Can You Sell or Assign a Government Contract?


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The simple answer is "NO" you cannot sell a government contract, or assign it to another individual or business entity, unless it goes through a process known as a "Novation"


What is a novation?


A novation is:


The governments consent to replace or transfer all duties and obligations of a government contract, with a new obligation to perform the same duties under the same contract, from one party to another party




A discussion of novations, whether simplistic or complex, should always begin with a brief understanding of the Anti-Assignment Act found at U.S.C. Title 41 Public Contracts, Chapter 1, Section 15.



The Anti-Assignment Act prohibits the transfer of a government contract to a third party. It purports that the government, in a contractual agreement, should deal solely with the party it entered into an agreement with. It also gives the government the right to terminate for default (T4D) a contractor, if an unauthorized transfer takes place, and the contractor, who the government has a contract with, fails to perform the contract duties. 



It is very important that a business that enters into a contract with the government understands the nuances of a novation. If an unauthorized transfer of a government contract takes place, without government consent, the government is not obligated to make payments to a new third party. This could obviously pose major problems for a firm, and potentially have a large effect on their business.



With all of that said, the whole point of a "novation" is to allow this transfer to legally take place. The Federal Acquisition Regulations (FAR) gives the government the ability to consent to a transfer of a government contract from one party to another. This consent is what’s known as a novation. It is the government’s responsibility to do the due diligence necessary before granting such consent, and subsequently agreeing to a novation.


The absolute very first step to a novation is to determine if it is, in fact, a novation. Often times a name change is confused with, and mistaken for, a novation, and vice versa. A name change occurs when there is a change in a firm’s legal business name and all contractual rights and obligations remain unaffected. A name change is usually a much quicker process to effectuate, from a government agencies standpoint.   A name change is simply when a firm that is currently under contract to do business with a federal government agency has simply decided to change their name.


A firm’s name change, while performing under a government contract, is not much different than an individual deciding to change their name. That individual would still be the same person with the same rights and responsibilities and obligations, but simply have a different name. That individual would still be responsible for their mortgage, their utility bills, their cell phone bill, etc. Only the name on the contract or obligation has changed.


I have found that often times, whether or not it is a name change or a novation, is unknown and misunderstood, even by the firm that has made a change. You have to ask questions to make a solid determination on whether or not it's a name change or a novation.  Questions such as; is there a new DUNS #, or entity number?  Has there been a legal transfer or a sale of assets from the old firm to the new firm? Was there a merger, a takeover, or an acquisition involved? These types of questions must be asked by the government official, answered with certainty by the contractor, and fully determined by each parties legal advisors, up front. This process alone, can take some time, research, and investigation. Until a novation has been fully executed, by the government, the firm who the government originally entered into the contract with, should continue performing under the original contract.



There are 3 parties, identified by FAR, that are involved in a novation:


Transferor = Current contractor

Transferee = New company (3rd party)

Government


According to FAR, a novation can only be completed if all 3 of the following elements exist:


1. All 3 parties, listed above, agree to the novation.

2. The novation must be found to be in the best interest of the government, and

3. All the assets are being transferred OR the entire portion of assets involved in performing the duties of the contract, are being transferred.


Whether or not it's a name change or a novation, always get your legal advisors involved in the process!


This is a simple quick basic introduction to novations. It is not intended as legal advice, but instead is a simple introduction to an area government contracting that can be difficult to understand.  Novations are an often misunderstood and complex area of government contracting, but one worthy of discussion. Hopefully this brief overview provides some quick insights.


Again, you cannot sell a government contract, or assign it to another individual or business entity, unless it goes through a process known as a "Novation"


Note: There are 3 exceptions recognized by the courts and case law, to the Anti-Assignment Act. There are also a number of cases available for study. FAR also explains the effect of stock option purchases in a novation type of situation. There are various caveats and intricacies that cannot be covered in a short post. I suggest further reading and research to understand the full breadth of insights and legalities involved in 3rd party contract assignments and government novations.


If you have further questions, please feel free to contact me and I'd be glad to help!


Click HERE to Learn How to Do Business With the Federal Government

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