Suspension and debarment are powerful administrative tools that the Government uses to exclude from federal contracting entities that are not “presently responsible.” These exclusions can be lengthy, effectively shutting debarred or suspended contractors out of the lucrative federal marketplace for years. Even after the period of exclusion ends, disclosure requirements in connection with proposal submissions and teaming arrangements make it difficult for a previously debarred or suspended contractor to shed the stain of a prior exclusion. Because of these severe consequences, contractors shape their compliance programs, organizational cultures, and conduct to minimize the risk of creating cause for debarment or suspension.
“Debarment or Suspension Based on a DEI Program? Let’s Think It Through,” by Dominique Casimir, was published in The Government Contractor, Volume 68 Issue 21, on June 3, 2026.
On May 29, 2026, the Office of Management and Budget (“OMB”) published a lengthy proposed rule in the Federal Register that would fundamentally transform the government-wide framework for federal financial assistance. Joined by virtually every grantmaking agency in the Executive Branch, the proposal seeks to revise Title 2 of the Code of Federal Regulations (the “Uniform Guidance”) in pursuit of three stated objectives: (1) improving transparency, accountability, and oversight for use of federal funds; (2) clarifying the regulatory status of the OMB requirements; and (3) reducing recipient burden.
Comments are due July 13, 2026, and may be submitted electronically via regulations.gov under docket OMB–2026–0034. OMB chose a 45-day comment period, and a final rule could be effective by October 1, 2026. Late comments will be considered “only to the extent practicable.”
What the Administration Is Seeking to Achieve
At its core, the proposed rule seeks to codify the policy directives from various executive orders into a durable regulatory framework that applies government-wide. OMB frames this as eliminating “wasteful spending” that became prevalent during the prior administration, ending what it characterizes as “unlawful DEI mandates,” “gender ideology,” and other “divisive doctrines.” The administration states that federal programs must be designed to achieve “essential public purposes authorized by law” while aligning with “administration policies and priorities.” The preamble reaffirms the view of OMB Director Russell Vought that the government’s ledger contains too much spending that is “wasteful,” “divisive,” or “woke.”
We are proud to announce that Blank Rome’s attorneys and practices were highly ranked across several categories in the 2026 Chambers USA rankings, which reflect our high level of integrated services for government contractors and companies in the Aerospace, Defense and Government Services sector.
The Department of Defense (“DoD”) released a proposed rule on May 7, 2026, that would significantly expand Foreign Ownership, Control, and Influence (“FOCI”) and beneficial ownership disclosure requirements beyond cleared contractors to a much broader segment of the Defense Industrial Base. Soon, any contractor or subcontractor with a DoD contract exceeding five million dollars will need to report its FOCI status in the National Industrial Security System (“NISS”).
Who Is Covered Under the Proposed Rule
The proposed rule would apply to any existing or prospective contractor or subcontractor, at any tier, holding a DoD contract valued in excess of five million dollars—regardless of whether classified information is involved. The reporting and review framework will be established under a new DFARS Part 240, “Information Security and Supply Chain Security.” The DoD does not mince words. The rule is designed to provide an “unprecedented level of visibility” into the ownership structures of its partners and to prevent foreign adversaries from accessing sensitive unclassified information and critical technologies.
On April 30, 2026, President Trump signed another executive order (“EO”) that may significantly impact how the government buys goods and services. The target: cost-reimbursement contracts, which let contractors bill the government for their “allowable, allocable, and reasonable” costs incurred, plus some pre-established or earnable profit. According to the EO, in Fiscal Year (“FY”) 2024, the government spent roughly $120 billion on cost-reimbursement consulting contracts. The EO seeks to significantly reduce that figure by making fixed-price contracts the default for federal procurement—meaning prices are locked in up front and contractors, not taxpayers, bear the risk of overruns.
What does the executive order require agencies to do?
Agencies that want to use structures other than fixed-price will begin to face real hurdles as agencies implement the EO’s directives. Nearly every exception from the “default” fixed-price model will require the contracting officer to provide written justification not just to someone senior within the contracting authority, but to the head of the relevant agency, and bigger-ticket exceptions—at thresholds of $100 million (Department of Defense (“DoD”)), $35 million (National Aeronautics and Space Administration), $25 million (Department of Homeland Security), and $10 million (everyone else)—need the agency head’s sign-off, not just notification.
Less than one month after the issuance of Executive Order 14398 (“EO 14398”), “Addressing DEI Discrimination by Federal Contractors,” a coalition of academic and contractor organizations has filed a lawsuit in federal court seeking to have it enjoined. See National Association of Diversity Officers in Higher Education v. Trump, No. 8:26-cv-01532 (D. Md. filed Apr. 20, 2026). Here is what government contractors need to know.
As we have previously covered, EO 14398 is a critical new development for government contractors. It introduces a new concept of “racially discriminatory DEI activities,” defined 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.”
The plaintiff organizations are challenging EO 14398 on three grounds.
Protest of: Effective Communication Strategies, LLC Government Accountability Office (“GAO”) B-423993; B-423993.2
The challenged procurement was a commercial item, simplified acquisition for microwaves and dehumidfiers.
The Army Corps of Engineers issued numerous solicitation amendments, including several issued after initial proposals were submitted, requiring offerors to revise and resubmit their proposals.
