When a government contractor changes hands, two rulebooks start running on separate clocks. FAR 42.1204 decides whether the Government recognizes the buyer as the party it now holds a contract with. The Small Business Administration decides whether the acquired company still counts as small — and that rule moved. The recertification provision most M&A guides cite at 13 CFR 121.404(g) no longer lives there. It lives at 13 CFR 125.12, and it carries a 30-day clock that starts the day control changes.
Background
A novation agreement is the Government's formal recognition of a successor in interest. FAR 42.1204(a) makes one appropriate when a third party acquires "all the contractor's assets" or "the entire portion of the assets involved in performing the contract" — covering asset sales with a provision for assuming liabilities, transfers incident to a merger or consolidation, and the incorporation of a proprietorship or partnership.
What it does not cover is a stock purchase. FAR 42.1204(b) carves out the case where ownership changes hands but no legal change occurs in the contracting party and the same contractor continues to control the assets and perform the work. No novation is necessary, though the regulation acknowledges there may be ownership-change issues that should appropriately be addressed in a formal agreement between the contractor and the Government, pointing to 42.1203(e). Asset deal means novation; stock deal generally does not.
The Government's leverage explains why deal counsel structures around that line. Under FAR 42.1204(c), when it is in the Government's interest not to concur in a transfer, "the original contractor remains under contractual obligation to the Government, and the contract may be terminated for reasons of default, should the original contractor not perform." Approval is discretionary, and a refusal leaves the seller — who may have already banked the purchase price — on the hook for performance.
Key Details
FAR 42.1204(e) sets out what opens the file: three signed copies of the proposed novation agreement, plus one copy each of a document describing the transaction, such as the purchase and sale agreement; a list of every affected Government contract with its number and type, the contracting office's name and address, the total amended value, and the remaining unpaid balance; evidence that the transferee can perform; and whatever else the contracting officer asks for.
FAR 42.1204(f) adds a second tranche: an authenticated instrument of transfer, such as a bill of sale or certificate of merger; certified board resolutions authorizing the transfer; certified stockholder minutes approving it; the transferee's authenticated incorporation documents if newly formed; an opinion of legal counsel that the transfer was properly effected, and on what date; audited balance sheets from before and after the transfer; evidence of security-clearance compliance; and consent of sureties on any bonded contract.
The list is not immovable. FAR 42.1204(g) lets the contracting officer modify it where the Government already obtained the documents during pre-merger review, or where an alternative formulation adequately protects the Government's interests. Under FAR 42.1203, the responsible contracting officer notifies every affected contract administration and contracting office, sends the list of affected contracts, and asks for comments within 30 days. Government counsel must review the agreement for legal sufficiency before execution. One sell-side detail hides in 42.1203(e): any separate agreement between transferor and transferee about who assumes which liabilities — incentive compensation plans, cost accounting standards noncompliances, environmental cleanup, final overhead costs — should be referenced specifically in the novation agreement.
What It Means for Contractors
The trap sits on the small-business side, and it is a citation trap. Pull up 13 CFR 121.404 today and paragraph (g) reads "Subcontracting" — when a concern must qualify as small for a subcontract, nothing more. Paragraph (i), headed "Recertification," sends you elsewhere: "See § 125.12 for information on recertification of size and status, and the effect of recertification." A diligence checklist still pointing to 121.404(g) is citing the wrong provision.
At the current address, 13 CFR 125.12(a) requires recertification of size and small business program status — 8(a), HUBZone, WOSB/EDWOSB, or SDVOSB — "within 30 calendar days of a merger, acquisition, or sale of or by a concern or an affiliate of the concern, which results in a change in controlling interest." Thirty days from the change in control, not from the novation, and the trigger reaches transactions involving an affiliate, not just the contracting entity.
Timing around a pending award is where deals get expensive. Under 13 CFR 125.12(e)(2)(i), if the events triggering a disqualifying recertification occur within 180 days after the date of an offer but prior to award, the concern is ineligible for that pending set-aside or reserved award. If they occur more than 180 days after the offer but before award, the concern stays eligible for a pending single award or reserve, and the award counts toward small business goaling for up to five years from the date of award — with one exception. Where the underlying award is a multiple-award set-aside or reserve, the concern is ineligible, because it would not be eligible for the orders set aside underneath it. That makes the offer date a diligence item, not a footnote.
Two provisions shape the post-closing picture. Under 13 CFR 125.12(e)(1), a concern with a qualifying recertification is generally considered small for up to five years from the recertification date and remains eligible for set-aside or reserved awards, absent a later disqualifying recertification. And 13 CFR 125.12(a)(3) confirms that recertification does not rewrite the award: limitations on subcontracting, non-manufacturer requirements, and subcontracting-plan obligations in effect at award survive for its life. The contracting officer may, however, require a subcontracting plan where a prime goes from small to other-than-small — a real cost the buyer should price.
Long-duration vehicles carry their own schedule. Under 13 CFR 125.12(b), on contracts running longer than five years, recertify no more than 120 days before the end of the fifth year, and again no more than 120 days before each later option is exercised. Tribal entities get a narrow carve-out at 13 CFR 125.12(d): no recertification when ownership of a concern at least 51 percent owned by an Indian Tribe, Alaska Native Corporation, or Community Development Corporation is restructured, so long as the ultimate owner is unchanged.
Practical sequencing for a seller: build the FAR 42.1204(e) contract list before signing, because assembling contract numbers, values, and unpaid balances across a portfolio takes longer than anyone budgets. Start the counsel opinion and the audited balance sheets early — they gate the file. And put the 30-day recertification on the closing checklist next to the novation package. The two clocks run in parallel, and only one waits on a contracting officer.
