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CAN YOU SELL A GOVERNMENT CONTRACT: ASSIGNMENT, NOVATION, CHANGE OF NAME AND ASSIGNMENT OF CLAIMS

Contractors frequently ask if they can sell or transfer (assign) their government contract to another company.  The sale or assignment of a purely commercial contract is very common and well recognized at law. But for a Government contract, there are special rules.  Although a transfer can be made through a process known as “novation,” the contract can be annulled if the rules are not carefully followed.

Commercial Contracts May Generally Be Sold: Generally, commercial contracts can be sold or transferred to a third party.  Indeed, Article 2-210 of the Uniform Commercial Code (“UCC”) explicitly permits this, by stating:

§ 2-210. Delegation of Performance; Assignment of Rights.

(1) A party may perform his duty through a delegate unless otherwise agreed [].

(2) Unless otherwise agreed all rights of either seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on him by his contract [].

(4) An assignment of “the contract” or of “all my rights under the contract” or an assignment in similar general terms is an assignment of rights and unless the language or the circumstances (as in an assignment for security) indicate the contrary, it is a delegation of performance of the duties of the assignor and its acceptance by the assignee constitutes a promise by him to perform those duties. [].

UCC Article 2 has been adopted by 49 states and the District of Columbia.  Only Louisiana, which has a civil law (not an English Common Law) system, has declined to adopt it.

Government Contracts May Not Be Sold Or Assigned, Except through Novation: The simple answer to the question of the assignment or sale of a government contract, is “NO.”  U.S. law prohibits it, and states that any attempted transfer or assignment will annul the contract:

General Prohibition on Transfer of Contracts . The party to whom the Federal Government gives a contract or order may not transfer the contract or order, or any interest in the contract or order, to another party. A purported transfer in violation of this subsection annuls the contract or order so far as the Federal Government is concerned, except that all rights of action for breach of contract are reserved to the Federal Government.

41 U.S.C. § 6305, known as the “Contracts Act.”  This prohibition, which is repeated in FAR 42.1204, protects the government from secret asssignments, prevents possible multiple claims and makes unnecessary the investigation of assignments. See American Gov’t Properties and Houma SSA v. United States, Fed. Cl. No. 09-153 (Aug. 28, 2014).  There are only two exceptions: (1) where the Government waives the prohbition by giving clear assent to the assignment; and (2) where the assignment occurs by operation of law (e.g., where there was corporate success through merger or consolidation).  In American Gov’t Properties, the Court held that an assignment of the contract violated the Contracts Act since there was no exception, that the contract had been annulled (voided), and that therefore, the Court had no jurisdiction because there was no contract and the Contract Disputes Act did not apply.

Furthermore, as readers know, only responsible contractors may receive contract awards, and when a contractor sells or transfer a contract, unless special provision are made for government review, the Government will have no assurance that the buyer is responsible.

Novation-the proper way to transfer a Government contract:  The FAR does provide for transfer of a contract to a third party through a process called “novation” (substitution of a new contract for an existing one, between different parties).  The government has the option (but is not required) to recognize a third party as a “successor in interest” to a Government contract only when there is a transfer of: (1) all the contractor’s assets; or (2) the entire portion of the contractor’s assets involved in performing the contract. FAR 42.1204(a).

In order to effect a novation, the contractor must carefully following the procedure in FAR 42.1204, by submitting copies of a proposed novation agreement, along with detailed information on all affected contracts, evidence of the transferee’s capability to perform, and any other relevant information requested by the contracting officer.  Certain specific documents must also be submitted (bill or sale or merger; minutes of boards of directors authorizing the transfer, copies of corporate articles, opinion of legal counsel, balance sheets, evidence of security clearances, if required, consent of sureties).  Even more important, the novation agreement must provide that:

(1)   the transferee assumes all the transferor’s obligations under the contract, and is receiving all the assets devoted to the contract

(2)   the transferor guarantees performance of the contract by the transferee (a bond may be used)

(3)   the transferor waives all rights under the government contract

(4)   Both transferor and transferee must comply with all Federal laws.

A sample novation agreement is included in the FAR, and should be used for all novations. FAR 42.1204.  REMEMBER: The novation will not take effect until approved by the Contracting Officer and the Contract is modified, in writing, to acknowledge and accept the novation.  Until that happens, the transferor must continue to perform, and all payments will be made to the contractor whose name appears on the contract.

