Pay BillWritten by Meaghan Clark, BMSS Contracts Manager
Mergers and acquisitions are on the rise in the government contracting world and with them, comes a process that many contractors are simply not prepared for: novation. Whether you are buying a company, selling one, or merging with another, understanding how novation works, and what can go wrong, could be the difference between a seamless transition and a costly, drawn-out ordeal.
What Is a Novation?
A novation is a formal agreement, governed by FAR Subpart 42.12, that recognizes a successor company and formalizes how that company assumes an existing government contract. It is not automatic. When a legal entity performing a government contract changes, whether through a merger, asset purchase, consolidation, or corporate reorganization, a novation is required.
More importantly, the government holds all the cards. Per FAR 42.1204, the government may approve a novation when it is in the government’s best interest. That discretion belongs entirely to the contracting officer, and it cannot be assumed away.
“It is the government’s discretion,” Clark explains. “That is scary. If I was a seller or a buyer, that is scary to think. But that does not mean it is the end of the world. You still own that company, and you still own that past performance. You just have to own it a different way.”
Why Novations Are Increasing
The surge in novation activity is a direct result of the surge in mergers and acquisitions throughout the government contracting community. Smaller companies that have built strong track records are increasingly attractive acquisition targets, and buyers are eager to absorb their past performance, their contracts, and their people. But the transaction closing date and the government’s recognition of the new ownership are two very different things.
The Novation Process: A High-Level Overview
The novation process requires contractors to submit a comprehensive documentation package to the contracting officer. This includes the purchase or merger agreement, a list of all affected contracts, audited financial statements, evidence of technical capability, and a detailed transition plan demonstrating that contract performance will continue without interruption.
“Think of it like redoing a proposal,” Clark says. “Even though the company you bought, or the company you sold, already won this contract, it is like you are having to talk the government into it all over again. You are having to resell yourself. You have to prove that you are financially capable, technically capable, and that the show is going to go on.”
The process takes time, often several months, and timeline matters. Submitting a novation package at the end of the government fiscal year, when contracting officers are focused on obligating funds and closing out contracts, can cause significant delays.
Common Pitfalls to Avoid
The pitfalls of the novation process are where the real risk lies, and many of them are avoidable with early, proactive planning.
Invoicing Confusion: Until the novation is approved, the original contractor must continue invoicing under the legacy company name. Clark cautions that this creates confusion on the ground, especially when employees have already transitioned to new badges, new email addresses, and a new company identity. “You just do not get to start billing as the new company,” she says. “Until the government recognizes the new legal entity, you are still the old one.”
Subcontract Assignment Clauses: Perhaps the most overlooked pitfall involves subcontractors who did not negotiate their assignment clauses carefully, or at all. “When you get that first subcontract agreement, and you are reviewing it, and you are negotiating it, and you think, I am not selling my company, and this is a five-year contract, you kind of skim over that assignment clause,” Clark explains. “But three years down the road, you grew so much, and the right offer comes along, and you cannot deny it. Then you go back and look at your contracts, and some of them say you simply cannot assign without approval. And they could tell you to go pound sand.”
Small Business Set-Aside Status: When a woman-owned small business sells to a large business, or any small business transitions to a differently classified entity, set-aside contracts are at risk. The government has small business goals to meet, and a novation that disrupts those numbers may not be approved. Prime contractors face similar concerns when a subcontractor’s socioeconomic classification changes.
Prime Contractor Approval: Subcontractors often face an additional layer of complexity. Rather than negotiating directly with the government, they must first convince their prime contractor to approve the novation, who may then have to take it to the government. “You are adding more time, more risk, more process,” Clark notes. “And the prime might just say, this is too much, we are busy, and if you did not negotiate the language, we do not have to reassign it.”
Key Takeaways and Best Practices
Engage legal and contracts counsel early, before the deal closes if possible. Understanding your contract portfolio’s risks should be part of the due diligence process, not an afterthought.
Review and negotiate your subcontract assignment clauses today, even if you have no plans to sell. Business changes fast, and protective language costs nothing to negotiate up front.
Submit complete, well-organized documentation. Incomplete packages restart the clock and push your novation to the back of the line.
Plan for parallel operations. Until the novation is finalized, you must continue to operate, invoice, and accept contract modifications under the original company name.
Communicate proactively with contracting officers, prime contractors, and your team. Transparent communication builds the confidence the government needs to approve the novation.
Be mindful of timing. Avoid submitting novation packages at the end of the federal fiscal year when contracting officers are focused elsewhere.
“A successful novation protects both the deal you made as a buyer or seller and the performance of the contract,” Clark concludes. “At the end of the day, the government does not care that you just became millionaires. They want to know that their contracts are still going on. The show goes on. That is the most important thing.”
If you are navigating a merger, acquisition, or name change and need guidance on the novation process, BMSS is here to help. Our government contracting team works with companies of all sizes to manage novation packages, review subcontract agreements, and mitigate risk at every stage of the process. Reach out to Meaghan Clark or visit bmss.com to learn more.
