’s a mouthful.

14398 then goes on to include specific language that should be in that clause. Contractors may recall last year after Executive Order 14173 was issued, that clauses started getting inserted into some but not all contracts and the language of those clauses varied. Executive Order 14398 and the FAR guidance now gives contractors and subcontractors some clarity and some consistency about what they’ll see. Executive Order 14398 then goes on to address penalties, which really run the gamut from cancellation or termination of a single contract through contractor debarment. The EO has some general and severability provisions along with a section about the Federal Acquisition Regulation Council providing more details.

So let’s talk about those. Lauren, you want to tell us a little bit more about the FAR Council’s recent action?

Lauren Hicks: Yeah. So, in mid-April, which was just a few weeks after Executive Order 14398 was issued, the FAR Council issued guidance implementing the executive order and the headline is kind of that DEI compliance for federal contractors related to race-based programming seemingly went from a policy conversation to a more aggressive legal risk.

The new clause declares that the contractor’s compliance is material to the government’s payment decision. And jumping back to the executive order for a second…executive order 14173 for a second. Last year, 2025’s executive order, recall the term “material” was also used there. So, what is it with this language? In both contexts, the government is trying to connect compliance directly to the False Claims Act, meaning potentially treble damages, significant civil penalties, and qui tam whistleblower lawsuits. So, these are really important and material rights related to federal contracting.

We don’t want to sleep on the False Claims Act. It’s one of the most aggressive kind of civil enforcement statutes in the federal government’s arsenal. Treble and civil damages can kind of add up really fast. The executive order itself further directs the Attorney General to consider bringing affirmative False Claims Act suits or actions against non-compliant contractors. Plus, it tells the government to fast-track review of qui tam suits, which remember, permits private whistleblowers to file suit on the government’s behalf and then share in the recovery.

From practical terms, what does that mean? Well, it means that an interested party, a disgruntled employee, person, contracting participant could go complain and then they might receive money at the end of that. And we do know that some of the government agencies, like EEOC and DOJ, seem to be interested in encouraging these types of whistleblower lawsuits. So, this means we’re facing both government-initiated enforcement and kind of a turbocharged private whistleblower mechanism running in parallel.

As for the new clause, the FAR guidance also includes some pretty aggressive deadlines. By April 24th, 2026, agencies were supposed to begin using the new clause in all new solicitations and resulting contracts. By April 27th, agencies were required to update their class deviations for certain parts. And then by July 24th, 2026, that’s not too far in the distant future, agencies must work to bilaterally, meaning hopefully by agreement, modify existing contracts to include this new clause. But there are some exceptions, so maybe a contract that’s expiring no later than December 31st of 2026, there is a little bit of discretion left to the contracting officer regarding whether to modify that agreement and try and include the new clause.
As we are discussing this clause, I want to read through the six core requirements in this clause. In connection with the performance of work under this contract, the contractor agrees as follows: one, the contractor will not engage in any racially discriminatory DEI activities. Two, the contractor will furnish all information and reports, including providing access to books, records, and accounts as required by the contracting officer for purposes of ascertaining compliance with this clause. Three, in the event of the contractor’s or a subcontractor’s non-compliance with this clause, this contract may be canceled, terminated, or suspended in whole or in part and the contractor or subcontractor may be declared ineligible for future government contracts.
Four, the contractor will report any subcontractor’s known or reasonably knowable conduct that may violate this clause to the contracting officer and take appropriate remedial actions directed by the contracting officer. Five, the contractor will inform the contracting officer if a subcontractor sues the contractor and the suit puts at issue in any way the validity of this clause.
And six, the contractor recognizes that compliance with the requirements of this clause are material to the government’s payment decisions for purposes of the False Claims Act.

All right. Now, so back to some limitations that exist on the implementation of this clause. We discussed earlier that it does flow down to all tiers of subcontractors, but scope and geography are also addressed. The clause applies to contracts and subcontracts at any tier for which the place of delivery of performance is in the United States. That geographic limitation, I think, is significant. If you’re a multinational contractor with overseas operations, international supply chains, or foreign subsidiaries kind of performing work outside the U.S., those activities are not covered by this clause.

