Novation (NOVA)
Novation is the legal transfer of contract rights and obligations from one company to another after acquisition, merger, or asset sale, governed by FAR Subpart 42.12, required because federal contracts are not freely assignable.
What Is Novation?
Novation is the legal transfer of all contract rights and obligations from one company (the transferor) to another company (the transferee), usually because of a corporate acquisition, merger, sale of assets, or restructuring that moves ownership of the contract-performing business. In federal contracting, novation is required because federal contracts are not freely assignable; the government must specifically consent to the transfer through a Novation Agreement signed by all three parties (transferor, transferee, and the government).
The process is governed by FAR Subpart 42.12 and is a precondition to the transferee being able to perform on, invoice against, and exercise any rights under the transferred contracts.
Key Characteristics
Novation has several distinguishing features. It applies whenever a federal contract changes hands due to a change in ownership of the performing entity, including asset sales (typically) but not most stock sales (which often preserve the legal entity).
It requires a Novation Agreement, a three-party legal document executed by the transferor, transferee, and the government (typically the cognizant Administrative Contracting Officer (ACO)). It involves a structured package of supporting documents: corporate resolutions, opinion of counsel, financial statements demonstrating the transferee's ability to perform, evidence of asset transfer, and audited financial reports.
It can take 60 to 180 days from request to government approval, with complex transactions sometimes taking longer. It applies to all federal contracts held by the transferring entity, requiring case-by-case novation rather than a bulk transfer.
How It Works in Government Contracting
Novation operates at three points around a corporate transaction. First, before closing, the parties typically negotiate the transaction with novation contingencies, plan the novation strategy, and identify cognizant ACOs for each affected contract.
Second, at and shortly after closing, the transferee submits a novation package to each ACO including the Novation Agreement, supporting documents, and a representation that all FAR requirements are met. The government reviews, may request additional documentation, and ultimately signs the Novation Agreement.
Third, during the post-novation period, the transferee performs on the novated contracts under its own legal identity, with all prior rights and obligations preserved. Until the government signs the Novation Agreement, the transferor remains legally responsible for performance, often creating awkward operational arrangements during the transition. Our capture management guide covers M&A-aware capture planning.
Real-World Example
A mid-sized federal services contractor (Company A) is acquired by a larger firm (Company B) through an asset purchase. Company A holds 47 active federal contracts across 12 agencies.
At closing, Company B inherits the assets but cannot legally perform on Company A's contracts until novation is complete. Company B's contracts team submits novation packages to each cognizant ACO within 30 days of closing, with full documentation.
Over the next 90 days, 41 contracts are novated cleanly. Six contracts hit complications: two require additional financial documentation, two require DCAA audit confirmation of Company B's adequate accounting system, and two are delayed because the cognizant ACO is unavailable.
By day 150, all 47 contracts are novated. During the transition, Company A's residual staff continued to invoice and report on the contracts under management services agreements with Company B.
Regulatory Framework
Novation is governed by FAR Subpart 42.12, particularly FAR 42.1204 (Applicability of novation agreements) and FAR 42.1205 (Agreement to recognize successor in interest). The government's standard Novation Agreement language is in FAR 42.1204(i).
Supporting documentation requirements are in FAR 42.1204(e). The cognizant ACO has discretion to consent or refuse to novate, though refusal is rare absent a financial responsibility concern.
For DoD contracts, DFARS 242.12 adds supplementary requirements. Anti-assignment statutes at 41 U.S.C. 6305 establish the general prohibition against assignment that novation addresses.
Why It Matters for Contractors
Novation timing and quality directly affect the value of acquired federal contracts. Delayed novation creates legal ambiguity about who can perform and invoice, complicating revenue recognition and customer relationships.
Failed novation (rare but possible) can leave acquired contracts effectively unusable. Acquirers who do not plan for novation often discover the complexity only after closing, producing post-acquisition operational disruption.
Strong novation discipline includes pre-closing identification of all affected contracts, early ACO outreach, complete supporting documentation, and parallel processing across multiple ACOs to compress the overall timeline. Past performance transfers with novation, so a clean novation preserves the transferee's competitive position on follow-on work. Our piece on the ROI of an AI proposal platform covers how proposal-aware M&A planning preserves federal contract value.
Common Misconceptions
Federal contracts can be transferred by simple assignment.
They cannot. Federal anti-assignment statutes prohibit assignment without specific government consent, which is what the novation process provides.
Novation transfers cure past performance issues.
It does not. Past performance ratings (good or bad) transfer with the novated contracts. The transferee inherits the transferor's CPARS record on those contracts.
Novation is automatic after a corporate acquisition.
It is not. Each contract requires a separate Novation Agreement signed by the cognizant ACO. The process is administrative but not automatic, and individual contracts can be denied or delayed.
Frequently Asked Questions
When is novation required versus a simple name change?
Novation is required when the legal entity holding the contract changes (acquisition by asset sale, merger that creates a new entity). A name change only requires a Change-of-Name Agreement under FAR 42.1205, which is a much simpler process. Stock acquisitions that preserve the legal entity typically do not require novation.
How long does novation typically take?
60 to 180 days from request to government signature on the Novation Agreement, with timing varying by transaction complexity, ACO workload, and documentation completeness. Complex transactions involving DCAA audit or financial responsibility review can extend beyond 180 days.
Can a contractor perform on a contract before novation completes?
The transferor (original contract holder) remains responsible for performance until novation. In practice, the transferee often performs operationally under arrangements with the transferor, but legal responsibility stays with the transferor until the Novation Agreement is signed. Our compliance automation guide walks through M&A transition planning.
What documentation is typically required for novation?
A Novation Agreement (FAR 42.1204(i) format), corporate resolutions authorizing the transaction, opinion of counsel confirming legal effect, audited financial statements showing the transferee's ability to perform, evidence of asset transfer (purchase agreement or equivalent), and case-specific items the cognizant ACO may request.
What happens if the government refuses to novate?
Refusal is rare but possible if the transferee lacks financial responsibility or the transaction raises national security concerns. In refusal cases, the transferor remains responsible for performance, often forcing a renegotiated transaction or termination of affected contracts.
Related Government Contracting Topics
FAR (Federal Acquisition Regulation): FAR Subpart 42.12 governs the novation process.
DFARS: DFARS 242.12 adds DoD-specific novation requirements.
Administrative Contracting Officer (ACO): Typically the cognizant official who reviews and signs Novation Agreements.
Defense Contract Audit Agency (DCAA): May audit financial responsibility of transferee during novation review.
Past Performance: Transfers with novated contracts, both favorable and unfavorable ratings.
Bilateral Modification: Format of the Novation Agreement; signed by all three parties.
Contracting Officer (CO): May share or coordinate novation responsibility with the cognizant ACO.
Joint Venture: Related corporate structure that does not require novation if no entity transfer occurs.
Subcontractor: Subcontracts may also require novation when the prime undergoes a corporate change.
CDA Claim: Avenue for resolving disputes that arise during or after the novation process.
Bid Protest: Rare but possible in novation contexts when competitor challenges the transfer.
CPARS: Performance ratings carry forward through novation under the new entity name.
How LotusPetal AI Helps
LotusPetal AI's capture and proposal automation platform supports M&A integration with a contract-by-contract novation tracker, ACO outreach workflow, and automated past performance record transition. M&A teams complete novation 30 to 60 days faster than manual workflows allow.