Change of Name Only: If only a change of the contractor’s name is involved and the Government’s and contractor’s rights and obligations remain unaffected, the contractor may simply forward to the contracting officer copies of the Change of Name Agreement, a list of contracts, the State document effecting the name change, and the opinion of legal counsel.  FAR 42.1205.  Once again, this section of the FAR includes a simple “Change of Name Agreement” which can be used.  Again, this should be memorialized in a modification to the contract.

You Cannot Sell Your Government Contract Invoices:  In the commercial world, invoices can be sold or “factored” to get immediate cash flow.  A financial factor may buy your invoiced receivables at a discount.  Collecting from the customer then becomes the factor’s responsibility. You cannot “sell” or factor your government contract invoices to a third party, because the Contracts Act states “ [the contractor] may not transfer the contract or order, or any interest in the contract or order, to another party”  41 U.S.C. § 6305(a).  But there is another lawful method, outlined in the Contracts Act, and 31 U.S.C. § 3727, the Assignment of Claims Act of 1940, that permits something similar, but not identical.

Under the Assignment of Claims Act, a Government contractor may obtain financing for its contract by borrowing money from a bank or financial institution and then assigning moneys due or to become due under a contract if the assignment is made to a that bank or financial institution, the contract does not prohibit the assignment, and generally, the assignment covers all unpaid amounts payable, is made to only one party, and is not subject to any further assignment.  There is a specific procedure in FAR 32.805, which requires formal submission of the Notice of Assignment to the Contracting Officer, and an acknowledgement of that instrument of assignment by the Contracting Officer.  Once acknowledged, the assignment takes effect.

The contract must then be modified, and all future payments of invoices must be made only to the assignee.  If the Government erroneously pays the contractor, the bank or financing institution may bring a suit against the government to recover any contract payment made to the contractor. Produce Factors Corp. v. United States, 467 F.2d 1343, 1349 (Ct.Cl.1972). An erroneous payment made by the Government is no bar to the rightful claimant, the assignee bank. Central Nat’l Bank v. United States, 91 F.Supp. 738, 741 (Ct.Cl.1950) (citation omitted).

Summary:  While commercial contracts may be sold or assigned to a third party, Government Contracts may not be.   However, government contracts may be transferred through novation, where the government gives its formal written approval after submission of specific information and assurances.  A simple change of the contractor’s name does not require a novation.  Finally, although government contractors may not “sell” their invoices, they may obtain loans from financial institutions and assign the proceeds of the contract to the financial institution granting the loan.

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• What the Federal Assignment of Claims Act Means for Government Contractors

The Federal Assignment of Claims Act defines how lenders or factoring companies can arrange for payments when federal contracts are part of the accounts receivable or loans made to the contractor. Essentially, if the borrower, or the contractor, uses the business's accounts receivable as collateral, then the Federal Assignment of Claims Act guides how the lender may control the collateral.

The Federal Assignment of Claims Act has been a law since the late 1930s, and it was designed to provide a roadmap for contractors working with the government to finance their projects when working on federal or government contracts. Further guiding the assignment process is the Uniform Commercial Code (UCC), which is a set of standards adopted by most of the United States.

A business that purchases goods or services may be required to send payments to a factoring company if the factoring company sends out a notice that the business’s accounts have been sold to the factoring company. Interestingly, a business may receive a Notice of Assignment form an invoice factoring company with which the business had no prior financial relationship.

How Factoring Helps Contractors Bid on Government Contracts

Government contracts represent a competitive arena where making the right bid can make all the difference in securing a contract or being passed over for another company. A contractor must research the costs of the project and ensure that his or her business can complete the project with the amount of money offered for the project's bid.

With the assistance of a government contract receivables financing company , virtually any government contracting company may bid with confidence on a project. Contractors who provide goods or services for fleet vehicles, disposable goods, and legal assistance may benefit as well as companies that provide technical assistance or which are involved in the transport of goods.

When a business must work under federal regulations and the Federal Assignment of Claims Act. There are a variety of benefits offered by government contract receivable financing. Some of those benefits include AR financing, spot factoring , and bridge financing. A contractor may also seek out same-day funding or PO financing , and enjoy industry-low rates and a quick invoice process.

Obtaining a Lucrative Government Contract

One of the reasons a contractor may seek out work with the government is the excellent pay and the reliability of a steady working relationship with the government. The federal government and the local governments around the country represent the largest employer in the United States, and companies that can secure successive government contracts may enjoy a lucrative income with the federal government as their only client.

