A novation agreement under FAR 42.1204 is the formal three-way agreement among the government, an original contractor, and an acquiring company that lets the acquiring company step into an existing federal contract after an asset transfer. You need one because 41 U.S.C. 6305 prohibits contractors from transferring their government contracts to anyone else; without the government’s recognition through this process, an attempted transfer voids the contract as far as the government is concerned.1Acquisition.GOV. FAR 42.1204 Applicability of Novation Agreements2Office of the Law Revision Counsel. 41 USC 6305 Prohibition on Transfer of Contract and Certain Allowable Assignments Approval is discretionary, not automatic, and the government can refuse if the successor doesn’t measure up.
When a Novation Is Required
The trigger is an asset transfer. A novation becomes necessary when a contractor transfers all of its assets, or the entire portion of assets involved in performing a particular contract, to another company.1Acquisition.GOV. FAR 42.1204 Applicability of Novation Agreements The typical case is an acquisition where the buyer takes the equipment, personnel, and intellectual property tied to a government contract. The seller can no longer perform, and the buyer needs formal recognition to take over.
Approval is not guaranteed. The regulation says the government “may, when in its interest” recognize the successor. If the acquiring company lacks the financial stability or technical capability to carry out the work, the contracting officer can decline. That leaves the original contractor still legally responsible for performance, and walking away can produce a termination for default.1Acquisition.GOV. FAR 42.1204 Applicability of Novation Agreements
Stock Purchases Don’t Trigger a Novation
If ownership changes through a stock purchase and the contracting entity itself stays legally intact and in control of performance, no novation is needed. The contractor’s legal identity hasn’t changed, so there is nothing for the government to formally recognize, and the contract stays where it is. FAR 42.1204(b) does note that ownership changes, whether by asset or stock purchase, may still need to be documented through a formal agreement between the contractor and the government.1Acquisition.GOV. FAR 42.1204 Applicability of Novation Agreements
Documents the Contractor Must Submit
The requesting contractor sends three signed copies of the proposed novation agreement to the responsible contracting officer, along with supporting documents. Paragraph (e) of FAR 42.1204 covers the initial package; paragraph (f) covers what follows as it becomes available.1Acquisition.GOV. FAR 42.1204 Applicability of Novation Agreements
Initial Package
Include the document describing the proposed transaction, such as the purchase agreement or memorandum of understanding. Attach certified copies of the board resolutions authorizing the transfer from each corporate party, plus certified minutes from any stockholder meetings required to approve the deal.1Acquisition.GOV. FAR 42.1204 Applicability of Novation Agreements
Also include a complete list of every affected government contract. For each one, show the contract number and type, the name and address of the contracting office, the total dollar value including amendments, and the approximate remaining unpaid balance.1Acquisition.GOV. FAR 42.1204 Applicability of Novation Agreements This is often more work than expected for contractors with active work spread across multiple agencies.
Follow-Up Documents
As the deal closes, submit an authenticated copy of the instrument that actually effects the transfer, such as a bill of sale, certificate of merger, or court decree. Legal counsel for both the transferor and the transferee must provide an opinion confirming that the transfer was properly carried out under applicable law and stating the effective date. Balance sheets for both companies, audited by independent accountants, must show the financial picture immediately before and after the transfer.1Acquisition.GOV. FAR 42.1204 Applicability of Novation Agreements
If the Government Already Reviewed the Deal
Where the government participated in a pre-merger or pre-acquisition review, the responsible contracting officer can modify the required documents to avoid duplication. The officer may also accept an alternative formulation of the information if the government’s interests are adequately protected.1Acquisition.GOV. FAR 42.1204 Applicability of Novation Agreements Engaging the contracting agency early in the deal can meaningfully shorten the paperwork.
What the Novation Agreement Itself Must Contain
FAR 42.1204(i) provides a template format for use when both parties are corporations and all assets are being transferred. The format can be adapted for other situations, but the core provisions don’t move.1Acquisition.GOV. FAR 42.1204 Applicability of Novation Agreements
The agreement establishes the agreed facts: the identities of the transferor, transferee, and government; a description of the affected contracts; the date and nature of the asset transfer; and a statement that the transferee has acquired all the transferor’s assets and assumed all obligations under the contracts. It also states that the transferee can fully perform and that recognition is consistent with the government’s interest.1Acquisition.GOV. FAR 42.1204 Applicability of Novation Agreements
Two operative commitments follow. The transferee assumes all of the transferor’s obligations under the contracts. The transferor waives all rights under the contracts against the government. The agreement must also make clear that the government bears no costs from the novation process.1Acquisition.GOV. FAR 42.1204 Applicability of Novation Agreements
How the Government Processes the Request
The submission goes to the responsible contracting officer identified under FAR 42.1202. In brief: if an administrative contracting officer has been assigned to affected contracts, that ACO takes the lead; if none has been assigned, the contracting officer overseeing the largest unsettled dollar balance is responsible.3Acquisition.GOV. FAR 42.12 Novation and Change-of-Name Agreements
Once the responsible officer receives the package, FAR 42.1203 takes over. That officer notifies every contract administration office and contracting office affected by the proposed transfer, providing each with the list of affected contracts. Those offices have 30 days to submit comments or objections, with supporting documentation.4Acquisition.GOV. FAR 42.1203 Processing Agreements
The contracting officer then evaluates whether recognition is in the government’s interest based on three factors: the comments received from affected offices, the successor’s responsibility as a prospective contractor under FAR Subpart 9.1, and any performance-related concerns that could impair the successor’s ability to carry out the work.4Acquisition.GOV. FAR 42.1203 Processing Agreements A clean performance record and solid financials produce a straightforward path. Past performance problems or thin capitalization produce hard questions.
Before executing the agreement, the contracting officer has government counsel review it for legal sufficiency. After execution, signed copies go to the transferor and transferee, and the officer prepares a Standard Form 30 incorporating a summary of the agreement and the list of affected contracts, then distributes it to every affected contracting office.4Acquisition.GOV. FAR 42.1203 Processing Agreements The FAR doesn’t set an overall timeline; the 30-day comment window is the floor, and complex deals across multiple agencies naturally take longer.
Small Business Recertification After the Novation
If the affected contracts include small business set-asides, the contractor has a further step. Within 30 days of the novation, it must rerepresent its size and socioeconomic status.5Acquisition.GOV. FAR 19.301-2 Rerepresentation by a Contractor That Represented Its Status as a Small Business Concern When a large company acquires a small business contractor, the successor will almost certainly no longer qualify.
Once a contractor rerepresents that it is no longer small, the agency can no longer count the value of future options exercised, modifications issued, or orders placed under that contract toward its small business prime contracting goals.5Acquisition.GOV. FAR 19.301-2 Rerepresentation by a Contractor That Represented Its Status as a Small Business Concern The contract itself isn’t cancelled, but the set-aside designation loses its significance going forward. That is worth thinking through before closing, because the contracting agency may show less enthusiasm for approving a novation that erases one of its small business contract dollars.