On March 26, 2026, the Trump Administration issued a new Executive Order (EO) that all-but promises contract termination for federal contractors whose diversity, equity, and inclusion (DEI) policies are deemed non-compliant with the EO. The EO builds on the Administration’s ongoing scrutiny of DEI initiatives, following a May 2025 Department of Justice (DOJ) memorandum signaling the use of the False Claims Act (FCA) to challenge DEI practices within federal contracting, higher education, and other federally funded entities. This blog specifically addresses what contractors need to know when faced with the EO’s immediate and significant threat of contract termination for prime contractors and subcontractors who fail to ensure strict compliance with the EO. Visit this link to register for our webinar on this important topic for government contractors.
Key Takeaways of the EO
The EO states that “DEI activities are not only unethical and often illegal, but also cause inefficiencies, waste, and abuse within entities that engage in such practices.” Pilieromazza already covered this EO in depth, and every government contractor or subcontractor should review this client alert to ensure they are tracking the scope and purpose of the EO, as well as what they can do immediately to minimize risk. As a refresher, the following key takeaways are critical to understanding the termination threat:
- The EO’s scope is expansive, extending its reach not only to projects directly related to a company’s business with the government, but to internal company-centric activities, such as training, committees, and incentives. This means federal contractors with internal policies, programs, incentives, and charters implementing what the EO considers as discriminatory DEI components, using race- and ethnicity-neutral provisions are at risk, or implementing otherwise neutral policies in a way that disparately impacts members of a certain race or ethnicity.
- The EO mandates modifications to existing contracts between contractors and the federal government within 30 days. Prime contractors are obligated to work with their subcontractors, independent contractors, and consultants (and subcontractors with further lower-tier subcontractors) to amend existing subcontracts to include the EO’s mandatory provision. Contractors who do not move swiftly to implement these modifications are at serious risk of termination.
- The EO specifically announces penalties for non-compliance, directing agencies to “cancel, terminate, suspend” any contract or contract-like instrument for “failure of the contractor or subcontractor to comply” or implement the provision discussed in the second key takeaway. It also requires agencies to suspend or debar contractors or subcontractors for non-compliance, and instructs DOJ to consider whether to bring FCA litigation against contractors and subcontractors who fail to comply with the EO’s requirements.
- The final key takeaway is clear: contractors must implement the requirements of the EO or else face contract terminations, suspension and debarment, and worse. Contractors should not only immediately implement changes necessitated by the EO to avoid costly terminations but must also prepare to defend themselves against termination.
Preparing for Potential Termination for Default
If your contract is terminated for default as a result of this EO, your first step should be to engage counsel to prepare to challenge any unsupported allegations. The clock for your ability to appeal the termination to the Boards of Contract Appeal (BCA) or Court of Federal Claims (COFC) starts running the moment you receive a termination notice, so it is imperative that you retain counsel quickly. For the BCA, you have 90 days from the date of termination to file an appeal. For COFC, you have one year from the date of termination to file. Pilieromazza has several resources about the ins-and-outs of contract appeals.
Start gathering documents showing your company’s compliance with the EO, including internal governing policies, subcontracts, consulting agreements, and documentation of “program participation” (as defined by the EO), along with anything else that might be relevant to your termination. Termination notices are often sparse on details, so if you engage counsel early enough before your appeal deadline, they may be able to ask the contracting officer (CO) for the specific basis for termination, a report of the agency’s findings with respect to your contract(s), and the agency’s supporting documents used in the termination decision. Your legal counsel may recommend further requests based on your specific situation.
Preparing for Potential Termination for Convenience
The tone of the EO is clear that terminations for default are most likely to result from non-compliance, but it is worth understanding terminations for convenience as well, as the government can always terminate for convenience (i.e., without cause), and the steps you take in the first few days after a termination for convenience are critical. Take the following steps to protect your interests and ensure you receive the compensation to which you are entitled:
- Review the Termination Notice Carefully. Confirm whether the termination is partial or complete, and whether it’s truly for convenience (as opposed to default, which has different consequences and is addressed in the following section of this blog). Understand what work is to cease and when.
- Reserve Your Rights in Writing. Consider issuing a reservation of rights letter to your CO to reserve your right to challenge the underlying termination decision.
- Preserve Records and Immediately Cease Work. Stop all terminated work as instructed, and safeguard all records—including costs incurred, inventory, labor hours, subcontracts, and any correspondence.
- If Applicable, Notify Subcontractors Promptly. Flow down the termination notice and ensure that your subcontractors stop work and preserve documentation for potential settlement costs.
- Submit a Timely Termination for Convenience Settlement Proposal (TSP). The nature of the TSP and your entitlement to recover may vary depending on the type of contract and termination clause cited in your notice (i.e., for commercial item contracts, you may recover the percentage of completion plus reasonable costs related to the termination). You are entitled to seek the recovery of costs associated with the termination—including consulting and legal fees—for the preparation of your TSP.
- Negotiate in Good Faith but Be Prepared to Dispute. If you reach an impasse in TSP negotiations, you may need to convert the settlement proposal to a claim under the Contract Disputes Act (CDA).
Assessing Broader Exposure
As stated above, allegations of non-compliance with this EO may trigger suspension and debarment inquiries, and False Claims Act scrutiny. Early legal guidance can help mitigate these risks, so if you have any concerns that your company may have exposure beyond a contract termination, you should contact counsel immediately.
Should you have any questions or concerns about the EO, terminations, claims, or anything else discussed in this blog, please contact Lauren Brier, Josie Farinelli, or another member of PilieroMazza’s REAs, Claims, and Appeals Group or Government Contracts Group. Remember to visit this link to register for our webinar on this important topic for government contractors.
