Contract Novation Agreement: Everything You Need to Know
A contract novation agreement is used by the government to move contracts from one business to another in line with the provisions of the Anti-Assignment Act.3 min read
A contract novation agreement is a mechanism used by the government to transfer contracts from one business to another in line with the provisions of the Anti-Assignment Act.
Government Contract Novations Under FAR 42.1204
Novation refers to the process through which the government transfers its contracts from one business to another without breaching the provisions of the Anti-Assignment Act. Several reasons can necessitate the use of a novation including:
- When a government contractor becomes part of another company which intends to continue performing the contract, or
- When a business that is handling government contracts files for bankruptcy and divests its assets. A common denominator in novation is a change in the designation of the contractor that will perform the government contract.
When Is a Formal Novation Agreement Granted?
According to the FAR 42.1204, granting of a formal Novation Agreement takes place when the government has concluded that its "best interest" lies in making the transfer and provides relevant documentation to support its position. However, the reality is more complicated than stated above. The novation process does not have a fixed schedule or timeline under the FAR 42.1204. Even if you have made all the necessary preparations and documentation, your Novation Agreement may not get the approval you desire.
How to Ease the Administrative Burden of Novation
Proactive thinking and planning are required to reduce the administrative burden related to novation and help your business position itself for better opportunities in the future. Also, assess the contract that is being transferred carefully. Having a clear knowledge of the deadlines and expectations will significantly reduce the risk of sanctions arising from novation processes that took longer than you had predicted.
While the FAR 42.1204 provides a list of requirements, this does not guarantee that your business will be able to meet all those conditions. Your records might not include a vital document required in the novation process. It's important to contact the government official that will be in charge of the novation before making any plans for the process. Talking with the official will enable your business to win concessions and exceptions that will allow it to participate in the process favorably.
However, you need to realize that you may not be able to use the same concessions or exceptions for other novations. This means you have to handle each novation based on its unique attributes. The novation process involves several rounds of interactions between the contractor and the government. You may be asked to provide more or new information, despite making a strong and in-depth initial submission.
The Meaning of Novation in Government and Business
The meaning of novation in commercial circles is different from its definition in government, according to federal procurement law. According to federal procurement law, a novation contract is appropriate when a government contractor transfers its obligations to that contract to a new entity. The government agency handling the novation process refers to the new contractor as a successor in interest.
Can Government Contracts Be Sold?
Under the Anti-Assignment Act, government contracts cannot be sold. The implication of this is that the government can only accept a novation agreement if the decision is considered to be in its best interests. However, problems often arise if a party buys only a government contract as the contracting officer may become suspicious of the transaction and block it.
When Can a Contract Novation Be Entertained?
Contract novation can be entertained when it involves asset purchase, according to the FAR 42.12. When novating contracts, the government assesses the asset purchase agreement to verify the transfer of real assets. If the sale is about intangible assets, the transaction can go ahead as a novation agreement is not a requirement in a stock purchase sale. However, the FAR 42.1204 provides a novation agreement template to be used for all novations, and contractors are expected to use.
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