A government contract novation agreement is a legal transfer, by mutual consent, of the contractual rights and obligations of one party to another. Novation typically occurs when a business sells or transfers its ownership and assets to another company – or whenever there is a change in the company’s control, whether that’s through the sale of the company, the formation of a partnership, a bankruptcy, a buyout or a merger.
Novation agreements are used to ensure continuity within a government contract when there is a change in the contracting parties. It allows the new party to “step into the shoes” of the old party to the agreement.
Key things that a business should know about government contract novations
It’s important to understand that novating a government contract requires the approval of the government agency involved – and you cannot simply sell a government contract the way that some other business contracts can be sold. The government agency will ultimately decide whether to allow the contract’s novation based on its own self-interests, so it pays to know how to present your case.
Before novation, the government agency involved will assess your company’s qualifications and financial stability to ensure that the contract can be effectively performed. You can generally expect in-depth scrutiny of the company’s abilities and finances, so that’s something that you need to prepare for in advance.
This is also the time to address any necessary provisions related to performance schedules, price adjustments and other contract terms. With novation, you assume all the rights, responsibilities – and all liabilities – associated with the contract that are subject to the novation agreement. However, the novation agreement will typically address the allocation of liability between the parties – which means that’s one area of the agreement that deserves your special attention.
The language used for novating contracts is very precise, and each agency has unique steps that have to be followed exactly in order for a novation agreement to be approved. This is most definitely not a “DIY” legal process. Seeking experienced legal guidance can help you avoid costly mistakes.
