You've just closed an acquisition of a small federal contractor, or you've sold your company to a larger firm. The due diligence is done, the deal is signed, and now you expect the federal contracts to flow over to the new entity.
They don't. Not automatically.
Federal contracts are not like commercial contracts. A standard assignment clause in a purchase agreement does not transfer a government contract to a successor entity. The government has to consent, in writing, through a specific legal mechanism called a novation agreement. Until that agreement is executed, the original contractor remains the party of record, legally obligated to perform.
This trips up acquirers constantly, especially private equity firms and strategic buyers who are new to the federal space. Get it wrong and you risk voiding the contracts, triggering a termination for default, or running into Anti-Assignment Act violations.
Why contracts don't transfer on their own
The Anti-Assignment Act (41 U.S.C. § 6305) prohibits transferring government contracts to another party without prior written approval from the contracting officer. The law exists to protect the government's right to choose its contractors based on responsibility, past performance, and compliance history. When you buy a company, the government didn't choose you. It chose the seller.
This matters at every contract size, from a $50,000 task order to a $50 million IDIQ vehicle.
Novation vs. administrative change: knowing the difference
FAR Subpart 42.12 governs both novation agreements and administrative changes, and the distinction matters.
A novation agreement is a three-party agreement between the original contractor (the "transferor"), the successor entity (the "transferee"), and the government. It legally substitutes the transferee for the transferor on all covered contracts. Use this when there's a change in the legal entity holding the contract, such as an asset purchase or a stock purchase where the legal entity is dissolved or merged into another.
An administrative change handles simpler situations where the legal entity remains the same but something administrative has changed, like a name change after a merger where the original legal entity survives intact. If you acquire a company and keep it operating as the same legal entity with the same EIN and DUNS/UEI number, you may only need an administrative change rather than a full novation.
If you're uncertain which applies, ask the contracting officer early. The wrong path wastes months.
What the contracting officer needs
FAR 42.1204 lists the documentation required to request novation. You submit the package to the cognizant contracting officer, which is typically the CO on your largest contract or the agency that manages the most contract value. That CO coordinates with other agencies on any additional contracts covered by the agreement.
The standard package includes:
The transfer agreement itself. This is the purchase agreement, asset transfer agreement, or merger document that proves the transfer of assets occurred. Redacting sensitive commercial terms is common, but the CO needs to see the operative clauses confirming ownership transferred.
List of all affected contracts. Every active federal contract, subcontract, and open task order must be identified. Include the contract number, agency, contracting office, and period of performance. Missing even one contract from the list creates legal exposure.
Evidence of asset transfer. Bills of sale, title transfers, or board resolutions showing that the contractor's assets and operations actually moved to the transferee.
Transferee's legal documentation. Articles of incorporation or organization, evidence of good standing in the state of formation, and the entity's taxpayer identification number.
SAM.gov registration. The transferee must have an active System for Award Management registration before any novation can be executed. If the transferee isn't registered, stop and fix that first. SAM registration alone can take 10 business days under normal circumstances and longer if there are issues.
Assumption of liabilities statement. A written statement from the transferee confirming it assumes all obligations under the contracts being novated, including any outstanding performance, payment, and compliance obligations.
Financial statements. The government wants to confirm the transferee is financially capable of performing. Recent audited financials or, for smaller firms, compiled statements are typically acceptable.
Novation agreement draft. FAR 42.1204 includes a suggested format. Most experienced federal attorneys use it as the starting point. You or your counsel draft it, the CO reviews it, and once all parties agree on the language, all three parties sign.
Timeline: how long does this actually take
There is no statutory deadline forcing a contracting officer to act on a novation request. That's the frustrating reality.
In practice, straightforward novations with clean documentation take three to six months from submission to execution. Complex situations involving multiple agencies, small business program concerns (more on that below), or pending option years can stretch to a year or longer.
During that period, the transferor remains the contractor of record and must continue performing. If the seller's entity is being wound down, this creates a practical problem. The deal structure needs to account for this. Many acquisitions include a transition services agreement or keep the old entity alive specifically to maintain contract performance until novation is complete.
Push the CO for a timeline after you submit the package. They're not required to give one, but most will acknowledge receipt and give you an estimate.
The small business set-aside problem
This is where novation gets genuinely complicated for diverse and small businesses. Many federal contracts are awarded under small business set-asides, 8(a) sole-source awards, SDVOSB set-asides, HUBZone contracts, and WOSB set-asides. When the transferee is not a small business, or doesn't hold the relevant certification, the government cannot novate the contract to the new entity.
A large business buying a small business 8(a) contractor cannot simply novate the 8(a) sole-source contracts. Those contracts were awarded specifically because the seller was an 8(a) participant. The SBA's 8(a) regulations (13 C.F.R. § 124.515) prohibit novating 8(a) contracts to firms outside the program.
For HUBZone and SDVOSB contracts, the rules are slightly different but the principle holds. If the transferee doesn't qualify, those set-aside contracts generally cannot be novated and may need to be allowed to expire or terminated.
This is critical due diligence for any acquisition. Before closing, map every contract to its award type. If a significant portion of the contract value is tied to certifications the buyer doesn't hold, you have a negotiation point on price and deal structure.
What happens if you skip the novation
If the buyer begins performing on contracts without executing a novation, the government may refuse to pay invoices submitted under the old entity's contract. It may also treat the performance as unauthorized and initiate a termination. In the worst case, it triggers a False Claims Act exposure if someone submits invoices from the new entity against contract numbers issued to the old one.
Contracting officers who discover an unnoticed acquisition sometimes work pragmatically with companies to clean it up retroactively, but that goodwill is not guaranteed and creates leverage problems.
Action steps
Before signing the LOI, pull the full contract list and categorize every active award by award type, set-aside status, and period of performance. Know exactly which contracts can and cannot be novated to your entity.
At or shortly after closing, assign one person to own the novation package. The documentation gathering alone takes weeks. File the package with the cognizant CO as soon as you have everything in order. Earlier is always better.
Keep the transferor entity active and capable of performing until the novation is executed and confirmed in writing. Don't dissolve the old entity, close its bank accounts, or reassign its key personnel to other projects until you have signed novation agreements in hand.
The federal contracting rules around acquisitions are not intuitive, and the stakes are high enough that most companies engaging in significant M&A in the GovCon space use outside counsel with specific FAR experience. If your deal involves more than a handful of contracts or any set-aside vehicles, that cost is worth it.
