Novation Agreements Under Federal Contracts

Businessman signing document

What’s a contractor to do when it is acquired/merged with another firm, is restructured or goes through a variety of other types of corporate transaction?

November 29, 2021
Hal Perloff - Construction Executive

A unique aspect of doing business with the federal government is the built-in limits on a contractor’s right to assign the contract or the right to payment under the contract to third parties. The Anti-Assignment Act (41 U.S.C. § 6305) prohibits the transfer of a government contract or interest in a government contract to a third party. An assignment of a contract in violation of this law voids the contract except for the government’s right to pursue a breach of contract remedies.

What’s a contractor to do when it is acquired/merged with another firm, is restructured or goes through a variety of other types of corporate transaction? The Federal Acquisition Regulations recognize that firms involved in government contracts get bought and sold from time to time and includes procedures for the novation of contracts in certain situations to avoid a potential violation of the Anti-Assignment Act.

What Is a Novation?

A novation is a three-party agreement between the United States, the original contractor and the new contractor offering to assume the government contract. The purpose the novation is to allow the government to recognize a new contractor as the successor-in-interest to a government contract and avoid a violation of the Anti-Assignment Act.

Reprinted courtesy of Hal Perloff, Construction Executive, a publication of Associated Builders and Contractors. All rights reserved.

Mr. Perloff may be contacted at hal.perloff@huschblackwell.com



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