The execution of a novation agreement is the process of recognizing the successor in interest to a government contract when assets are transferred as a result of their sale, a merger/consolidation, or the formation of a partnership.  Normally when the issue of novation arises we think in the realm of large companies that consolidate and acquire other businesses in an attempt to gain a competitive edge; however, a small business with some government contracts in its portfolio may make it an appealing acquisition for another company looking to expand.  For this reason, it is important for the small business government contractor to be familiar with the novation process as summarized in this blog and described in FAR 42.12, Novation and Change-of-Name Agreements.

From the contracting officer’s perspective, the first step in the novation process begins after a request to novate is received.  If there is more than one contract that will be affected, a determination must be made to identify the responsible contracting officer.  If your company holds several large contracts it is likely that some functions have been assigned to another office to administer (i.e. DCMA) and that office will be responsible for processing the novation.  However, for many of you reading this blog there will not be any DCMA oversight and you will find yourself dealing directly with the contracting officer from the largest affected contract.  Since novations are not a frequent occurrence in smaller contracts, expect that the contracting officer will not be as familiar with the process as an administrative contracting officer (ACO).

In FAR 42.12 there is a list of supporting documents which accompany a novation request, but not all are required.  The required documents include a copy of the transaction agreement, list of affected contracts, and documentation to show that the company assuming contract responsibility can perform.  Aside from these documents there are several other items which are required on an ‘as applicable’ basis and the CO may request other information necessary to support their final determination.   While it is assumed that the government will always novate a contract when requested, a determination that the novation is in the government’s interest must be made based on the information submitted.  Therefore, it is in your best interest to present the information required and requested by the CO early and in an itemized and concise format.

Since the CO has some leeway in which documenting will be required it is necessary to enquire early before executing any agreement; if not, you may find yourself having to go back and develop documentation after-the-fact.  For example, one of the documents required ‘as applicable’, are the before and after balance sheets from both companies and they are to be audited by an independent accountant.  Therefore, if not done at the time of execution, the CO may require additional steps on your part to document that the assets did indeed transfer between the companies.

Aside from these items, the contracting officer will consider inputs from the contracting officer’s of other affected contracts, the responsibility of the proposed successor, on-going contract issues, and any potential organization conflict of interest that might arise.  Remember the government is not obligated to enter into the novation agreement.  The contracting officer’s primary responsibility is to protect the government’s interest, the taxpayer’s interest, and if there is concerns with the novation request, the decision may be made to not novate the contract.  Therefore, be sure to fully resolve any pending issues before requesting the novation.  In a situation where the government decides not to novate a contract for any reason, the original contractor will be required to perform and, if they do not, the contract may be terminated for default.

As with most dealings with the government, the novation process can be a time-consuming ordeal; however, a company that understands the process and includes the contracting officer in the discussion before any agreements are finalized will find the process fairly straightforward and they can expect to see the novation approved not long after the agreement is finalized.  If not, you may find yourself having to reengage with the other party many months after-the-fact in an effort to resolve open issues or acquire needed documentation.