In the first days following his inauguration on January 20, 2025, President Trump issued a number of sweeping executive orders. This advisory focuses on Executive Order 14173, titled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity” (the “Executive Order”), which will have significant implications for federal contractors and grant recipients regarding affirmative action and DEI programs. This advisory addresses how the Executive Order will impact affirmative action programs and then turns to cost allowability concerns for federal contractors and grant recipients. 

Affirmative Action Implications

With regard to affirmative action and equal opportunity employment, the Executive Order rescinds a number of prior executive orders, including Executive Order 11246, issued by President Johnson on September 24, 1965, which prohibited federal contractors from engaging in employment discrimination and required those contractors to take affirmative action to ensure equal employment. The requirements of Executive Order 11246 were implemented contractually through the Federal Acquisition Regulation clause 52.222-26. The Office of Federal Contract Compliance Programs (“OFCCP”) was, until now, charged with enforcing affirmative action obligations.

Under the Executive Order, the OFCCP is now expressly prohibited from “allowing or encouraging Federal contractors and subcontractors to engage in workforce balancing based on race, color, sex, sexual preference, religion, or national origin.” Exec. Order, “Ending Illegal Discrimination And Restoring Merit-Based Opportunity” Sec. 3(b)(ii) (Jan. 21, 2025).

It is notable, however, that the OFCCP also enforces other statutory requirements which are not changed by executive order. For example, the Vietnam Era Veterans’ Readjustment Assistance Act and the Rehabilitation Act, which are intended to assist veterans and people with disabilities, respectively, remain in effect.

It is unclear to what level OFCCP will continue to pursue any enforcement action against federal contractors. The Executive Order instructs the OFCCP to immediately cease holding federal contractors responsible for taking affirmative action. On the other hand, the Executive Order specifically exempts programs for veterans from the prohibition on DEI programs, so OFCCP may turn to focus on those programs.

Conversely, the GSA has issued a memo indicating that it will begin forbearing enforcement of “all contract clauses, provisions, terms, and conditions, related to ‘diversity, equity, and inclusion.’” General Services Administration, Contractor Notice re Implementation of Executive Order (Jan. 22, 2025). The forbearance includes, but is not limited to, any clause that mandates diversity-related obligations, any reporting or record keeping requirements related to diversity, and any requirements imposed firm-wide on contractors, where the requirement is not mandated by law.

Cost Allowability Implications

The Executive Order carries with it important implications for contractor cost allowability. Specifically, the Executive Order requires the head of each agency to include the following in all federal contracts and grant awards:

A term requiring the contractual counterparty or grant recipient to agree that its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code; and

A term requiring such counterparty or recipient to certify that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.

Exec. Order, “Ending Illegal Discrimination And Restoring Merit-Based Opportunity” Sec. 3(b)(iv) (Jan. 21, 2025) (emphasis added). 

We are aware of certain executive agencies that have begun to approach federal contractors and grant recipients to begin implementing these changes, seeking to modify contracts to remove any DEI performance obligations and also taking the rather strident position that the contractor’s costs for DEI related programs will not be reimbursed. Thus, a key question many contractors are grappling with in the wake of the Executive Order is whether the costs they have incurred or will incur in administering and/or modifying or winding down DEI programs will be treated differently because of the Executive Order.

Contractors should recognize that the cost principles that were in effect on the date their contracts or grants were awarded control the allowability of costs. Retroactive application of cost principles is generally not permitted, even when a new cost principle makes unallowable a cost that was previously allowable. General Dynamics Corp. v. U.S., 47 Fed. Cl. 514, 546 (2000). Thus, if the costs of a contractor’s DEI programs were allowable under a contract before this executive order, a contractor has a sound argument that its DEI-related costs remain allowable after the executive order. This argument also applies to the costs of modifying or winding down DEI programs.

While the government may take action to seek to change contracts it has already awarded, it likely must negotiate that change in terms with the contractor and reach a bilateral modification. Contractors should carefully consider the impact of any proposed modification to understand which costs will be made unallowable. A contractor should protect itself from bearing costs that the government has caused but will not reimburse. Attempts by the government to make unilateral changes to contracts already in effect can and should be challenged by the contractor, but such challenges could lead to further dispute if the government takes the position that it does not need bilateral consent.

One potential implication of the Executive Order is that employees who were responsible for implementing DEI programs may no longer have a position if funding for the position disappears, either as a result of termination of contractual DEI performance obligations or because the position is no longer viable if the costs of the position are no longer allowable. Employment related claims and litigation may arise from any related employment actions. This will result in additional costs for the contractor. If a contractor agrees to a bilateral modification to its contracts to implement the Executive Order, it should endeavor to preserve its ability to recover employment litigation related expenses which would otherwise be allowable. Indeed, some of that litigation may allege illegal discrimination, which could implicate the Federal Circuit’s decision in Tecom. Geren v. Tecom, 566 F. 3d 1037 (Fed. Cir. 2009).

Alternatively, to the extent a contract included any particular DEI performance obligation, the government may opt to terminate that part of the contract for convenience. While the costs of the DEI performance obligation would cease from that date forward, the contractor would be entitled to its termination costs and could also seek an equitable adjustment if the removal of the work impacts the time or cost of the other work not terminated. 

While the implication for contracts that were priced and awarded before the Executive Order remain somewhat murky, future contracts are likely to include terms that make it clear that the costs associated with any DEI programs are unallowable. We shall see whether the FAR Council issues an interim rule or deviation to change the relevant cost principles to implement the Executive Order or proceeds straight to a notice of proposed rulemaking.

Contractors are permitted to keep operating under the prior non-discrimination and affirmative action regulatory scheme for 90 days from January 21, 2025. There have already been challenges to many of the executive orders, and more challenges are likely to come, so contractors should consider maintaining the status quo until there is more clarity around the changes imposed by the Executive Order. Contractors facing these issues are rightfully concerned about the exact impacts the broad language of the Executive Order will have on their business. Clarity through rulemaking is likely to come, but litigation over these issues is also likely to shed additional light on the new requirements contractors face. Until then, contractors should carefully review their contracts and their DEI programs to understand where they stand in relation to the new federal DEI context.