One caveat, it’s unclear how the government will treat contracts that have mixed performance or delivery in both the U.S. and outside of the U.S. Also, the clause implementation only applies to contracts valued over the micro purchase threshold, which is currently $15,000.
So let me pause for a second before we continue with the specifics of the guidance. Chris, what does all this mean for contractors who happen to be mid-contract bid right now?

Chris Near: Yeah. And appreciate you going through all that, Lauren, because I know there’s a lot to both the executive order and the FAR guidance and we’re trying to make this as exciting as we possibly can, but sometimes we got to go through the specifics of everything and help out folks and at least let folks know maybe what they ought to be thinking about.

And those who are mid bid right now, it really means reviewing the proposal assumptions immediately or as soon as you can. If pricing has already been submitted and those staffing plans have been built around the existing compliance frameworks as they were before, consider reviewing those. The insertion of this clause that Lauren just went through could possibly have an effect on things like a cost structure, subcontracting strategies, even risk considerations. And so, all of those are very important to be thinking through as you determine how this clause may actually affect things going forward.

Lauren, you also had mentioned the term bilateral earlier. That seems to imply that the contractor has a say in negotiating this clause that we’re talking about. Is that true?

Lauren Hicks: Well, in theory, yes, that would be what it would mean, but in practicality, perhaps not so much. Contracting officers are supposed to make every effort to bilaterally modify existing contracts, but then it goes on to say that if a contractor refuses to agree to the modification, the contracting officer should consider whether the contract should be terminated for convenience because it no longer meets the agency’s needs. So, that seems to create almost a default that, “Hey, you will sign this or else maybe we don’t really need your contract.” And then beyond that, if there’s a discussion between the contracting officer and the contractor about modifying the clause, the agency has to request approval from the FAR Council before adopting any text that’s different than what I read in the section above in that model guidance.

Chris, I don’t think there’s any way around it. Those two kind of constraints, in my opinion, are clearly meant to have a deterrent effect from any modifications by the agency or any sort of tolerance toward failure to add that clause into the contract.

So, interestingly to government data from fiscal year 2025 shows that there are over 160,000 prime contracts awarded to more than 34,000 different vendors and those unique vendors that meet the clauses, scope, and geographic conditions amounting to those numbers is pretty significant. Then when you start adding subcontracts, the sort of maximum estimated universe is more than 642,000 contracts or awards, right?

And so this guidance puts in some serious obligations on prime contractors when it comes to subcontractors and their supply chains. Is that right?

Chris Near: Yeah, it really does. And there’s a couple layers here to that. First, mandatory flow downs. The clause must be included in subcontracts at any tier, including those for commercial products and commercial services that are performed, as you talked about earlier about the scope in the United States.

Second, there’s a duty to report. What that means is conduct from a subcontractor that is known or reasonably knowable to violate the clause has to be reported to the contracting officer with remedial actions to be taken as that contracting officer directs.

And then third and finally, if a contractor sues a prime contractor and the validity of the DEI clause is at issue, the prime has to inform the contracting officer about that as well. So, a subcontractor’s violation, as you can see just from those three things, can very quickly become a prime contractor’s problem.

Lauren, what other types of things are you hearing about how folks may be handling these types of obligations we’re talking about?

Lauren Hicks: I think it’s fair to say that there’s a tremendous amount of unease and uncertainty. Prime contractors are trying to figure out how to kind of operationalize this language of known or reasonably knowable, which is a little bit of a vague standard as defined in the EO, or lack thereof really. What level of due diligence does that require? Do you need to affirmatively investigate subcontractor race-based DEI programs? Is it more of a, see something, say something standard? The guidance doesn’t spell that expectation out.

And I think that ambiguity is likely to make compliance teams pretty uncomfortable and that leads us to enforcement. Chris, what do you think listeners should know about how this might play out in practice?

Chris Near: So, this might sound like a little bit of a repeat of what you mentioned a few minutes ago as we went through the clause itself, but the government’s own Paperwork Reduction Act filing estimates that approximately 1% of covered awards will trigger some form of enforcement activity in a given year. And there’s already these categories identified that you had talked about, Lauren.

