GAO Confirms that Novations Work: Agency Properly Recognized Buyer of Contract as Awardee

The Anti-Assignment Act (41 U.S.C. § 6305) prohibits the transfer of a government contract or interest in a government contract to a third party. However, government agencies recognized that contractors are on occasion bought, sold, merged, or simply encounter circumstances upon which it becomes desirable or necessary for them to assign a government contract to a third party.  

To address this issue, the Federal Acquisition Regulation (FAR) provides for a novation process to give contractors a method to transfer government contracts and not run afoul of the prohibitions in the Anti-Assignment Act. The ultimate goal of the novation process is to successfully transfer the contract and have the government recognize a new contractor as the successor-in-interest to the transferred contract.

In practice however, contractors seeking novation of a government contract understand the uncertainty of the process. First, the government is not required to enter into a novation agreement when requested by a contractor, but may do so in the contracting officer’s discretion, if the government finds the novation to be in the government’s “best interest.” FAR 42.1204. Despite these uncertainties, contractors can successfully novate a government contract; if they follow the procedures and then communicate that process to an agency evaluating proposals. In a recent GAO decision, a contractor was successful in novating a contract and sustained a challenge to an agency recognizing the transferee as  the successor-in-interest to that contract. The case is ICI Services Corporation, B-418255.5; B-418255.6 (October 13, 2021).

The relevant facts of this case are as follows:

The Department of the Navy originally issued an RFP  to contractors holding contracts for the Navy’s SeaPort Next Generation (SeaPort-NxG). The RFP sought contractors to provide support to one of the Navy’s major program offices. Alion–specifically, its Naval Systems Business Unit (NSBU)–submitted a timely proposal responding to the RFP. Alion’s NSBU consisted of various business units, all of which supported its maritime-related customers.

Prior to submitting its proposal, Alion entered into an agreement with Serco, Inc., another SeaPort-NxG contract holder, where Serco would acquire, among other things, Alion’s NSBU. In its proposal, Alion specifically informed the Navy about the agreement with Serco, that the corporate transaction contemplated by the agreement was expected to close later in the year, and that the resources identified in its proposal would remain the same after the transaction.

Alion also notified the Navy that their proposal anticipated the transaction with Serco and was structured such that Serco’s acquisition of Alion’s NSBU would not impact the performance of the resulting task order. The proposal also provided that all assets and personnel of Alion’s NSBU, including all those required to perform the task order, would be transferred as part of the transaction. Upon completion of the Serco-Alion transaction, Serco did in fact acquire “all NSBU employees, including all SSBU employees proposed for the PMS 317 task order; all NSBU/SSBU facilities; other NSBU assets (e.g., proposals, leases, licenses); and other federal contracts awarded to Alion’s NSBU.” After the transaction, Alion remained in existence as a separate entity and retained its SeaPort-NxG contract.  

The Navy subsequently entered into discussions with all offerors regarding their PMS 317 proposals. Because the Alion NSBU was now a part of Serco, the agency’s discussions were held with Serco. In the discussions, the Navy sought, and Serco provided detailed information regarding the Serco-Alion transaction so the Navy could determine whether Serco was a complete successor-in-interest to Alion for purposes of the submitted proposal.

Serco confirmed that, “with one minor exception, all assets and personnel initially proposed by Alion had been acquired by Serco and would continue to be used by Serco to perform the PMS 317 task order.” Serco also provided information showing that as a result of the Serco-Alion transaction, and contract novations, Serco “owns” or is solely performing the contracts and task orders included within the past performance section of its PMS 317 proposal.

After assessing the information, the contracting officer determined that: “(1) Serco had acquired the entirety of the business entity that had submitted Alion’s proposal (including the PMS 317 proposal itself) which was proposed to perform under Alion’s proposal; and (2) Serco’s purchase of Alion’s NSBU resulted in all relevant PMS 317 proposal assets–i.e., employees, leases/subleases, ‘any and all’ other SSBU resources needed to perform the task order–being transferred from Alion to Serco.” “

Based this information, the Navy concluded that Serco was not only the  successor[-]in[-]interest to the Alion NSBU which was identified to perform under Alion’s initial proposal, but was also the successor[-]in[-]interest to the proposal previously submitted by Alion.” The Navy substituted Alion for Serco as an offeror under the RFP and ultimately awarded Serco the task order. 

