Federal Anti-Assignment Act: Novation, Exceptions, and Penalties

The Federal Anti-Assignment Act prohibits contractors from transferring a government contract, or the right to receive payment under one, to any third party unless the transfer fits a recognized exception. Those exceptions are narrow but important: contractors can assign payments to a bank or other financing institution, transfers that happen by operation of law (like a merger or inheritance) are generally allowed, and voluntary transfers can proceed through a formal novation agreement that substitutes the new contractor for the old one. Skip these routes, and the government can treat the contract as annulled.

The Two Statutes Behind the Rule

The framework rests on two provisions. 41 U.S.C. § 6305 bars a contractor from transferring a government contract or any interest in it. An unauthorized transfer “annuls the contract or order so far as the Federal Government is concerned,” and the government keeps every right it had to pursue a breach claim.¹ In plain terms, the government can act as though the transfer never happened and owes nothing to the would-be transferee.

31 U.S.C. § 3727 covers the other half of the problem: assigning money claims against the government. A contractor who has earned payment can only assign that claim after the government has allowed it, decided the amount, and issued a warrant. The assignment has to be attested by two witnesses and acknowledged before a notary or similar official, who must certify that they fully explained the assignment to the person making it.² Those formalities exist to block fraudulent or coerced transfers.

Both statutes trace to the Civil War era, and both share the same policy: the government picked its contractor through competition, and it shouldn’t have to deal with strangers who never went through that process.

Assigning Contract Payments to a Bank or Lender

The most-used exception lets a contractor assign the right to receive payment to a financing institution. Contractors performing on large federal contracts often need working capital, and no lender will extend credit without security over the receivables. Section 6305(b) permits assignment to a bank, trust company, federal lending agency, or other financing institution when specific conditions are met.¹

The conditions for a valid assignment are:

The contract must involve total payments of at least $1,000.
The contract must not itself prohibit assignment.
Unless the contract expressly allows a partial assignment, the assignment must cover all unpaid amounts.
Only one assignee is allowed, though that assignee may act as agent or trustee for multiple lenders.
The assignee cannot reassign the payment rights.
Written notice and a copy of the assignment must be filed with the contracting officer or agency head, any surety on a bond connected to the contract, and the disbursing officer designated to make payment.

Once these are satisfied, the assignment is valid regardless of other laws that might otherwise invalidate it. The Federal Acquisition Regulation mirrors the same requirements at FAR 32.802.³

One point matters for lenders: the government can still exercise setoff rights against payments to the assignee for any liability the contractor owes the government, as long as that liability existed when the government received notice of the assignment. Some Department of Defense, GSA, and Department of Energy contracts include a “no setoff” provision that shields the assignee from this risk.⁴ Before advancing money, a lender should check whether that provision is in the contract.

Transfers That Happen by Operation of Law

The Act was aimed at voluntary trafficking in government contracts, not at every change of contractor identity. Courts have consistently treated involuntary transfers as outside the prohibition.

The clearest example is a corporate merger where the surviving entity absorbs all assets and liabilities of the predecessor. The government is effectively dealing with the same organization under a new corporate structure, so the statute’s policy concerns aren’t triggered. Transfers by inheritance, whether under a will or by intestate succession, also generally qualify. Bankruptcy transfers can fall within the exception too, though whether they do depends on the specifics of the case and whether a genuinely new entity is stepping in to perform.

Stock Purchase vs. Asset Purchase

If you’re buying or selling a company that holds government contracts, the deal structure decides whether the Act is triggered at all.

In a stock purchase, the buyer acquires ownership shares of the contracting company. The company itself stays the same legal entity, holding the same contracts under the same name. Nothing has been transferred to a different party, so the Anti-Assignment Act is generally not triggered and no novation is needed.

In an asset purchase, the buyer acquires the seller’s assets individually, including contractual rights. From the government’s side, a different legal entity is now claiming the right to perform and receive payment. That triggers the Act, and the government won’t recognize the new contractor without a novation agreement.

This distinction drives deal structure in government contracting. Buyers who want to avoid the delay and uncertainty of novation often prefer a stock deal for that reason alone.

