Page 12 - GovCon M&A Blog Articles

Government Contracts & Investigations Blog
When considering whether to grant a novation request, the responsible contracting officer is also required to identify and evaluate any significant organizational conflicts of interest (“OCIs”). FAR 42.1204(d). A responsible contracting officer generally will not allow the novation of a government contract to a transferee with a significant OCI unless that OCI can be avoided or mitigated. However, if the responsible contracting officer determines that a conflict of interest cannot be resolved, but nevertheless finds that it is in the best interest of the Government to approve the novation request, he or she may submit a request for higher-level approval to waive the OCI. Id.
There is no mandatory deadline for the responsible contracting officer to act upon a novation request. In our experience, the process typically requires between two and six months. Longer timeframes may be required for very large deals or if the responsible contracting officer has concerns regarding the transferee’s ability to perform.
Most novation requests are approved. Contractors have little recourse for a denial. If your request is denied, the best course of action typically is to have your attorney reach out to agency counsel to discuss whether there are any circumstances under which the Government might agree to the novation. Although a claim for denial of a novation request may be a theoretical possibility, the probability of success would be very low due to the extraordinarily broad discretion that is afforded to contracting officers in this area.
Novation Deal Terms
Novation cannot, by its nature, be a condition to closing, since formal Government approval can only be obtained after a government contract has been transferred. Instead, most purchase agreements include a provision requiring the parties to cooperate with each other to obtain the novation after closing. Such cooperation is critical. Although the FAR requires the transferee to submit the novation packet, much of the necessary information – including financial statements, corporate approvals, and other documents – will be in the transferor’s possession.
While the approval process is pending, it is common for the parties to enter into a pre-novation subcontract whereby: (1) the transferor, who the Government still regards as the entity holding the contract, subcontracts all of the work to the transferee, and (2) the transferor agrees pay the transferee for that work. Pre-novation subcontracts are more complex than traditional subcontracts in at least one important respect. They are intended to allow the subcontractor maximum control over the business it has just purchased, in effect allowing the subcontractor to act as though it were the prime contractor. Yet the prime contractor still remains in privity with the Government, meaning that affording the subcontractor complete control can create significant liability and risk for the prime. This risk is typically mitigated through a broad indemnification provision. Separately, it should be noted that a pre-novation subcontract requires the transferor to remain in existence as a legal entity, to have at least one employee with authority to bind the transferor, and to maintain its SAM registration.
It is also common for the purchase agreement to address what happens in the event the novation request is denied. Potential strategies include indemnification, a purchase price adjustment, and/or a permanent subcontract similar to the pre-novation subcontract described above.
What You Need to Know About Mergers and Acquisitions Involving Government Contractors and Their Suppliers | 09 Volume II — Obtaining Consent to Assign a Government Contract