Avoid some of the most deadly mistakes when preparing and submitting a federal government novations!
Under FAR 42.1205, a government contract novation agreement is sometimes required when the buyer of an existing contractor firm assumes an obligation to pay or perform under the terms of the original agreement.
About 64% of novation agreements are disapproved. Why is this?
- Understanding the psychology of what the government looks for can be a problem for either buyers or sellers.
- Many government contractors know that the Anti-Assignment Act prohibits the mere sale of federal contracts but how to craft the deal to protect the government’s interest still remains a problem.
The Anti-Assignment Act, 41 USC 15 and 41 USC 6305, prohibits the sale or transfer of a federal contract. However, courts have also decided that the contracting officer may consent to a transfer and that certain transfers are allowed even without Government consent. If the underlying prohibitions and statutory intent apply to the facts of your case, the contracting officer may very well deny the assignment.
Definition and Meaning: According to the free dictionary website, (novation dictionary), the novation definition is “the substitution of a new contract for an old one. The new contract extinguishes the rights and obligations that were in effect under the old agreement. A novation ordinarily arises when a new individual assumes an obligation to pay that was incurred by the original party to the contract.
Is Your Situation Subject to a Government Contract Novation?
FAR 42.1204(a) states that “novation agreements” with the Government are required if a federal contractor transfers all of the assets involved in performing a federal Government contract, including:
- the sale of these assets with a provision for assuming liabilities;
- the transfer of these assets incident to a merger or corporate consolidation; or
- the contribution of these assets in connection with the formation of a new business entity.
An assignment and novation contract is also required if a forward merger or asset purchase sale results in the transfer of a Government contract or all of the assets involved in performing the particular contract.
Under the novation definition, the big problem for most companies occurs when attempting to simply transfer the contract with nothing else. This can create a risk for the government.
Things to consider:
When deciding to execute an asset purchase agreement, you might want to consider the following:
- If the only asset being transferred is the contract, then the government may decide that you are violating the Anti-Assignment Act;
- The existing prime contractor should first discuss the plan with the contracting officer and get a feel for his or her thoughts.
- Understand that if there is no stock purchase then the government does not have to approve the contract novation.
Under the novation definition, government contract novations also become relevant when the original party continues its responsibility to the government, but a new contract is substituted for the old one. Contract novations often occur when small business owners decide to retire, engage in an asset purchase agreement with a buyer or some other similar business arrangement.
Asset purchase? Under federal procurement law, government contract novation agreements are usually required when there is an asset purchase sale. However, an even in a situation where there is a stock purchase, you always want to check with the contracting officer (CO) to see what his or her preference might be. The regulations do not require a novation for stock purchases but realize that contracting officers have great amounts of discretion.
- Even if the business name stays the same, many COs still require an agreement.
- More complications can occur when SBA 8(a) participant is buying or selling an existing business.
Agency Will Consider the Risk of Future Performance: When you submit a bid, the agency initially evaluates your proposal based on key personnel and management. When you change ownership and have different management, the risk of performance becomes an important consideration for the government when accepting novation proposals. Therefore, having a properly drafted novation contract or asset purchase agreement can be necessary under FAR 42.1205.
Government’s Interest is Paramount: Federal procurement law under 41 USC 6305 which prohibits the transfer of government projects to a third party requires the agency first to decide whether the contract novation is in the government’s interest.
- The government can refuse to approve your novation contract and still hold you liable for performance of the project.
- Although the contracting officer requires proof of the sales transaction, you may want to have some level of finality conditioned upon the government’s acceptance and approval.
- If you continue to sell the company without an approved contract, the government may essentially issue you a termination for default.
FAR 42.1204 – Stock Purchase
Under FAR 42.1204(b), the novation contract process is not necessary when there a change of ownership resulting from a stock purchase. There must also be no legal change in the original contracting party and the original party remains in control of the assets and is the party performing the contract.
FAR 42.12 – Asset Purchase
The contract novation process and requirements are somewhat different when there is an asset purchase. Under FAR 42.1204(a), an asset purchase sale will require an agreement. Under 41 USC 6305, there is no provision to simply sell government projects. However, the Government, when in its interest, may recognize a third party as the successor in interest to a Government contract when the third party’s interest in the project arises out of the transfer of—
(1) All the contractor’s assets; or
(2) The entire portion of the assets involved in performing the contract. (See 14.404-2(l) for the effect of novation agreements after bid opening but before award.) Examples of such transactions include, but are not limited to—
(i) Sale of these assets with a provision for assuming liabilities;
(ii) Transfer of these assets incident to a merger or corporate consolidation; and
(iii) Incorporation of a proprietorship or partnership, or formation of a partnership.
FAR 42.12 Approach to Government Contract Law
If you want to start a contract novation for an existing federal government project, you, with the help of your attorney, must submit the proposed agreement and documents set forth at FAR 42.1204(e) and (f).
Generally, government novation contracts are not required when your company merely changes its name. In that situation, you should seek approval from the government to recognize the name change. See FAR 42.1205(a). You may want to engage help from a government contracts lawyer and business law attorney.
Be Proactive: The best approach in handling a government novation is to first speak with the contracting officer ahead of time. In addition, you may want to ensure that your documents with a prospective buyer are conditioned upon the government’s approval.
When it comes to federal law, you sometimes want to value your business on the fact that you have an existing project worth a certain amount.
- Keep in mind that government contracts are not meant to be sold.
- However, if the contracting officer believes the contract novation agreement to be in government’s best interest, the buyer may ultimately get the intended result.
SBA 8(a) Contracts
For small businesses under the 8a Certification Program, you also want to notify the SBA of your intentions to sell the 8a certified business and enter into a novation contract. SBA does not override the contracting officer’s authority here. There are more complex rules when it comes to government contract novation law under the SBA 8a Certification Program.
Call 1-866-601-5518 for Contract Novation Help.