Novation Agreement
Also known as: Novation, recognition of successor in interest
What you do here: Get the government to recognize a successor in interest before transferring the contract's assets
At a Glance
- Who signs it
- Three parties — the transferor, the transferee (successor), and the government
- What it does
- Recognizes a successor in interest so the contract lawfully moves to the new entity
- Governing authority
- FAR Subpart 42.12 (42.1204 lists the required documents)
- When you need it
- Transfer of all assets, or the portion performing the contract (merger, acquisition, sale)
- SDVOSB effect
- A change in ownership/control can trigger recertification and affect set-aside eligibility
What It Is
A novation agreement is a three-party agreement — signed by the original contractor (the transferor), the successor (the transferee), and the government — by which the government recognizes a successor in interest to a federal contract. The Anti-Assignment statutes generally bar a contractor from simply assigning a government contract to someone else, so when a contractor transfers all its assets, or the entire portion of the business that performs the contract (as in a merger, acquisition, or sale of a division), the government won't automatically deal with the new entity. FAR Subpart 42.12 provides the mechanism: the transferee proposes a novation, submits the documents listed in FAR 42.1204 (the transfer instrument, the parties' corporate authorizations, financial statements, and more), and the responsible contracting officer — after determining it's in the government's interest — executes a novation agreement recognizing the successor and transferring the contract's rights and obligations. Without a novation, the successor has no privity and the government can decline to pay it. For an SDVOSB, novation is high-stakes: because it usually reflects a change in ownership or control, it can trigger recertification of size and SDVOSB status and, if control leaves veteran hands, can jeopardize the very eligibility the set-aside was awarded on.
When You See It
- When a contractor is acquired, merges, or sells the division that performs the contract.
- When all the contractor's assets (or the assets performing the contract) are transferred to a new entity.
- When a corporate reorganization creates a new legal entity that will perform the existing contract.
- Any time the performing entity's legal identity changes and the government must recognize the successor.
Key Features
| Feature | What It Means |
|---|---|
| Three-party agreement | A novation is signed by the transferor, the transferee, and the government — all three must agree to move the contract. |
| Overcomes anti-assignment | It's the FAR mechanism that lets a contract lawfully move to a successor despite the statutory bar on assigning government contracts. |
| Documented package required | FAR 42.1204 lists the documents the transferee must submit — the transfer instrument, authorizations, financials, and certifications. |
| Government discretion | The contracting officer executes a novation only after determining recognizing the successor is in the government's interest — it's not automatic. |
| Triggers recertification | Because it reflects a change in ownership/control, novation can trigger SBA size and SDVOSB status recertification. |
The SDVOSB Angle
Novation is where an SDVOSB can accidentally destroy the eligibility its whole business is built on. If ownership or control passes out of the service-disabled veteran's hands in the transaction, the successor may no longer qualify as an SDVOSB — and even a within-family transfer can trigger recertification and change how the agency counts the contract. Plan the transaction with eligibility in mind from day one: confirm the successor still meets the 51% veteran ownership and control rules, expect to recertify your size and SDVOSB status, and coordinate with the contracting officer and the SBA before you close. Don't transfer the assets and then seek the novation as an afterthought; get the sequencing and the recertification analysis right first.
How to Handle It
- Before closing, confirm whether the transaction transfers all assets or the portion performing the contract (novation territory).
- Analyze SDVOSB eligibility of the successor — does it still meet 51% veteran ownership and control?
- Assemble the FAR 42.1204 document package (transfer instrument, corporate authorizations, financials, certifications).
- Coordinate with the responsible contracting officer early and plan for size/SDVOSB recertification.
- Execute the three-party novation before relying on the successor's right to perform and be paid.
Watch Out For
- Transferring assets without a novation — the successor lacks privity and the government can decline to pay it.
- Losing SDVOSB eligibility when ownership or control leaves veteran hands in the transaction.
- Overlooking the recertification triggered by the change in ownership/control.
- Treating novation as a formality; the contracting officer can decline if it's not in the government's interest.
Run the Numbers
Frequently Asked
What is a novation agreement?
A novation agreement is a three-party agreement — among the original contractor, the successor, and the government — by which the government recognizes a successor in interest to a federal contract after the contractor transfers all its assets or the portion of the business performing the contract (for example, in a merger, acquisition, or sale). Governed by FAR Subpart 42.12, it's the mechanism that lets a contract lawfully move to a new legal entity despite the statutory bar on assigning government contracts.
Does a novation trigger SDVOSB recertification?
Usually. Because a novation reflects a change in the contractor's ownership or control, it can trigger the SBA requirement to recertify size and SDVOSB status. If ownership or control passes out of the service-disabled veteran's hands, the successor may no longer qualify as an SDVOSB, which can affect the agency's ability to count the work toward its SDVOSB goals. Analyze eligibility and plan the recertification before closing the transaction — see the compliance deadlines reference for the recertification triggers.
Can I just assign my government contract to a buyer?
Generally no. The Anti-Assignment statutes bar a contractor from simply assigning a government contract to another party. To move the contract to a successor after transferring the business or its assets, you need a novation agreement under FAR Subpart 42.12: the transferee submits the required documents (FAR 42.1204), and the contracting officer executes a three-party agreement recognizing the successor — but only after determining it's in the government's interest. Without it, the buyer has no privity with the government.
Primary Sources
- FAR Subpart 42.12 — Novation and Change-of-Name Agreements
- FAR 42.1204 — Applicability of novation agreements
- 13 CFR § 125.18 — SDVO SBC eligibility and recertification
Plain-English reference, not legal advice. Contract modification, options, novation, and termination rules are fact-specific, and the FAR and agency supplements are amended from time to time — always read the current FAR text, follow the notice and certification timeframes in your specific contract clauses, confirm the requirements with the contracting officer, and consult qualified counsel before relying on a modification, settlement, claim, or termination position.
Change log (1)
- LaunchedPublished the federal contract modifications, options & change management reference covering how a federal contract changes after award — the bilateral supplemental agreement and the unilateral modification (FAR 43.103), the change order under the Changes clause (FAR 52.243-1), the administrative change (FAR 43.101), the equitable adjustment and the Request for Equitable Adjustment (FAR 43.204 / 43.205), the constructive change doctrine, the options to extend the term and quantity (FAR 52.217-8, 52.217-9, and the Subpart 17.2 quantity options 52.217-6/-7), the novation and change-of-name agreements (FAR Subpart 42.12), and the terminations for convenience and default (FAR Part 49 / 52.249-2 / 52.249-8) — each with an at-a-glance quick-facts card, a when-you-see-it list, a key-features table, an SDVOSB-specific angle, a how-to-handle-it checklist, watch-outs, FAQPage, Article, Dataset, and BreadcrumbList structured data, primary-source FAR citations, and cross-links into the glossary, regulation explainers, clauses, forms, contract types, protest & dispute forums, compliance deadlines, how-to guides, FAQ, and the limitations-on-subcontracting, price-to-win, size-standard, and set-aside eligibility calculators.