December 2012 / The Voice of the Government Services Industry

Thinking Ahead of the Competition

ALSO INSIDE: 7 10 13 22 DYNAMICS AND THE GAMEBOARD AND FAR’S NOVATION CELEBRATING 40 COMPETITION STRATEGIC PLANNING PROCESS Is it Time to Revisit the FAR’s Novation Process? by Todd R. Overman Hogan Lovells

t has been 15 years since the novation process outlined in the Federal Acquisition Regulation I 1 (FAR) was last revised. Those revi- sions were prompted by the American Bar Association Public Contract Law Section’s 1995 request that the govern- ment ease novation requirements, and came at a time of increasing consolida- tion within the defense industry. The last several years have seen a continued trend of mergers and acquisitions involving government contractors, in many cases, increasing the need to novate contracts, or change the name of contractors in connection with an acquisition. Many contractors now view the FAR’s novation process as a costly regulatory burden, which takes too long and imposes unnecessary re- quirements. In addition, contractors often cannot predict what will be a contractor from transferring gov- submit a written novation request to required of them because the unifor- ernment contracts to a third party.2 the responsible contracting officer in mity the FAR envisions is jettisoned Nonetheless, the government may accordance with the procedures in by agencies and contracting officers consent to the transfer of govern- FAR Subpart 42.12 and by supplying who impose demands not specified ment contracts from a contractor to the extensive set of documents speci- in the FAR or in any publicly avail- a successor-in-interest when it is in fied in the FAR. The FAR also permits able agency guidance. Thus, perhaps the government’s interest and when the “responsible contracting officer” the time has come again to revisit the all assets necessary to perform the reviewing the novation package to FAR’s novation process. contract have transferred to the third request any other relevant informa- party. When a contractor wants the tion to assist in their evaluation of I. The Current Novation Process government to recognize a successor- the request. FAR 42.1202 identifies The Anti-Assignment Act prohibits in-interest, the contractor must the standards for determining how to continued on page 15

1 See 62 Fed. Reg. 64,934 (Dec. 9, 1997). 2 41 U.S.C. § 15.

Professional Services Council Service Contractor / December 2012 / 13 from page 15 comment process or at least be pub- GSAM states that contracting officers licly available. To the extent agencies should process a novation request once are encountering transactions, such as Contractors are a “complete package” is received. corporate conversions, that do not fit sometimes given This decentralizing of the nova- squarely within the existing regulatory tion process is problematic for two process, they should consider provid- primary reasons. First, agencies vary ing written guidance to contractors on differing or in the requirements they impose and what will be expected of them to rec- the length of time it takes them to ognize the successor entity. Under the inconsistent novate contracts. This not only cre- current system of approving novations ates uncertainty for contractors, but in after the transfer has occurred, each of directions about how situations where one agency approves these steps will facilitate the agency’s to manage novation a novation request before the other, review and accelerate timely novation the government is sending an incon- execution. requests, thereby sistent message on who the contractor increasing the cost of record is for the transferred assets. B. Decentralizing of the Second, agencies and COs vary in Novation Process. and frustration. their familiarity with the novation process and associated requirements. The FAR centralizes the novation Accordingly, contractors are some- process by making the administrative to require that it be the responsible times given differing or inconsistent contracting officer (ACO) or the CO agency to novate all GSA Federal Sup- directions about how to manage nova- with the largest unsettled balance of ply Schedule contracts. However, for tion requests, thereby increasing the contracts the single responsible official contractors holding multiple Sched- cost and frustration associated with for processing and executing all of the ules, the General Services Adminis- the novation process to both agencies novation(s) and subsequently modify- tration Acquisition Manual (GSAM) and contractors. ing all of the affected contracts. Yet does not provide any guidance as to Novations should be handled in a contractors routinely confront federal which GSA contracting officer will uniform manner by agency officials agencies and COs who want to indi- be responsible for processing a nova- with expertise in the novation process. vidually novate contracts. For in- tion request. Moreover, contrary to Officials from DCMA, GSA, and oth- stance, it is common practice for GSA the explicit provisions in the FAR, the er federal agencies should create a no-

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16 / Service Contractor / December 2012 Professional Services Council vation working group, with industry which the government has 30 days to input, to address how to most effec- review an acquisition that could result tively and efficiently process novation To eliminate the in foreign control of a company doing requests. One possible solution could business in the U.S., with an added be to supplement FAR 42.1202 with business uncertainty and 45-day review period if needed. In more specific instructions as to which potential administrative the context of an acquisition requir- agencies are responsible for handling ing a novation, a contractor could file novation requests of specific types of headaches, the novation a novation request upon signing the contracts. For instance, there should asset purchase agreement and build be more transparency as to the role of decision-making the time for novation review into the GSA vs. DCMA and which contracts process should be overall closing process which routinely and associated orders each agency has includes gathering other material authority over. Similarly, there should consents, and potentially other regula- be more explicit instructions for how time-limited. tory requirements, such as anti-trust contractors should approach agencies clearance. The responsible contracting with unique authority over contract- officer could ask for additional infor- ing matters (e.g., FAA). complexity after the assets are trans- mation within the initial 30 days, and ferred, but before the government ap- if necessary, extend to an additional C. Timeline for Novation proves a novation. As a result, a seller review period, to coordinate with Execution. and buyer often execute a subcontract other agencies or confirm that all as- pending novation so that the buyer sets necessary to perform the contracts In 1995, the FAR Council was can perform the contracts and get paid will be transferred to the transferee informed about the lengthy period for the work until the contracts are upon the closing of the transaction. of time to complete the novation novated. These interim arrangements Once approved, the transaction would process. Seventeen years later, the often drag on for years and can create close and the parties would execute problem persists and perhaps has been confusion for government customers. the novation agreement. There are exacerbated with the volume of nova- To eliminate the business uncer- certainly other models to consider, tion requests and limited government tainty and potential administrative but the original concern regarding resources. Contractors may wait a headaches, the novation decision-mak- the need for “prompt review” remains year, two years, or even longer to have ing process should be time-limited. an issue, and alternatives should be contracts novated. And because the One potential solution would be to explored to provide a more concrete FAR requires contractors to submit supplement the existing process with approval timeline. post-transfer documents evidencing an express commitment by the respon- the transfer of assets, most contractors sible contracting officer to complete Todd R. Overman is a partner in the wait until after the transaction closes the novation review within 75 days of Government Contracts Practice Group before submitting a novation request submission of all available information at Hogan Lovells US LLP, whose prac- and government officials are reluctant by the transferor and transferee. The tice includes advising on mergers and to approve a novation until most, Committee on Foreign Investment acquisitions in the aerospace, defense if not all, of those documents are in the United States (CFIUS) pro- and government services industries. provided. This creates uncertainty and cess could serve as a useful model, in

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Professional Services Council Service Contractor / December 2012 / 17