In addition to providing the necessary funds to begin work on a government contract, the cash from government contract receivables financing may allow a company to hire additional employees for the project, expand the business, and take on additional contracts. The contractor can also buy additional equipment and ensure all invoices are paid on time.

Government Contractor Financing Solutions

Becoming a government contractor can mean that payment isn't always right around the corner. It's common for the government to offer lengthy payment cycles. A contract that requires a lengthy wait for payment may mean a contractor cannot bid on the project because of a lack of current operating cash. Government contract receivables can eliminate this problem and ensure that you can get paid.

Security Business Capital can help you work through all of your government contracting financing needs. Contact us today for a quote!

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TOPN: Assignment of Claims Act of 1940

Laws acquire popular names as they make their way through Congress. Sometimes these names say something about the substance of the law (as with the '2002 Winter Olympic Commemorative Coin Act'). Sometimes they are a way of recognizing or honoring the sponsor or creator of a particular law (as with the 'Taft-Hartley Act'). And sometimes they are meant to garner political support for a law by giving it a catchy name (as with the 'USA Patriot Act' or the 'Take Pride in America Act') or by invoking public outrage or sympathy (as with any number of laws named for victims of crimes). History books, newspapers, and other sources use the popular name to refer to these laws. Why can't these popular names easily be found in the US Code?

The United States Code is meant to be an organized, logical compilation of the laws passed by Congress. At its top level, it divides the world of legislation into fifty topically-organized Titles, and each Title is further subdivided into any number of logical subtopics. In theory, any law -- or individual provisions within any law -- passed by Congress should be classifiable into one or more slots in the framework of the Code. On the other hand, legislation often contains bundles of topically unrelated provisions that collectively respond to a particular public need or problem. A farm bill, for instance, might contain provisions that affect the tax status of farmers, their management of land or treatment of the environment, a system of price limits or supports, and so on. Each of these individual provisions would, logically, belong in a different place in the Code. (Of course, this isn't always the case; some legislation deals with a fairly narrow range of related concerns.)

The process of incorporating a newly-passed piece of legislation into the Code is known as "classification" -- essentially a process of deciding where in the logical organization of the Code the various parts of the particular law belong. Sometimes classification is easy; the law could be written with the Code in mind, and might specifically amend, extend, or repeal particular chunks of the existing Code, making it no great challenge to figure out how to classify its various parts. And as we said before, a particular law might be narrow in focus, making it both simple and sensible to move it wholesale into a particular slot in the Code. But this is not normally the case, and often different provisions of the law will logically belong in different, scattered locations in the Code. As a result, often the law will not be found in one place neatly identified by its popular name. Nor will a full-text search of the Code necessarily reveal where all the pieces have been scattered. Instead, those who classify laws into the Code typically leave a note explaining how a particular law has been classified into the Code. It is usually found in the Note section attached to a relevant section of the Code, usually under a paragraph identified as the "Short Title".

Our Table of Popular Names is organized alphabetically by popular name. You'll find three types of link associated with each popular name (though each law may not have all three types). One, a reference to a Public Law number, is a link to the bill as it was originally passed by Congress, and will take you to the LRC THOMAS legislative system, or GPO FDSYS site. So-called "Short Title" links, and links to particular sections of the Code, will lead you to a textual roadmap (the section notes) describing how the particular law was incorporated into the Code. Finally, acts may be referred to by a different name, or may have been renamed, the links will take you to the appropriate listing in the table.

Assignment of Claims Act of 1940

Oct. 9, 1940, ch. 779, 54 Stat. 1029

Assignment of Claims Act Documentation

We are often asked, by lenders and borrowers alike, what the current market trend is with respect to lenders requiring documentation proscribed by the Federal Assignment of Claims Act  of 1940, as amended, 31 U.S.C.3727 ,  41 U.S.C.6305 (the “Assignment of Claims Act” or “FACA”), such as instruments of assignment and notices of assignment.  Are lenders still requiring their borrowers to complete, execute and deliver these documents?  What are the risks of not obtaining them?  Is there something short of full compliance with the Assignment of Claims Act that can be done to adequately protect a lender and not unduly burden a borrower?

Anyone who has been involved in the process of obtaining FACA assignments knows that it is frequently a tedious and sometimes burdensome process, especially if a borrower has many smaller contracts with a number of different government agencies.  As a result, we have found that the vast majority of lenders are not requiring borrowers to provide FACA assignments at the closing of a loan, but instead reserve the right to require them to be provided at a later date – typically upon the occurrence of an event of default under the loan documents.

