FAR 42.1204—Applicability of novation agreements.
Plain-English Summary
FAR 42.1204 explains when the Government may recognize a new company as the successor in interest to an existing contract through a novation agreement, and when it may not. It ties the rule to the statutory prohibition on transferring Government contracts, then describes the limited situations where a transfer of assets can support novation, such as a sale of all assets, transfer of the assets used to perform the contract, merger, corporate consolidation, or incorporation of a proprietorship or partnership. The section also distinguishes novation from a mere stock purchase, where the legal contracting party does not change and novation is usually unnecessary, though ownership-change issues may still need a separate agreement. It addresses what happens if the Government declines to recognize the transfer, including the original contractor’s continuing liability and possible default termination. The rule also requires the contracting officer to evaluate organizational conflicts of interest and consider a waiver if needed, and it sets out the contractor’s submission package, supporting documents, possible document modifications, required novation terms, and the standard format for corporate transfers involving all assets. In practice, this section is the roadmap for handling corporate transactions that affect federal contracts and for protecting the Government’s interests while preserving contract continuity when appropriate.
Key Rules
Transfers are generally prohibited
Federal law prohibits transferring Government contracts to a third party, so novation is the exception rather than the rule. The Government may recognize a successor only when the third party’s interest arises from a qualifying transfer of assets.
Qualifying asset transfers only
Novation may be appropriate when the transfer involves all of the contractor’s assets or the entire portion of assets used to perform the contract. Common examples include asset sales with liability assumption, mergers or consolidations, and formation of a corporation or partnership from a proprietorship or partnership.
Stock purchases usually do not need novation
If ownership changes through a stock purchase but the legal contracting entity stays the same and remains in control of the assets and performance, a novation agreement is unnecessary. Even so, the parties may still need a formal agreement with the Government to address issues created by the ownership change.
Government may refuse transfer
If the Government does not agree to recognize the transfer, the original contractor remains bound by the contract. If performance does not occur, the contract may be terminated for default or other applicable reasons.
Conflict-of-interest review required
Before approving a novation, the contracting officer must identify and evaluate any significant organizational conflicts of interest under FAR subpart 9.5. If the conflict cannot be resolved but approval is still in the Government’s best interest, a waiver request may be pursued under FAR 9.503.
Contractor must submit a full package
The contractor must provide three signed copies of the proposed novation agreement plus supporting documents, including the transaction document, a list of affected contracts, evidence of the transferee’s capability, and any other information the contracting officer requests.
Additional proof may be required
As documents become available, the contractor must provide transfer instruments, board and stockholder approvals, corporate formation documents, legal opinions, financial statements, security clearance evidence, and surety consent or a statement that bonds are not required. The contracting officer may reduce or modify these requirements if the Government already has the information or is otherwise protected.
Novation terms protect the Government
When novation is approved, the agreement must generally require the transferee to assume all obligations, the transferor to waive rights against the Government, and the transferor to guarantee performance unless a satisfactory performance bond is accepted instead. The agreement also preserves compliance with all Federal laws.
Standard format applies to corporate transfers
For corporate transactions involving transfer of all assets, the contracting officer must use the prescribed novation format, though it may be adapted for specific cases and used as a guide for similar situations.
Responsibilities
Contracting Officer
Determine whether the transaction qualifies for novation, evaluate the Government’s interest, review the contractor’s submission, assess organizational conflicts of interest, decide whether a waiver is needed, modify document requirements when appropriate, and execute the novation agreement when recognition of the successor is consistent with the Government’s interest.
Contractor / Transferor
Request recognition of the successor in interest, submit the proposed novation agreement and all required supporting documents, provide additional information requested by the contracting officer, and ensure the transfer is properly documented and legally effective.
Transferee / Successor Company
Demonstrate capability to perform, accept the transfer of contractual obligations if novation is approved, and provide corporate, financial, legal, and security-related documentation needed to support the request.
Government / Agency
Decide whether recognizing the transfer serves the Government’s interest, protect its interests during corporate transactions, and ensure contract administration continues appropriately if novation is approved or if the transfer is not recognized.
Transferor and Transferee Legal Counsel
Provide legal opinions confirming that the transfer was properly effected under applicable law and stating the effective date of transfer.
Sureties
Consent to the transfer when bonds are required, or otherwise support the transfer package as applicable.
Practical Implications
A novation is not automatic just because a company changes hands; the key question is whether the legal contracting party changed through a qualifying asset transfer.
Stock purchases are often mistaken for novations, but if the same legal entity remains the contractor, the Government usually does not need a novation agreement.
Contractors should expect a detailed documentation process, especially for mergers and asset sales, and should plan early because missing corporate approvals, legal opinions, or financial statements can delay approval.
Contracting officers must look beyond the transaction structure and assess organizational conflicts of interest, security clearance issues, surety consent, and whether the transferee can actually perform.
If the Government declines to recognize the transfer, the original contractor still owes performance, so parties should not assume the deal relieves the seller of contract liability.