Effective Communication Strategies (“ECS”) challenged one of these amendments, which added a requirement for a refrigerator that met outlined technical specifications and complied with the Trade Agreements Act.
The relevant amendment was issued in the morning, with revised quotations due the same day at 5:00 p.m.
The Agency and ECS then engaged in several rounds of communications and further solicitation amendments regarding the refrigerator requirements, with the Agency imposing extremely short response deadlines—always less than a day and sometimes less than an hour.
GAO found that the Agency had failed to afford offerors a reasonable opportunity to respond to the Agency’s evolving requirements, both in response to the amendment and during communications.
GAO recommended the Agency amend the solicitation and allow for a reasonable response time.
On Friday, April 10, 2026, the Department of Justice (“DOJ”) announced a $17 million False Claims Act (“FCA”) settlement with International Business Machines (“IBM”), based on the company’s alleged violations of federal anti-discrimination laws. The settlement is the first under the DOJ’s Civil Rights Fraud Initiative, created last May with the objective of investigating and prosecuting “illegal DEI” practices, primarily through an FCA lens. Coupled with a new Executive Order—issued on March 26—that imposes contract prohibitions on “racially discriminatory DEI activities” in federal government contracts and subcontracts, the IBM settlement signals an escalation in the government’s focus on DEI programs and employment policies.
The DOJ Press Release and Settlement Agreement
The Alleged “Covered Conduct” Identifies Specific Problematic Practices.
DOJ alleged that IBM improperly made employment decisions based on protected characteristics through specific programs and actions, described as the “Covered Conduct” for purposes of the settlement agreement:
Compensation Incentives: A “diversity modifier” linking bonus compensation to demographic targets
Hiring and Promotion Criteria: Basinginterview eligibility or prioritization on race, sex, or national origin
Demographic Goals for Business Units: Developing race and gender targets tied to employment decisions
Limited-Access Programs: Limiting training, mentoring, and leadership development to employees meeting specific demographic criteria, such as minorities.
On March 26, 2026, President Trump signed Executive Order 14398 (“EO 14398”) titled Addressing DEI Discrimination by Federal Contractors, taking aim at the diversity, equity, and inclusion (“DEI”) practices of federal contractors. EO 14398 ventures into territory already covered by the President’s prior DEI-related executive orders (“EOs”), in particular EO 14173, which requires a contractor certification regarding “illegal DEI,” but goes further. It directs federal agencies to include a mandatory contract clause prohibiting “racially discriminatory DEI activities” in all covered contracts and subcontracts, requires prime contractors to police the DEI practices of subcontractors at every tier, imposes new reporting requirements, and threatens a panoply of consequences for noncompliance, including contract termination, False Claims Act (“FCA”) exposure, and suspension and debarment. Like EO 14173, it also requires the government to “identify economic sectors that pose a particular risk of entities engaging in racially discriminatory DEI,” signaling the Administration’s ongoing desire to stamp out DEI. The accompanying White House Fact Sheet declares that the EO will ensure “merit-based and efficient contracting and employment.”
EO 14398 is likely to be challenged in court on a variety of theories, similar to the ongoing wave of EO 14173 litigation. Contractors will almost certainly question the EO’s scope and the ambiguity in its key terminology, as well as its enforcement assumptions.
Throughout 2025, the Trump administration communicated that it considered Diversity, Equity, and Inclusion (“DEI”) programs legally suspect. Executive Order 14173 (“EO” or “EO 14173”) declared that DEI programs “violate the text and spirit of our longstanding federal civil-rights laws” and directed agencies to “combat illegal private-sector DEI preferences, mandates, policies, programs, and activities.” The EO invoked the False Claims Act (“FCA”) to signal substantial financial exposure for federal contractors, and the Department of Justice (“DOJ”) established a Civil Rights Fraud Initiative to pursue claims. Throughout 2025, federal agencies presented government contractors with EO 14173 certifications, requiring contractors to agree that compliance with federal antidiscrimination laws is material to the government’s payment decisions under the FCA and attesting that any DEI programs do not violate federal antidiscrimination law. Many companies responded by undertaking privileged reviews of their DEI programs and, in some cases, rolling them back.
More recently, however, DOJ has vocally affirmed that DEI programs can in fact be lawful. At the Federal Bar Association’s FCA conference on February 19, 2026, Deputy Assistant Attorney General Brenna Jenny from DOJ’s Civil Division stated plainly: “Let me start by making absolutely clear, DOJ Civil Fraud is not investigating companies for having a DEI program.” She emphasized that companies “can engage in discrimination with or without DEI programs” and “can also operate a DEI program without it being discriminatory.” Instead, she explained that DOJ’s investigations focus on “companies that implemented programs and practices that pressured supervisors and management to make hiring and promotion decisions based on race or sex,” including setting and tracking demographic goals, tying executive compensation to diversity metrics, and requiring employees to set DEI-related goals that affect compensation and promotion. In Fourth Circuit litigation, DOJ conceded that there is “‘absolutely’ DEI activity that falls comfortably within the confines of the law.” Nat’l Ass’n of Diversity Officers in Higher Educ. v. Trump, No. 25-1189, slip op. at 26 (4th Cir. Feb. 6, 2026) (Diaz, C.J., concurring).
