Is your company in a situation, performing as a prime contractor on government contracts, but needing to sell the business? Or is there a material change in your business causing a transfer of assets to another business? In the commercial world of contracts and business operations, the assignment of contracts primarily operates under the Uniform Commercial Code (the “UCC”) and assignments occur frequently due to the ever-changing business landscape. However, this process does not exist in government contracting and novation may be the route for your organization. Assignment and novation of contracts have different consequences for the parties involved; however, for purposes of this article, we will specifically address novation within the context of contracting with the U.S. Government.
41 U.S.C §6305 prohibits the transfer of government contracts from the contractor awarded the contract to a third party. If a contractor finds themselves in a situation where they need to novate a government contract, which is the method of transferring contracts to a third party arising out of the sale of the contractor’s assets or the entire portion of assets involved in performing the contract, they need to follow the steps outlined in FAR 42.1204 which stipulates that the contractor shall provide 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.
Additionally, FAR 42.1204 (f) specifies that,” 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.”
Contracting Officer Approval
When a company responds to a solicitation, the Contracting Officer ensures that, through various procurement methods and due diligence, an award to the specific contractor is in the government’s best interest. In this administrative situation, the Contracting Officer, again, has a duty to evaluate and determine if the change is in the government’s best interest. If the Contracting Officer does not determine the action to be in the best interest of the government, the proposed novation may not be accepted by the government. The contractor may be held liable to perform the obligation.
From a practical standpoint, if your organization is in a position to notify your Contracting Officer in advance of a potential change, the process may be more efficient for all parties, as good communication with your Contracting Officer is fundamental to the working relationship.
If your company has a situation which may warrant a contract novation, our novation experts would be happy to discuss the process in more detail and best approach forward. Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and requirements related to compliance with Government contracting terms and conditions.