Official Regulatory Text
(a) 41 U.S.C.6305 prohibits transfer of Government contracts from the contractor to a third party. The Government may, when in its interest, recognize a third party as the successor in interest to a Government contract when the third party’s interest in the contract arises out of the transfer of- (1) All the contractor’s assets; or (2) The entire portion of the assets involved in performing the contract. (See 14.404-2 (l) for the effect of novation agreements after bid opening but before award.) Examples of such transactions include, but are not limited to- (i) Sale of these assets with a provision for assuming liabilities; (ii) Transfer of these assets incident to a merger or corporate consolidation; and (iii) Incorporation of a proprietorship or partnership, or formation of a partnership. (b) A novation agreement is unnecessary when there is a change in the ownership of a contractor as a result of a stock purchase, with no legal change in the contracting party, and when that contracting party remains in control of the assets and is the party performing the contract. However, whether there is a purchase of assets or a stock purchase, there may be issues related to the change in ownership that appropriately should be addressed in a formal agreement between the contractor and the Government (see 42.1203 (e)). (c) When it is in the Government’s interest not to concur in the transfer of a contract from one company to another company, the original contractor remains under contractual obligation to the Government, and the contract may be terminated for reasons of default, should the original contractor not perform. (d) When considering whether to recognize a third party as a successor in interest to Government contracts, the responsible contracting officer shall identify and evaluate any significant organizational conflicts of interest in accordance with subpart 9.5 . If the responsible contracting officer determines that a conflict of interest cannot be resolved, but that it is in the best interest of the Government to approve the novation request, a request for a waiver may be submitted in accordance with the procedures at 9.503 . (e) When a contractor asks the Government to recognize a successor in interest, the contractor shall submit to the responsible contracting officer three signed copies of the proposed novation agreement and one copy each, as applicable, of the following: (1) The document describing the proposed transaction, e.g., purchase/sale agreement or memorandum of understanding. (2) A list of all affected contracts between the transferor and the Government, as of the date of sale or transfer of assets, showing for each, as of that date, the- (i) Contract number and type; (ii) Name and address of the contracting office; (iii) Total dollar value, as amended; and (iv) Approximate remaining unpaid balance. (3) Evidence of the transferee’s capability to perform. (4) Any other relevant information requested by the responsible contracting officer. (f) Except as provided in paragraph (g) of this section, the contractor shall submit to the responsible contracting officer one copy of each of the following documents, as applicable, as the documents become available: (1) An authenticated copy of the instrument effecting the transfer of assets; e.g., bill of sale, certificate of merger, contract, deed, agreement, or court decree. (2) A certified copy of each resolution of the corporate parties’ boards of directors authorizing the transfer of assets. (3) A certified copy of the minutes of each corporate party’s stockholder meeting necessary to approve the transfer of assets. (4) An authenticated copy of the transferee’s certificate and articles of incorporation, if a corporation was formed for the purpose of receiving the assets involved in performing the Government contracts. (5) The opinion of legal counsel for the transferor and transferee stating that the transfer was properly effected under applicable law and the effective date of transfer. (6) Balance sheets of the transferor and transferee as of the dates immediately before and after the transfer of assets, audited by independent accountants. (7) Evidence that any security clearance requirements have been met. (8) The consent of sureties on all contracts listed under paragraph (e)(2) of this section if bonds are required, or a statement from the transferor that none are required. (g) If the Government has acquired the documents during its participation in the pre-merger or pre-acquisition review process, or the Government’s interests are adequately protected with an alternative formulation of the information, the responsible contracting officer may modify the list of documents to be submitted by the contractor. (h) When recognizing a successor in interest to a Government contract is consistent with the Government’s interest, the responsible contracting officer shall execute a novation agreement with the transferor and the transferee. It shall ordinarily provide in part that- (1) The transferee assumes all the transferor’s obligations under the contract; (2) The transferor waives all rights under the contract against the Government; (3) The transferor guarantees performance of the contract by the transferee (a satisfactory performance bond may be accepted instead of the guarantee); and (4) Nothing in the agreement shall relieve the transferor or transferee from compliance with any Federal law. (i) The responsible contracting officer shall use the following format for agreements when the transferor and transferee are corporations and all the transferor’s assets are transferred. This format may be adapted to fit specific cases and may be used as a guide in preparing similar agreements for other situations. Novation Agreement The ABC Corporation (Transferor), a corporation duly organized and existing under the laws of __________ [ insert State ] with its principal office in ____________ [ insert city ]; the XYZ Corporation (Transferee), [ if appropriate add "formerly known as the EFG Corporation" ] a corporation duly organized and existing under the laws of _________ [ insert State ] with its principal office in ____________ [ insert city ]; and the United States of America (Government) enter into this Agreement as of ____________ [ insert the date transfer of assets became effective under applicable State law ]. (a) The parties agree to the following facts: (1) The Government, represented by various Contracting Officers of the ______________ [ insert name(s) of