Avoid some of the most deadly mistakes when preparing and submitting a federal government novation contracts and assignment of contract documents!
Under FAR 42.12, government contract novation agreements are sometimes required when the buyer of an existing contractor firm assumes an obligation to pay or perform under the terms of the original agreement.
Buyers and sellers should be extremely careful to not assume that the government has to accept your business sell. There is no automatic legal right to novate contracts with federal projects.
About 64% of federal contract novations 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.
Government Contract Novation Definition
According to the free dictionary website, (novations dictionary), the contract 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.
Novation of a contract ordinarily arises when a new individual assumes an obligation to pay that was incurred by the original party to the contract. Companies dealing with Federal Government contracts should understand the difference between novation contract and assignment of contract requirements.
Is Your Situation Subject Government Novation Contract Agreements?
FAR 42.1204(a) states that when dealing with an assignment of contract transaction, “novation contract 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 contracts are 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 novations legal 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 with the process to novate contracts:
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 legal definition, government novations also become relevant when the original party continues its responsibility to the government, but a new contract is substituted for the old one. Novation contracts often occur when small business owners decide to retire, engage in an asset purchase agreement with a buyer or some other similar business arrangement.
Novation Agreement With 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 when it comes to assignment of contract requirements. 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 contract novation agreements.
- 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 among other things. 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 to novate contracts.
- 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.
- Understand the difference between novation and assignment of contract terms.
- If you continue to sell the company without an approved contract, the government may essentially issue you a termination for default.
Novations Process FAR 42.1204 – Stock Purchase Agreements: Under FAR 42.1204(b), the novation 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.
Novation Contract – FAR 42.12o4 Approach to Government Contract Law: If you want to execute a contract novation agreement 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 contract novation agreements to be in government’s best interest, the buyer may ultimately get the intended result.
Federal Novation Agreements in SBA 8(a) Contracts
For small businesses under the Federal 8a Certification Program, you also want to notify the SBA as part of the novation process of your intentions to sell the 8a certified business and enter into a novation contract agreement. 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 Government Contract Novation Help.