The question then becomes, if FACA assignments are not being required at loan closing, how is a lender protected, and what are the potential risks of not having FACA assignments in place?

Before describing some of the specific benefits afforded by the Assignment of Claims Act, we will point out a common misunderstanding with respect to FACA assignments.  Many people believe that FACA assignments perfect a lender’s security interest in government accounts receivable.  That is simply not the case.  Perfection of a lender’s security interest in government accounts receivable, like any other account receivable, is accomplished by filing a properly completed UCC-1 financing statement among the state records of the jurisdiction of organization, jurisdiction of incorporation or state of residence of the borrower.  What then are the benefits of having FACA assignments in effect?  There are 4 primary benefits.

First, a properly processed FACA assignment obligates the government to make contract payments directly to the bank or financial institution identified in the FACA assignment.  Put another way, the government is prohibited from sending government contract payments to any other person or entity while the FACA assignment is in effect.  Just to be clear though, the actual obligation of the government to make payments under a government contract is set forth in the contract itself (or by reference to a particular Federal Acquisition Regulation set forth in the government contract).  However, once the obligation to pay ripens (pursuant to the terms of the applicable government contract), the payment direction of the FACA assignment then governs and (as further described below) not even the contractor/borrower can change that payment direction without the lender’s consent.

Second, a properly processed FACA assignment puts the government “on notice” that a lender is relying on the payment direction afforded by the FACA assignment – typically for purposes of collateralizing a loan, credit facility or some other financial accommodation made by the lender to the borrower.  And if the government is “on notice” of the FACA assignment, then the government is prohibited from clawing back from the lender any government contract payment received by the lender on behalf of its borrower that may have been made in error (or that could have been retained by the government as an offset to some other liability that the borrower may owe to the government).  Of course, the government would still have recourse against the borrower for the return of any such payment, but it would not have any such recourse against the lender.

Third (albeit similar to the first point), a properly processed FACA assignment protects a lender from borrower-fraud.  When a FACA assignment has been accepted by the government, the borrower is unable to redirect the government to make contract payments elsewhere.  The government can only act pursuant to the written instructions of the lender (as to where payments should be sent – either by mail, ACH or wire) while the FACA assignment is in effect.  A few years back, one of our lender clients shut down a revolving line of credit of one of its customers (simply because the customer failed to provide requested financial information to renew the line).  And, while suspending the customer’s line of credit quickly got the customer’s attention, the customer was also quick to re-direct future payments under its government contracts to a different financial institution.  For the record, this particular lender client of ours hadn’t retained us until after it had already shut down the line of credit and discovered that its customer had redirected payments elsewhere.  Had FACA assignments been in effect, the customer would not have been able to redirect the payment on its government accounts receivable to a different account maintained by another financial institution.

And fourth, a properly processed FACA assignment provides the lender with the right to pursue collection of a government contract receivable against the government.  If, for example, the government was obligated to make a government contract payment pursuant to the terms of the applicable government contract, but simply failed to do so, then the lender can pursue a collection action directly against the government for the payment of the assigned government contract receivable (which, unlike commercial account debtors, the lender would not be able to do in the absence of a FACA assignment).  Obviously, to the extent that the government had a valid defense against the borrower as to the payment of the government contract receivable, the lender would likewise be subject to that defense.

So, notwithstanding the benefits afforded by FACA assignments, why aren’t lenders insisting on them and what are lenders doing to otherwise minimize the risk that their government contract receivable collateral will not disappear?  There are a number of reasons, but we will only highlight the most common ones in this article.  First and foremost, many lenders find comfort in having a perfected security interest in the government account receivable by virtue of simply filing a UCC-1 financing statement.  Second, government contracts are awarded, expire, terminate and are renewed all the time, and many lenders cannot keep up with processing FACA assignments for every government contract of their borrowers.  Instead, some lenders obligate their borrower to periodically provide FACA assignments for only those government contracts which meet certain criteria, such as having a remaining value of $500,000 or more and a remaining term (including renewal options) of 6 months or longer.  The dollar threshold is intended to quantify a certain credit risk tolerance while the “6 months or longer” criteria is appropriate from a practical perspective because sometimes it could take a few months just to get the government to acknowledge receipt of a properly filed FACA assignment.  And while there is certainly the “inconvenience” factor that borrowers oftentimes claim, the fact is that the task of completing FACA assignments is ministerial in nature and not very time consuming to accomplish.  Nevertheless, for our lender clients who elect not to require FACA assignments either at loan closing and/or periodically thereafter, we include a provision in our loan documents which grants the lender the right to require them at any time after the occurrence of an event of default.  The savvy lender knows, however, that it cannot count on a borrower performing a post-event of default obligation if that borrower is presumably already in default for failing to perform some other obligation.  For that reason, our loan documents also include a corresponding right of the lender to obtain injunctive or other equitable relief (such as specific performance) to compel the borrower to deliver FACA assignments to the lender (if requested) after the occurrence of an event of default.  This adds an extra level of protection to the lender in the event that a borrower, who is already in default, fails to timely comply with the lender’s request.