The Novation Process for Voluntary Transfers

When a voluntary transfer does trigger the Act, the parties need a novation: a three-way agreement between the original contractor, the new contractor, and the government that formally substitutes one for the other. The process runs under FAR Subpart 42.12.⁵

What You Have to Submit

The contractor requests the novation in writing and submits a package showing the new entity can perform. FAR 42.1204 calls for:

An authenticated copy of the instrument effecting the transfer, whether a bill of sale, certificate of merger, purchase agreement, or court decree.
A list of every affected contract, with contract numbers and types.
Certified copies of board resolutions from both corporations authorizing the transaction.
Certified copies of stockholder meeting minutes approving the transfer, when applicable.
Legal opinions from counsel for both parties confirming the transfer was properly effected and stating the effective date.
Balance sheets from both the original and new contractor as of the dates immediately before and after the transfer, audited by independent accountants.
Evidence that the new contractor has the technical ability and resources to perform the remaining work.
Evidence that any security clearance requirements have been met.
Written consent from the surety on all bonded contracts, or a statement that no bonds are required.

The contracting officer can trim this list if the government already obtained some documents during a pre-merger review.⁶

How the Government Decides

The contracting officer evaluates whether recognizing the new contractor is in the government’s interest, looking at the transferee’s financial stability, technical capability, integrity, and past performance. The FAR requires a 30-day window for comments or objections on the proposed transfer.⁵ In practice the full review often runs longer, especially with classified contracts or complicated financials. If the evaluation is favorable, the officer signs the novation, and the new contractor becomes the contractor of record.

What the Seller Still Owes After Novation

A novation does not let the original contractor walk away clean, and sellers who assume otherwise get a hard surprise. Under the standard novation format in FAR 42.1204, the transferor guarantees payment of all liabilities and performance of all obligations the new contractor assumes. That guarantee extends to future contract modifications, and the original contractor waives notice of and consents to any such modifications.⁷

The original contractor also waives all its rights under the contract against the government, while the government explicitly does not waive its rights against the original contractor. If the new contractor defaults, the government can go back to the transferor for performance or damages. A satisfactory performance bond from the new contractor can stand in for the transferor’s guarantee, but one or the other is required.⁶ Anyone selling a government contracting business needs to price that continuing exposure into the deal.

When You Only Need a Change-of-Name Agreement

If the contractor is simply changing its legal name, with no transfer of ownership or assets, a full novation isn’t required. FAR 42.1205 provides for a change-of-name agreement instead. The contractor submits the legal document effecting the name change (authenticated by the appropriate state official), a legal opinion confirming the change was properly executed, and a list of all affected contracts with numbers, types, and contracting office addresses.⁸

The contracting officer may also ask for the total dollar value and remaining unpaid balance for each contract. Because no new entity is performing, the government’s review is mostly administrative: was the name change legally valid.

What Happens If You Skip These Rules

An unauthorized transfer isn’t a dispute the parties argue out later. The statute annuls the contract as far as the government is concerned.¹ The government can treat the contract as void and refuse to recognize the third party. The would-be transferee has no standing to demand payment for work performed, however much has been invested.

The government can also terminate the original contract for default. A default termination makes the original contractor liable for the excess costs the government incurs to reprocure the work from someone else.⁹ On a large contract, those costs can run well past the original contract value.

The exposure can extend beyond a single contract. Unauthorized assignment isn’t listed as a specific trigger for debarment, but the FAR allows suspension or debarment for “any other cause of so serious or compelling a nature that it affects the present responsibility of a Government contractor.” An unauthorized transfer that disrupts government operations can fall within that language, potentially barring the contractor from federal work for years.¹⁰ Either use one of the recognized exceptions or structure the transaction so the Act is never triggered in the first place.

1
Office of the Law Revision Counsel. 41 USC 6305 – Prohibition on Transfer of Contract and Certain Allowable Assignments
2
Office of the Law Revision Counsel. 31 USC 3727 – Assignments of Claims
3
Acquisition.GOV. FAR 32.802 – Conditions
4
Acquisition.GOV. FAR 32.803 – Policies
5
eCFR. 48 CFR Part 42 Subpart 42.12 – Novation and Change-of-Name Agreements
6
eCFR. 48 CFR 42.1204 – Applicability of Novation Agreements
7
Acquisition.GOV. FAR 42.1204 – Applicability of Novation Agreements
8
Acquisition.GOV. FAR 42.1205 – Agreement to Recognize Contractors Change of Name
9
Acquisition.GOV. FAR 49.402-2 – Effect of Termination for Default
10
Acquisition.GOV. FAR Subpart 9.4 – Debarment, Suspension, and Ineligibility