A few weeks ago, I spoke at APTAC’s Fall 2020 Conference about SBA’s size and affiliation regulations. In passing, I mentioned the term novation, the process of assigning a federal government contract from one contractor to another.

During the Q&A session, a participant asked if our blog contained any information about that concept. Sheepishly responding that it didn’t, I committed to writing one. I’m making good on that promise today.

Novation is a Latin word meaning “to make new, renew, replace an existing legal obligation with a new one.” Derived from novus, meaning new, novation is more than just another example of lawyers refusing to use an English word when a Latin one will do. It is an important legal concept—especially in the government contracting world.

Let’s start off with the basic principle underlying novation: once a contractor is awarded a federal government contract, that entity cannot transfer that contract to another entity without the government’s consent. The government indicates a consent by granting a novation under FAR Subpart 42.12.

Normally, two circumstances generate the need for a novation:

  1. A contractor transfers all its assets to another entity. For example, the contractor’s owner is retiring, and she wants to fold up the shop. So, she sells all her assets to another firm.
  2. A contractor sells its assets, involved in performing a certain contract or contracts, to another firm. This might arise where a contractor sells some of its assets and the buying firm agrees to assume the contractor’s liabilities. It might also arise where assets are transferred in connection with a merger or other corporate consolidation.

Now, if a contractor’s ownership changes as a result of a stock purchase, but (1) the contractor remains the same legal entity, (2) the contractor remains in control of the assets, and (3) contractor is still the performing party, then a novation wouldn’t be required.

What is the process for securing a novation?

First, identify the single CO who you will be working with. If you only want to novate a single contract, then work with that contract’s CO. If you need to novate multiple contracts, you’ll still only work with a single CO. The FAR outlines the relatively simple rules for identifying the proper CO in those circumstances.

Second, informally reach out to the CO about your transfer plans. Gauge the CO’s receptivity to the idea, and follow any specific directions.

Third, assemble and submit the mandatory package of documents and other information, which include the following:

  • a draft novation agreement (the form and terms are essentially dictated by the FAR)
  • a list of all the affected contracts between the transferor and the government
  • evidence of the transferee’s ability to perform the contracts
  • an authenticated copy of the transfer agreement (e.g., merger agreement, purchase agreement, etc.)
  • certified approvals from the boards or management of both entities for the transfer
  • certified approvals from the both entities’ shareholders for the transfer, if applicable
  • an authenticated copy of the transferee’s articles of incorporation, if a corporation was formed for the purpose of receiving the assets
  • opinion letters from both entities’ attorneys stating that the transfer was properly done under the applicable law and stating the effective date of transfer
  • balance sheets from both entities, as of the dates immediately before and after the transfer, audited by independent accountants
  • evidence that the transferee meets any security clearance requirements, if applicable
  • consent from sureties on the contracts, if bonds were required (or a statement from the transferor that no bonds were required)

After submitting these documents, the government will decide whether to approve the novation. In doing so, it will only consent if the transfer is in the government’s best interests. In other words, the government has total discretion in this arena. Given that deferential standard, it’s difficult to challenge any adverse novation decision. So, be sure that you’re application is thorough and persuasive.

If you’re thinking about a possible novation request to the government, give us a call at 913-354-2630 or send us an email to discuss.

To make new: What is novation? was last modified: February 6th, 2023 by John Mattox