Though long lived statutes prohibit transferring contracts to another company, the government recognizes the need to provide the means to transfer a contract when ownership changes and assets are transferred. FAR 42.12 sets forth the basic and procedural requirements for recognizing a successor in interest to a government contract when that contractor's assets are transferred. FAR 42.1204 sets forth the conditions in which the government's contracting personnel should believe they are entitled to consent to a transfer of contracts. Generally, the government will want a Novation Agreement for most transaction that are not pure stock purchases. Even when there is such a stock purchase arrangement the FAR states there may be issues related to the change in ownership where a formal agreement is appropriate.

The language of the FAR suggests the government has unbridled discretion to approve or disapprove novation requirements. However, nowhere does the FAR or its various agency supplements identify what factors or conditions a contracting officer should consider when approving or disapproving a novation. Nor, on the other hand, do the regulations identify what factors should not be considered. Consequently, contractors are at the mercy of the good faith and sound business judgement of COs who are often inexperienced in novation agreements.

A Novation Agreement is the vehicle for the government to consent to assignment of a contract. It is three way agreement (i.e. tripartite) between the seller, buyer and the government. In the typical Novation Agreement, the government recognizes the buyer as the successor-in-interest to the seller. The seller waives "all rights under the contract" against the government and guarantees the buyer's performance (or in lieu of a guarantee, offers a suitable performance bond). The buyer, in turn, assumes the seller's obligations under the contract. FAR 42.1204(e) sets forth a model Novation Agreement. The FAR states this model agreement may be adapted to fit specific cases. It is not uncommon for the government to set forth additional clauses that may not be in the FAR.

One peculiarity of going though the novation process has to do with timing. FAR 42.1204 contemplates that a request for a Novation Agreement will normally be submitted after the transaction has been consummated. For example, the FAR requires "authenticated" copies of the transaction documents, balance sheets certified as of the date immediately following the transaction, and legal counsel's opinion on the legal validity of the transfer. As a practical matter the buyer and seller should enter into a separate agreement in which the seller delegates to the buyer authority to perform government contracts in the seller's name for a period of time after the closing until all Novation Agreements are executed.

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