agency(ies) ], has entered into certain contracts with the Transferor, namely: ____________ [ insert contract or purchase order identifications ]; [ or delete "namely" and insert "as shown in the attached list marked ‘Exhibit A’ and incorporated in this Agreement by reference." ]. The term "the contracts," as used in this Agreement, means the above contracts and purchase orders and all other contracts and purchase orders, including all modifications, made between the Government and the Transferor before the effective date of this Agreement (whether or not performance and payment have been completed and releases executed if the Government or the Transferor has any remaining rights, duties, or obligations under these contracts and purchase orders). Included in the term "the contracts" are also all modifications made under the terms and conditions of these contracts and purchase orders between the Government and the Transferee, on or after the effective date of this Agreement. (2) As of _________, 20, the Transferor has transferred to the Transferee all the assets of the Transferor by virtue of a __________ [ insert term descriptive of the legal transaction involved ] between the Transferor and the Transferee. (3) The Transferee has acquired all the assets of the Transferor by virtue of the above transfer. (4) The Transferee has assumed all obligations and liabilities of the Transferor under the contracts by virtue of the above transfer. (5) The Transferee is in a position to fully perform all obligations that may exist under the contracts. (6) It is consistent with the Government’s interest to recognize the Transferee as the successor party to the contracts. (7) Evidence of the above transfer has been filed with the Government. [ When a change of name is also involved; e.g.,a prior or concurrent change of the Transferee’s name, an appropriate statement shall be inserted (see example in paragraph(8) of this Agreement) ]. (8) A certificate dated ______, 20, signed by the Secretary of State of ___________ [ insert State ], to the effect that the corporate name of EFG Corporation was changed to XYZ Corporation on ___________, 20, has been filed with the Government. (b) In consideration of these facts, the parties agree that by this Agreement- (1) The Transferor confirms the transfer to the Transferee, and waives any claims and rights against the Government that it now has or may have in the future in connection with the contracts. (2) The Transferee agrees to be bound by and to perform each contract in accordance with the conditions contained in the contracts. The Transferee also assumes all obligations and liabilities of, and all claims against, the Transferor under the contracts as if the Transferee were the original party to the contracts. (3) The Transferee ratifies all previous actions taken by the Transferor with respect to the contracts, with the same force and effect as if the action had been taken by the Transferee. (4) The Government recognizes the Transferee as the Transferor’s successor in interest in and to the contracts. The Transferee by this Agreement becomes entitled to all rights, titles, and interests of the Transferor in and to the contracts as if the Transferee were the original party to the contracts. Following the effective date of this Agreement, the term "Contractor," as used in the contracts, shall refer to the Transferee. (5) Except as expressly provided in this Agreement, nothing in it shall be construed as a waiver of any rights of the Government against the Transferor. (6) All payments and reimbursements previously made by the Government to the Transferor, and all other previous actions taken by the Government under the contracts, shall be considered to have discharged those parts of the Government’s obligations under the contracts. All payments and reimbursements made by the Government after the date of this Agreement in the name of or to the Transferor shall have the same force and effect as if made to the Transferee, and shall constitute a complete discharge of the Government’s obligations under the contracts, to the extent of the amounts paid or reimbursed. (7) The Transferor and the Transferee agree that the Government is not obligated to pay or reimburse either of them for, or otherwise give effect to, any costs, taxes, or other expenses, or any related increases, directly or indirectly arising out of or resulting from the transfer or this Agreement, other than those that the Government in the absence of this transfer or Agreement would have been obligated to pay or reimburse under the terms of the contracts. (8) The Transferor guarantees payment of all liabilities and the performance of all obligations that the Transferee- (i) Assumes under this Agreement; or (ii) May undertake in the future should these contracts be modified under their terms and conditions. The Transferor waives notice of, and consents to, any such future modifications. (9) The contracts shall remain in full force and effect, except as modified by this Agreement. Each party has executed this Agreement as of the day and year first above written. United States of America, By _______________________________________________ Title _____________________________________________ ABC Corporation, By _______________________________________________ Title _____________________________________________ [ Corporate Seal ] XYZ Corporation, By _______________________________________________ Title _____________________________________________ [ Corporate Seal ] Certificate I, ___________, certify that I am the Secretary of ABC Corporation, that ________________, who signed this Agreement for this corporation, was then _____________ of this corporation; and that this Agreement was duly signed for and on behalf of this corporation by authority of its governing body and within the scope of its corporate powers. Witness my hand and the seal of this corporation this day of __________________ 20 ___. By _______________________________________________ [ Corporate Seal ] Certificate I, ____________, certify that I am the Secretary of XYZ Corporation, that ________________, who signed this Agreement for this corporation, was then _____________ of this corporation; and that this Agreement was duly signed for and on behalf of this corporation by authority of its governing body and within the scope of its corporate powers. Witness my hand and the seal of this corporation this day of _________________20. By _______________________________________________ [ Corporate Seal ]