With proposals costing hundreds of thousands of dollars and many IDIQs having 50 or more awardees, it can easily happen that some contractors who win a spot on a contract are unable to capitalize on it and simply stop trying to capture task orders. Whether it was because the initial win was based on sheer luck or perhaps because of a tragic, unforeseeable change in circumstances, making it impossible to bid or even keep the company doors open, a contractor may find itself with a shiny new license to hunt, but without the proper tools to successfully compete for and win the actual task orders. After failing to win any work for usually a year or more, contractors in situations like this may just be looking to recoup the bid and proposal costs or salvage the win. Often, they look to sell their zombie contracts to a more viable candidate. In the past, this was not too difficult, but in recent years, even months, it has become a harder and harder “sell.”
First, it has always been true, yet not fully understood by many, that the sale of a federal contract is prohibited. However, this has always been more of a technical or legal truth than reality. Now, however, agencies have started to question more and more transactions during the novation process, especially in cases where IDIQ contracts without ongoing task orders are sold to other contractors. At some agencies, but particularly GSA, contracting officers are questioning whether a transaction truly includes “all assets needed to perform the contract,” as required by FAR Part 42, or whether transactions are an improper sale of a federal contract. Many contractors come back with something along the lines of “this is a services contract, there are no assets, just people.” However there are two issues with that statement: (1) it inaccurately admits the improper sale of a federal contract and (2) it ignores the fact that many tangible and intangible assets exist, even when a “naked” IDIQ contract is transferred. Despite what some inside and outside of the government may believe, assets such as proposals, bid strategies, and marketing plans all have real value. Indeed, the proposals themselves for these contracts may have cost hundreds of thousands of dollars to prepare.
Given these facts and recent experience, we recommend that contractors carefully review all possible tangible and intangible assets that are part of a transaction, value each item, and then include them on at least the buyer’s post-transaction balance sheets, if not the seller’s pre-transaction balance sheets when possible, to show the agency the factual reality that there are valuable assets changing hands.
Lastly, we have also seen agencies use purchase terms against contractors. Particularly, terms whereby the seller retains workshare have been used as evidence that (1) the buyer is not capable of performing the work and that (2) not all assets needed to perform the work were transferred. While the existence of a workshare guarantee is evidence of neither, it has not stopped contracting officers from making such conclusions. Thus, given these new interpretations coming out of various agencies, we recommend carefully crafting such provisions going forward and giving full explanations in the novation package cover letter.
While the government enjoys a broad level of discretion when reviewing novations so they are never guaranteed, focusing on these and similar issues can help resolve the government’s concerns as to improper sales of federal contracts. In the past year or so, we have seen a major paradigm shift amongst a number of federal agencies. Thus, if you are buying or selling “naked” IDIQ vehicles, be prepared for a fight on the novation front, regardless of how well crafted the purchase agreement—some agencies will use the smallest excuse to reject a novation as not being in the best interests of the government when, by any reasonable account, it absolutely is.
About the Author: Cy Alba is a partner and member of the Government Contracts and Small Business Programs groups. He may be reached at ialba@pilieromazza.com.
