Executive Order 14398, signed March 26, 2026, is forcing contractors to rethink diversity practices in public procurement. EO 14398 targets “racially discriminatory DEI activities,” placing federal contractors under heightened scrutiny for decision-making that considers race or ethnicity.
At the same time, many state and local governments require participation by Minority Business Enterprises (MBEs) in their public projects. These state and local programs address historic inequities in contracting.
The result is a compliance trap: how can contractors navigate the Scylla and Charybdis of EO 14398 and MBE Mandates, meeting inclusion-oriented participation goals while avoiding conduct that could be deemed impermissible under federal rules?
Scylla: A New Federal Baseline
EO 14398 establishes a clear policy objective: federal contracting must be “merit-based” and free from disparate treatment based on race or ethnicity. EO 14398 requires agencies to insert mandatory contract clauses obligating contractors and subcontractors to certify compliance, provide records, and report violations throughout the supply chain.
Noncompliance can lead to contract termination, suspension, debarment, and even False Claims Act exposure if certifications are inaccurate.
While EO 14398 does not ban all diversity initiatives, it sharply narrows the permissible scope, focusing on whether any program or decision involves “disparate treatment” tied to race or ethnicity.
Charybdis: Contractual MBE Requirements on state and local projects
In contrast to EO 14398, state and local MBE programs often require contractors to meet participation targets or demonstrate “good faith efforts” to include certified minority-owned firms. These programs are embedded in public contracting frameworks and tied to policy goals around economic equity and diversity. MBE programs often depend on identifying and engaging firms based on minority status.
Although many jurisdictions structure these requirements as aspirational goals rather than strict quotas, the reality for contractors can feel more rigid—particularly when participation percentages are tracked, reported, and tied to performance evaluations.
Navigating the Narrow Strait Between Federal and Local Obligations
EO 14398 does not invalidate state or local MBE programs. Rather, it regulates the conduct of federal contractors and subcontractors, leaving companies to reconcile overlapping obligations. That ambiguity has created uncertainty for contractors balancing federal requirements with state and local MBE frameworks.
The risk is not theoretical. Because the EO requires flow-down provisions, prime contractors may be responsible for subcontractor practices that could be construed as noncompliant—even when those practices are intended to satisfy local MBE requirements.
In the absence of definitive guidance, contractors are converging around a set of practical strategies to navigate the conflict.
1. Reframe MBE Participation as Process, Not Outcome
Treat MBE requirements as process-driven obligations—focused on outreach and opportunity—rather than outcome-driven mandates. Solicit bids from certified firms, expand outreach networks, and document engagement, without making award decisions based on race or ethnicity.
2. Emphasize Race-Neutral Criteria
EO 14398 places a premium on “objective” and “merit-based” decision-making. So, align procurement process around neutral criteria such as price, capacity, experience, and schedule, while including diverse firms in the bidding pool.
3. Double Down on Documentation
Like all things, documentation is a critical safeguard. Contractors should maintain detailed records of: (a) bid solicitations and responses; (b) outreach to MBE-certified firms; (c) evaluation criteria and scoring; and (d) race-neutral justifications for award decisions. Documents demonstrate both “good faith efforts” under MBE programs and compliance with the EO’s nondiscrimination mandate.
4. Strengthen Subcontractor Oversight
Because EO 14398 requires flow-down compliance, federal contractors must actively monitor their subcontractor practices. This includes revising subcontract terms, implementing certification processes, and conducting periodic audits to ensure alignment across the supply chain.
5. Negotiate Flexibility
Many state and local public contracts include language such as “good faith efforts” or “to the extent permitted by law,” which allow contractors to reconcile conflicting obligations. Asking the contracting agency how it is reconciling its MBE program with federal directives can also yield clarifications or alternative compliance pathways. Many agencies are actively adjusting their programs and will give guidance.
The path between EO 14398 and MBE mandates remains unsettled. EO 14398 builds on earlier efforts to curtail affirmative action requirements in federal contracting, including the rollback of prior frameworks that explicitly required minority participation. Meanwhile, state and local governments show little sign of abandoning MBE programs, setting the stage for continued tension.
For now, federal contractors are left to navigate the narrow path: promoting inclusive participation while avoiding any appearance of race-based decision-making. Those that succeed in navigating the narrow strait will be the ones that treat compliance not as a box-checking exercise, but as a carefully documented, process-driven discipline.
Contact a member of our Construction team for assistance navigating the competing demands of federal and local requirements.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.
