Contract Novation and Change of Name Agreements
When a government contractor is sold, merged, or acquired, the existing government contracts do not automatically transfer to the new owner. A novation agreement is required to legally transfer the rights and obligations to the successor entity.
The novation process is governed by FAR 42.12 and involves all three parties: the government, the original contractor, and the successor.
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What Triggers a Novation?
A novation is triggered whenever there is a change in the legal identity of the contractor that holds a government contract. The most common triggers are:
Asset sale
Company A sells all or substantially all of its assets — including government contracts — to Company B. The original entity may dissolve or continue with different business. This is the most common novation trigger.
Merger
Two companies merge into a single entity. If the surviving entity is different from the one that held the contracts, a novation is needed. If the contractor is the surviving entity, only a name change may be required.
Acquisition / stock purchase
When Company B buys all the stock of Company A, the legal entity (Company A) still exists as a subsidiary. A novation may not be needed if Company A continues as the contracting entity. However, if Company A is later dissolved into Company B, novation becomes necessary.
Corporate reorganization
Internal restructuring that changes the legal entity holding the contracts, such as moving contracts from a division to a newly created subsidiary, or converting from an LLC to a corporation.
Importantly, a stock purchase alone — where the same legal entity continues to hold and perform the contracts — generally does not require a novation, even though the ownership has changed. The key question is whether the legal entity on the contract is changing, not whether the ownership of that entity has changed.
FAR 42.12 Requirements
FAR 42.12 sets out the requirements for processing novation and change-of-name agreements. The regulation places the burden on the contractor (and its successor) to submit a complete novation package and demonstrate that the transfer is in the government's interest.
The contracting officer — typically the Administrative Contracting Officer (ACO) from DCMA for DoD contracts — must make two determinations: first, that the successor is responsible (i.e., has the technical capability, financial resources, and organizational capacity to perform); and second, that the novation is in the government's interest.
FAR 42.1204 specifies the required documents for a novation package:
- The proposed novation agreement signed by all three parties
- Legal evidence of the transfer (merger certificate, bill of sale, asset purchase agreement)
- A list of all affected contracts with contract numbers and values
- The transferee's certified financial statements for the most recent fiscal year
- An opinion of legal counsel for the transferee on the legality of the transfer
- Evidence that the transferee has obtained all required permits, licenses, and authorizations
- A certified copy of board resolutions authorizing the transaction
Novation vs. Change-of-Name Agreement
A change-of-name agreement is simpler than a novation. It is used when the same legal entity continues to perform the contract but has changed its legal name. Common reasons include corporate rebranding, conversion from one entity type to another (LLC to Corp), or name changes resulting from a merger where the surviving entity is the contractor.
The key distinction: in a novation, the contract moves from one legal entity to a different legal entity. In a name change, the same entity keeps the contract — it just has a new name. The name change agreement requires less documentation: the signed agreement, a copy of the legal document effecting the name change (such as an amended articles of incorporation), and the list of affected contracts.
Name changes also process faster — typically 30 to 60 days — because no responsibility determination is needed. The same entity is performing; it just goes by a different name.
Practical tip
When structuring a corporate transaction, consider whether a stock purchase (which may not require novation) is preferable to an asset purchase (which will). The novation process can delay contract performance, create gaps in billing, and complicate security clearance transitions. Structuring the deal to avoid novation can save months of administrative effort.
Processing Timeline
Pre-submission coordination
2-4 weeksIdentify the responsible contracting officer, discuss the transaction, and gather preliminary guidance on required documents.
Package preparation
4-8 weeksAssemble all required documents, obtain legal opinions, compile contract lists, and prepare the draft novation agreement.
Government review
4-8 weeksThe contracting officer reviews the package, requests clarifications, and conducts the responsibility determination on the successor entity.
Negotiation and execution
2-4 weeksFinal terms are negotiated, all three parties sign the agreement, and contract modifications are issued for each affected contract.
Impact on Security Clearances
For contractors performing classified work, the security clearance implications of a novation are often more complex and time-consuming than the novation itself. A facility clearance (FCL) is granted to a specific legal entity. When that entity changes through a sale or merger, the FCL does not automatically transfer.
The successor entity must apply to the Defense Counterintelligence and Security Agency (DCSA, formerly DSS) for its own facility clearance. This involves submitting a new Standard Form 328 (Certificate Pertaining to Foreign Interests), demonstrating that the successor is not under foreign ownership, control, or influence (FOCI), and completing facility inspections.
During the transition, DCSA may issue an interim clearance or allow the successor to operate under the predecessor's clearance for a limited period. However, there is always a risk of a gap — a period where the successor does not have an active clearance and cannot perform classified work. This gap can last weeks to months and can result in contract performance delays, loss of cleared personnel, and potential default.
Individual personnel security clearances (held by employees) are generally not affected by a corporate change, provided the employees transfer to the successor and their clearances are sponsored by the new entity within the required timeframe.
Frequently Asked Questions
What is a novation agreement in government contracting?
A novation agreement is a legal instrument that transfers all rights and obligations under an existing government contract from one contractor (the transferor) to another (the transferee/successor). It requires the consent of all three parties: the government, the original contractor, and the successor. Novation is governed by FAR 42.12 and is required when a contractor sells its assets, merges with another company, or is acquired.
When is a novation required vs. a change-of-name agreement?
A novation is required when there is a change in the legal entity performing the contract — such as a sale of assets, merger, or acquisition where the original entity ceases to exist or transfers its government contracts. A change-of-name agreement is used when the contractor changes its legal name but the same legal entity continues to perform (for example, a company rebrands but does not change ownership or corporate structure).
How long does the novation process take?
The novation process typically takes 60 to 180 days from submission of a complete package to execution of the agreement. Complex novations involving classified contracts, multiple contracting offices, or concerns about the successor's responsibility can take longer. The timeline depends on the responsiveness of the Administrative Contracting Officer (ACO), the completeness of the submitted documents, and whether any responsibility issues arise.
What happens to security clearances during a novation?
Security clearances are tied to the legal entity, not the contract. When a company is sold or merged, the facility clearance (FCL) does not automatically transfer. The successor company must apply for its own FCL through the Defense Counterintelligence and Security Agency (DCSA). During the transition, a Facility Clearance Sponsorship can sometimes bridge the gap, but there is risk of a clearance gap that could interrupt classified work.
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