The first being books and record requests where the government can demand access to information, reports, and records related to compliance. Secondly, reports filed by prime contractors where there is a known or reasonably knowable violation of the clause. And then third, litigation notices where a subcontractor brings a lawsuit challenging the clause.

I mentioned 1% of covered awards, 1% may not sound like a lot, but we’re talking about 1% of potentially 642,000 covered awards. So that number could be pretty large pretty quick. But even outside of the Paperwork Reduction Act filing, even now, before anything else is approved, agencies could require contractors to submit existing records in connection with individual investigations, including those initiated by the EEOC or even the DOJ.
Lauren, what else do you think our listeners ought to be aware of?

Lauren Hicks: A couple of things. I think, Chris, there’s a lot of sort of stay tuned on this issue of books and records requests. Some folks have referred to that as auditing. We just don’t really know what that’s going to look like, right? In theory, based on the way this language and the guidance was crafted, it potentially gives incredibly broad rights that appear to be quite expansive compared to maybe what we would normally see if it were traditional enforcement because this is a contracting right of the governments.

And so, they’ve left a pretty broad and vague right to investigate books and records. And you can imagine when we start talking about employment practices, policies, and maybe even employee data and information, we really don’t know if this will turn into something that is material or if this will be something that’s not very frequently used because frankly, government contracting officers are fairly busy and may not have a lot of time to do these types of investigations.
So that is very much a stay tuned. We don’t really know what’s coming there, but you really want to watch and pay attention if we start hearing reports of deep or thorough or intrusive investigations.

Also, it’s worthy of note, Chris, that part of the executive order directs the Office of Management and Budget, along with the Attorney General, the EEOC chair, and others to identify, “economic sectors that pose a particular risk of entities engaging in sort of racially discriminatory DEI activities and to issue additional guidance for those sectors.” So, as of the recording of this podcast, no sectors have been identified yet, but contractors and industries with historically prominent DEI programs, and there are quite a number of those, should definitely remain on alert.

Chris Near: Well, that is excellent to know. Well, and to kind of wrap us up today and bring us home, how about we leave our listeners with a couple final takeaways?

Lauren Hicks: Sounds good.

Chris Near: So, I think the first takeaway I’d like to mention would be to audit those internal programs, to review company DEI initiatives, membership programs, vendor diversity requirements, resource allocation practices, all of those things against the definitions that we now have in this new executive order and the FAR Council’s guidance.

And while I realize a lot of folks may have done such an audit last year after Executive Order 14173 came out, it might not be a bad idea to give it another look-over. One example, for example, that we’ve gotten more information about since last January is employee resource groups, or ERGs. That’s an area that might have had a different risk assessment last year under 14173 versus now under 14398.

Lauren Hicks: That’s a really good point, Chris. I think another takeaway would be to kind of map exposure and plan for contracting compliance. I mean this is not the most exciting part, right? I mean it’s tedious to comply with having to flow down a new provision, but that can include looking at your supply chains and identifying contracts or vendor relationships that might require this flow-down language because it is tedious and can be burdensome depending on the type of system and mechanisms that you have in place and making sure that you are compliant if you do have an obligation to flow it down. So, evaluate those supply chains, not just for scope, but for readiness of implementation.

And finally, we have to prepare for the possibility that the government contracting team might ask for this contract amendment to be completed in a very short period of time. We did experience that last year with Executive Order 14173. Turnaround times for those amendments were often three days, seven days. Occasionally, we would see 10 days or more, but it seemed like a majority of them were very brief turnaround times.

And reminder that it is even possible that they might ask you for additional kind of substantive information regarding race-based DEI programs. We don’t know if those will really happen and what that might look like in practice but stay tuned and we will keep you apprised if we learn about what those look like.

Chris Near: Excellent takeaways. Thank you so much, Lauren. I really appreciate you talking through this with me and with our listeners today. And if you would like more information on the topics that Lauren and I have discussed today or others that may be of interest to you as an employer or a contractor, please check out the many informative blog articles and podcasts and webinars and many other resources that can be found on the Ogletree’s website. With that, Lauren and I thank you so much for listening and hope you have a great day.

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