Why a contract does not simply move with a deal
Under FAR 42.1204, federal law prohibits transfer of Government contracts from the contractor to a third party 1. The Government may, when in its interest, recognize a third party as the successor in interest to a Government contract 2, including when the third party's interest arises out of the transfer of the entire portion of the assets involved in performing the contract 3.
A novation agreement is unnecessary when there is a change in the ownership of a contractor as a result of a stock purchase, with no legal change in the contracting party, and when that contracting party remains in control of the assets and is the party performing the contract 4. Even so, whether there is a purchase of assets or a stock purchase, there may be issues related to the change in ownership that should be addressed in a formal agreement between the contractor and the Government 5.
When the Government does not concur in a transfer, the original contractor remains under contractual obligation to the Government, and the contract may be terminated for default should the original contractor not perform 6.
What the Government will look at
Among the documents a contractor submits with a request to recognize a successor is evidence of the transferee's capability to perform 7. When considering it, the responsible contracting officer shall identify and evaluate any significant organizational conflicts of interest in accordance with FAR subpart 9.5 8.
Size consequences follow too. FAR 52.219-28 calls for a size rerepresentation within 30 days after execution of a novation agreement 9, or within 30 days after a merger or acquisition that does not require a novation 10, and size standards count a concern together with its affiliates 11.
Diligence: exclusions, conduct and conflicts first
Agencies shall not solicit offers from, award contracts to, or consent to subcontracts with excluded contractors 12. The fraudulent, criminal or other seriously improper conduct of any officer, director, shareholder, partner, employee or other individual associated with a contractor may be imputed to the contractor 13, and the conduct of one contractor participating in a joint venture or similar arrangement may be imputed to the other participants 14.
Where FAR 52.203-13's internal control system applies, it includes reasonable efforts not to include as a principal anyone whom due diligence would have exposed as having engaged in conduct that conflicts with the company's code 15. An acquisition can bring new principals into the company overnight.
The target's record also travels into proposals: evaluations should take into account past performance information regarding predecessor companies, key personnel who have relevant experience, or subcontractors that will perform major or critical aspects of the requirement 16. Bids2Bank's past-performance library marks a record verified only when the award's recorded recipient is your own UEI 17, so a target's awards under its own UEI do not show as verified for yours.
Bids2Bank's vendor check applies the exclusion rule to teaming partners: approval is refused while a partner on the pursuit is excluded in SAM.gov 18.
Worked example. Company G agrees to buy the assets of Contractor H, which holds four agency contracts and a teaming role on a fifth. Diligence finds that one of H's principals is listed as excluded, and that H's largest contract creates a conflict with work G already performs for the same customer. G restructures: the excluded principal leaves before closing, the conflicted contract is excluded from the purchase, and G files its novation requests for the other three contracts with a list of affected contracts and evidence of its capability to perform.
Review your past-performance library →
Indented paragraphs are invented worked examples. Tool links open Bids2Bank and need a free account.