There are many nuances to properly completing and processing FACA assignments, as well as details with respect to the mechanics of complying with the Assignment of Claims Act, which we have not fully vetted in this article.  If you would like further information, or would like to discuss government contract financing generally, please do not hesitate to contact us.

Note: This Bulletin is not intended as legal advice.  Readers should seek professional legal counseling before acting on the information it contains.

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What is an Assignment of Claims?

The Assignment of Claims Act (ACA) was passed in 1940 and is codified in 31 U.S.C. § 3727 and 41 U.S.C. § 6305. The ACA allows contractors to assign their rights to receive payment from a federal contract to a third party, called an assignee, who then collects the funds from the government. The ACA’s main purpose is to help contractors and subcontractors access capital by allowing them to monetize their accounts receivable from the government.  What is an Assignment of Claims?

A contractor can assign a contract’s payments to a financing institution if the following conditions are met:

• The contract is for $1,000 or more
• The assignment is made to a bank, trust company, or other financing institution, including a federal lending agency
• The contract doesn’t prohibit the assignment
• The assignment covers all unpaid amounts unless the contract permits otherwise 

The ACA also defines how lenders and factoring companies can arrange for payments when federal contracts are part of a contractor’s loans or accounts receivable. When a FACA assignment is in effect, the government is required to make contract payments directly to the designated bank or financial institution. 

Read more about Assignment of Claims

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Change Number: DFARS Change 05/30/2024 Effective Date: 05/30/2024

Subpart 232.8 - ASSIGNMENT OF CLAIMS

232.803 policies..

(b) Only contracts for personal services may prohibit the assignment of claims.

(d) Pursuant to 41 U.S.C. 6305, and in accordance with Presidential delegation dated October 3, 1995, Secretary of Defense delegation dated February 5, 1996, and Under Secretary of Defense (Acquisition and Sustainment) delegation dated February 23, 1996, the Director of Defense Procurement determined on May 10, 1996, that a need exists for DoD to agree not to reduce or set off any money due or to become due under the contract when the proceeds under the contract have been assigned in accordance with the Assignment of Claims provision of the contract. This determination was published in the Federal Register on June 11, 1996, as required by law. Nevertheless, if departments/agencies decide it is in the Government's interest, or if the contracting officer makes a determination in accordance with FAR 32.803(d) concerning a significantly indebted offeror, they may exclude the no-setoff commitment.

232.805 Procedure.

(b) The assignee shall forward—

(i) To the administrative contracting officer (ACO), a true copy of the instrument of assignment and an original and three copies of the notice of assignment. The ACO shall acknowledge receipt by signing and dating all copies of the notice of assignment and shall—

(A) File the true copy of the instrument of assignment and the original of the notice in the contract file;

(B) Forward two copies of the notice to the disbursing officer of the payment office cited in the contract;

(C) Return a copy of the notice to the assignee; and

(D) Advise the contracting officer of the assignment.

(ii) To the surety or sureties, if any, a true copy of the instrument of assignment and an original and three copies of the notice of assignment. The surety shall return three acknowledged copies of the notice to the assignee, who shall forward two copies to the disbursing officer designated in the contract.

(iii) To the disbursing officer of the payment office cited in the contract, a true copy of the instrument of assignment and an original and one copy of the notice of assignment. The disbursing officer shall acknowledge and return to the assignee the copy of the notice and shall file the true copy of the instrument and original notice.

232.806 Contract clauses.

(a)(1) Use the clause at 252.232-7008 , Assignment of Claims (Overseas), instead of the clause at FAR 52.232-23, Assignment of Claims, in solicitations and contracts when contract performance will be in a foreign country.

(2) Use Alternate I with the clause at FAR 52.232-23, Assignment of Claims, unless otherwise authorized under 232.803 (d).

DFARS Parts

Dfars appendix.

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