Novation Agreement

A novation agreement is a legally required three-party instrument executed among the government, the original contractor (transferor), and the successor company (transferee) that formally transfers all rights and obligations under a government contract from the original awardee to the successor following a corporate transaction.

What is a Novation Agreement?

Novation agreements are required under FAR 42.12 when a contractor's corporate identity changes through merger, acquisition, or asset sale and the successor entity wants to continue performance of existing government contracts. Without a novation, government contracts cannot be transferred, Assignment of Claims Act prohibitions (41 U.S.C. § 6305) prevent assignment of government contracts to a new entity without government consent. The novation agreement is the formal mechanism through which the government provides that consent.

The novation process requires the successor company to submit a request package to the cognizant contracting officer containing: a description of the corporate transaction; certified copies of the sale or merger agreement; evidence of the transferee's legal standing and financial capability; a list of all government contracts to be novated; proposed assignment-of-liabilities provisions; and the signatures of authorized representatives of both the transferor and transferee. FAR 42.1204 provides the specific documentation requirements.

Once the cognizant contracting officer reviews and approves the package (which typically requires legal review and may take 60 to 180 days for complex transactions), a novation agreement is executed that: identifies each contract being novated; certifies that the transferee has assumed all obligations under the contracts; releases the transferor from future performance obligations; and obtains the government's consent to the transfer. The cognizant contracting officer then coordinates execution of the novation across all affected contracts.

A novation is distinct from a name change. If a company legally changes its name but retains the same legal entity (same CAGE code, same EIN, same structure), the process is a simpler administrative change documented under FAR 42.12's name change procedures rather than a full novation.

Why Novation Agreements matter for government contractors

Novation delays are a common and painful problem in mergers and acquisitions involving government contractors. The acquiring company may be legally unable to invoice, receive payments, or perform under the target's contracts until the novation is executed, creating cash flow disruptions and performance risks. Due diligence for any government contractor acquisition should include an assessment of the novation timeline and process across the contract portfolio.

Example

An aerospace company acquires 100% of the stock of a defense electronics contractor. The seller has 23 active DoD contracts. Because this is a stock acquisition (the legal entity continues, only ownership changes), a novation is generally not required, the contracting entity remains the same. However, if the transaction had been structured as an asset purchase (the buyer acquires assets, not the legal entity), a novation would be required for each of the 23 contracts. The buyer's M&A counsel confirms the stock-versus-asset structure before closing to avoid triggering the novation requirement.

Frequently Asked Questions

Is a novation required for a stock acquisition versus an asset purchase?

Generally, no novation is required for a stock acquisition because the legal entity holding the contracts does not change, only its ownership changes. A novation is required when the legal entity performing the contracts changes, which occurs in asset purchases and mergers where the acquiring company absorbs the target. This is a critical distinction in structuring government contractor acquisitions.

Who is the "cognizant contracting officer" for novation purposes?

For companies with multiple contracts across many agencies, FAR 42.1202 provides procedures for identifying the cognizant contracting officer, typically the contracting officer responsible for the largest contract value, or the contracting officer designated by the agency with the most contractual responsibility. DCMA administers novations for major defense contractors.

Can performance continue during the novation process?

Yes, typically. The parties often reach an interim administrative arrangement, sometimes called a letter of recognition or interim recognition, that allows the transferee to continue performance and receive payments while the formal novation documentation is being executed. The specific interim arrangement must be approved by the contracting officer.

Can the government refuse to approve a novation?

Yes. The government may decline to recognize the novation if the transferee lacks the technical or financial capability to perform, if the corporate transaction structure raises concerns about responsibility, or if the documentation submitted is insufficient. In practice, novations are rarely rejected outright; more commonly, additional documentation or conditions are required.