After its debriefing, ICI filed a protest with the GAO raising several issues challenging the Navy’s  award of the task order to Alion. Among the issues in the protest, ICI argued that the Navy failed to properly evaluate Serco’s eligibility for award as a corporate successor-in-interest to Alion. After reviewing ICI’s assertions, the GAO found no basis sustain ICI’s argument. In explaining the basis of its decision the GAO stated:

As an initial matter, not only was Serco’s acquisition of that portion of Alion imminent and certain–in fact, the transaction was completed prior to the agency’s award decision–but the Navy was aware of the transaction and fully considered it as part of the agency’s evaluation. Further, the record reflects the Navy reasonably found Serco to be the complete successor-in-interest to Alion as a result of Serco’s acquisition of the entirety of the NSBU, which was the business entity that had submitted Alion’s proposal and which was (with the one noted exception) proposed to perform under the proposal.

In its opinion, the GAO expressed that in reaching its decision it focused on whether or not “it was reasonable for an agency to reach conclusions that it did regarding the corporate transaction. The GAO determined that an agency’s decision on an award is not improper where an acquisition or restructuring transaction does not have a “significant impact on cost or technical impact on contract performance. 

In applying its analysis to this matter, GAO found that the transfer of the NSBU from Alion to Serco is the type of transaction for which GAO has permitted the assignment of proposals: “a sale that  involves an ‘entire portion of a business embraced by the proposal.’” GAO also determined that once Serco was found to be the successor-in-interest to Alion’s NSBU and Alion’s proposal, the Navy’s decision to allow Serco as Alion’s substitute as an offeror under the RFP,  and subsequently award of the task order to Serco, was reasonable. Key factors in the GAO’s decision was that 1) the Navy was aware of the particular transaction, 2) the Navy determined that the transaction was imminent and certain, and 3) that the transaction transferred the “entire portion of a business embraced by the proposal.”

Basically, “ICI failed to demonstrate that Serco’s acquisition of the NSBU–completed before the submissions of offerors’ FPRs–would have resulted in the task order being performed in a manner materially different from what was proposed by Alion.”

Also, as part of its argument ICI asserted that Serco was not a complete successor-in-interest to Alion’s proposal because Serco did not acquire Alion’s SeaPort-NxG contract, Alion did not transfer all of its assets included in its proposal. GAO disagreed with ICI on this point and stated that ICI in its argument “improperly conflates the standard required for a contract novation with the standard we have applied for determining a proper successor-in-interest to a business entity which submitted the initial proposal.”

The standard for the government to novate a contract is that “the entire portion of the assets involved in performing the contract” must be transferred to a third party.  [emphasis added]. With respect to determining a proper successor-in-interest to an entity submitting a proposal, GAO has found that the transfer of rights and obligations of the entity submitting the proposal is permissible in situations involving “the sale of an entire portion of a business embraced by the proposal.” In other words, GAO was not going to second-guess the decision to allow the novation.

In this case, the GAO determined that the Navy was reasonable in assessment that Alion did, in fact, transfer to Serco the entire portion of assets that would be involved in performing the task order contemplated by the RFP for purposes of the novation. The GAO determined that the Navy was also reasonable in its decision that the Alion-Serco transaction resulted in a transfer of the entire portion of a business embraced by Alion’s proposal.

There a couple of takeaways from this case. Although the ultimate goal of a novation is for the government to recognize a contractor as a successor-in-interest to a government contract, the FAR novation rules apply only to whether the government will allow a different contractor to perform. The government uses different criteria to then determine if a third-party buyer will be recognized as a successor-in-interest with respect to evaluating bid proposals.

This case also demonstrates that, despite the difficulties in obtaining agency approval for novation of a government contract, if the procedure is performed correctly it can be successfully accomplished and withstand a bid protest.

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