Sometimes businesses that have active contracts with the government decide to restructure, or even get bought out or sold to other companies. In these instances, the contracts must be modified to reflect the new business information, especially when work remains to be performed and final payment has not yet been made. This process is called novation, and Part 42.12 of the Federal Acquisition Regulation (FAR) describes the requirements for its legal execution.

To begin with, novation is not a ‘given.’ As described in FAR Part 42.1204, 41 U.S.C. 6305 prohibits transfer of Government contracts from the contractor to a third party. However, the Government may “recognize a third party as the successor in interest to a Government contract when the third party’s interest in the contract arises out of the transfer of all the contractor’s assets, or the entire portion of the assets involved in performing the contract.” Examples of these transactions include sale of these assets with a provision for assuming liabilities, transfer of these assets incident to a merger or corporate consolidation, and incorporation of a proprietorship or partnership, or formation of a partnership.

Subpart 42.1202 of the FAR describes which Contracting Officer, whether the original Procuring Contracting Officer (PCO), or an Administrative Contracting Officer (ACO) holding delegation for administration of the contract, will be responsible for executing the novation. The key point therein establishes that the contracting officer bearing responsibility for the largest portion of unsettled dollar balances will be responsible for executing the novation.

The first step in executing a novation is for the contractor desiring the government’s recognition of a successor in interest to submit a written request to the responsible contracting officer. As shown in FAR Part 42.1203, the responsible contracting officer then identifies and requests the necessary information from the contractor, in order to evaluate the proposed agreement, including the items identified in 42.1204 (e) and (f) or 42.1205(a), as applicable. These items include the document that describes the proposed transaction, a list of all affected contracts, evidence of the transferee’s capability to perform, and any other relevant information requested by the responsible contracting officer.

The responsible contracting officer then notifies each contract administration office and contracting office affected by the proposed agreement, and provides those offices with a list of all affected contracts. The contracting officer’s notification will also include a request for the submission of any comments or objections to the proposed transfer within 30 days after notification. Any such submission should be accompanied by supporting documentation.

After receiving the necessary information, the responsible contracting officer determines whether or not it is in the Government’s interest to recognize the proposed successor in interest. The contracting officer bases this determination on the following criteria: the comments received from the affected contracting and contract administration offices, the proposed successor’s responsibility under FAR Subpart 9.1, Responsible Prospective Contractors, and any factor relating to the proposed successor’s ability to satisfactorily perform the contract.

FAR Part 42.1204(h) states that “when recognizing a successor in interest to a Government contract is consistent with the Government’s interest, the responsible contracting officer shall execute a novation agreement with the transferor and the transferee.” This agreement normally provides that the transferee assumes all the transferor’s contractual obligations, the transferor waives all contractual rights against the Government, and the transferor guarantees performance of the contract by the transferee, and nothing in the agreement shall relieve the transferor or transferee from compliance with any Federal law. In some cases, a satisfactory performance bond may be accepted instead of the transferor’s guarantee of the transferee’s performance.

After review by government counsel for legal sufficiency, the proposed agreement gets signed by both the transferor and transferee, making it binding and complete. As noted in 42.1204(d), throughout the process, the CO must evaluate for organizational conflict of interest (OCI), and either resolve it per FAR Part 9.5, or request waiver under Part 9.503. Once the proposed novation has been finalized, the responsible CO prepares a contract modification that includes a summary of the novation agreement and a complete list of affected contracts as attachments. Distribution includes copies furnished to the transferor, transferee, and all the affected contracting and contract administration offices.

The rest of FAR Part 42.1204 provides some templates and guidance for required verbiage in the various instances of novation. It also clarifies some occasions that do not require novation, such as cases where a stock purchase results in a change of ownership of a contractor. These instances must involve no legal change in the contracting party, and that party remaining in control of the assets and continuing to perform the contract. Another key aspect lies in when the Government determines that its interests are not met by novation, wherein the original contractor remains obligated to perform. When novation proposals do not receive Government concurrence, the original contractor’s non-performance my result in termination for reasons of default.

In conclusion, the FAR has made provisions for handling the dynamic business environment and various changes that may occur during the performance of a contract. In such cases of novation, the Government seeks to accommodate the contractor’s situation as much as possible while preserving its own interests in securing adequate completion of the contract.