Federal contracts are written between the government and a named contractor — a specific legal entity, identified by a specific UEI / CAGE code, registered in SAM.gov. Most of the time, the contractor that signs the contract is the contractor that performs the contract. But sometimes, between award and completion, the contractor's legal identity changes. The company is sold. A new entity is formed. Assets and obligations are transferred. When that happens, the federal contract has to follow the change — through a formal process called novation.
This article explains what novation is, when it is appropriate, what FAR Subpart 42.12 actually requires, and what the contracting officer's review involves. It also discusses how veteran-owned firms like A5N Prime approach contract continuity when novation is the right path.
What Is a Novation?
A novation in federal contracting is the formal substitution of one contractor for another on an existing federal contract, by mutual agreement of the original contractor, the successor in interest, and the government. Once novated, the government accepts the successor as if the successor had been the original contractor from the date of award, and the original contractor is released from further obligation on the contract.
Novation is governed primarily by FAR Subpart 42.12 — Novation and Change-of-Name Agreements. The Federal Acquisition Regulation distinguishes between two related but different mechanisms:
- Novation Agreement (FAR 42.1204). Used when there is a transfer of assets from one entity to another, accompanied by a transfer of the contract. The successor is a different legal entity from the original contractor.
- Change-of-Name Agreement (FAR 42.1205). Used when the contractor changes its name but remains the same legal entity. The taxpayer ID, the ownership, and the corporate structure are all unchanged — only the name is different.
The two mechanisms have different documentation requirements and very different government scrutiny levels. Change-of-name is largely administrative. Novation is a substantive review.
When Is Novation Appropriate?
FAR 42.1204 lists the circumstances under which a novation can be recognized:
- Sale of assets — the original contractor sells substantially all of the assets associated with the contract to the successor.
- Merger or consolidation — the original contractor merges with or is consolidated into the successor.
- Incorporation of an unincorporated business — the sole proprietor or partnership transfers the business to a newly incorporated entity.
- Other transactions where the contract is transferred along with the underlying business.
Novation is not appropriate for:
- Pure stock transfers, where the corporate entity that holds the contract remains the same but ownership changes hands. In that case, the contract stays with the original entity; no novation is needed (though notification of ownership change may be required for SDVOSB or other set-aside contracts).
- Re-assignment of the contract to a third party for performance, with no transfer of underlying business. The Anti-Assignment Act (41 U.S.C. § 6305) prohibits this.
What the Novation Package Contains
A complete novation package, per FAR 42.1204(e) and (f), typically includes:
- The proposed Novation Agreement itself, in the format prescribed by FAR 42.1204(i).
- Documentation of the underlying transaction — the asset purchase agreement, bill of sale, articles of merger, or other instrument that transfers the business.
- Authenticated copies of the successor's corporate documents — articles of incorporation or organization, certificates of good standing, operating agreements.
- Authority documents — corporate resolutions, board minutes, or other evidence that the signers on both sides are authorized.
- A list of all federal contracts affected by the transfer.
- Evidence that the successor has the capacity to perform — financial statements, capability narrative, SAM.gov registration in the successor's name with current representations and certifications.
- If the contract is set aside for SDVOSB, WOSB, HUBZone, or another small business category — evidence that the successor maintains the qualifying status. For SDVOSB contracts, this means the successor must hold its own SDVOSB certification through SBA VetCert.
- A Certificate of Good Standing for the successor from the state of incorporation.
The Contracting Officer's Review
Under FAR 42.1203, the responsible contracting officer is the one assigned cognizance over the affected contracts. The CO reviews the novation package to confirm that:
- The transfer of assets is genuine and complete.
- The successor has the capacity to perform — financially, operationally, and from a compliance standpoint.
- Any set-aside status is maintained.
- The novation is in the government's interest. The CO is not required to approve novation if the government's interests would be harmed by the substitution.
Approval is not automatic. The CO can require additional documentation, can require performance guarantees from the successor, and in some cases can decline to recognize the novation — which would force the original contractor to continue performance or terminate. The review timeline varies; complex novations with multiple affected contracts can take 60-90 days or longer.
Set-Aside Continuity
One of the most common novation scenarios for veteran-owned firms is the transfer of an SDVOSB contract from one SDVOSB entity to another. The contract was won under SDVOSB set-aside; the successor must also be an SDVOSB to preserve the set-aside basis. If the successor cannot maintain SDVOSB status, the CO has limited options — typically termination for convenience and recompete.
For SDVOSB-to-SDVOSB novations, the successor's SBA VetCert certification must be issued and in effect before the novation is approved. Pending applications are not enough. Firms planning a novation should sequence the SBA certification timeline carefully against the contracting officer review timeline.
Practical Considerations for the Successor
The successor in a novation takes on the full obligations of the contract, including any past performance, any open modifications, any outstanding deliverables, and any latent liabilities (warranty exposure, environmental remediation obligations, audit findings). The successor should perform real diligence before signing the novation agreement, ideally with the involvement of counsel familiar with federal contracts.
Specifically, the successor should verify:
- The current performance status of each affected contract — open deliverables, schedule status, CPARS ratings.
- Any open modifications or change orders that affect scope, price, or schedule.
- Any pending or threatened claims, disputes, or audits.
- The current invoicing and payment status — accounts receivable, retainage, withheld amounts.
- Subcontractor and supplier relationships that will need to transfer or be reassigned.
- Surety relationships for bonded work — bonds typically need to be re-issued in the successor's name.
Why This Matters for A5N Prime
A5N Prime LLC has experience with contract continuity, including the transfer of recurring federal grounds work between affiliated SDVOSB entities. The lesson from that experience: novation is a substantive process, not an administrative one. The contracting officer is doing real review, the government's interest is at the center of the review, and the firm that wants the novation approved needs to bring a clean, well-documented package and to demonstrate that performance will continue uninterrupted.
Done well, novation preserves multi-year contract value and government relationships across an organizational change. Done poorly, it creates schedule risk, payment risk, and reputational risk that can take years to repair.
For more on how A5N Prime handles contract continuity and federal performance, see our capabilities, about page, and past performance portfolio. To discuss federal contract continuity, novation, or teaming, contact us.