Administrative Contracts: Economic and Financial Balance

This page is a translation of the original Portuguese text, provided for convenience. It deals with Brazilian law. If there is any discrepancy, the Portuguese version prevails. Read the original in Portuguese

Economic and financial balance is a constitutional guarantee that protects the contractor from changes that make an administrative contract excessively burdensome. Here is how this right works.

The Constitutional and Statutory Basis for Economic and Financial Balance

The economic and financial balance of administrative contracts (public contracts) is grounded in Article 37, item XXI, of the 1988 Federal Constitution, which guarantees that the actual terms of a bid will be maintained in public procurement. Law 14.133/2021, Brazil’s new Public Bidding and Administrative Contracts Law, regulates this right in several provisions, especially Articles 124 through 136.

The concept of economic and financial balance refers to the relationship between the obligations the contractor takes on and the compensation the Public Administration guarantees, as set when the contract was signed. When later events upset that relationship and make the contract more burdensome for one of the parties, that party has the right to have the original balance restored.

This protection is not limited to the contractor. The Administration may also seek to restore the balance when later events make the contract more burdensome for the public treasury. In practice, however, most rebalancing requests come from contractors, who are more vulnerable to unforeseen changes in economic conditions.

The principle that the economic and financial equation is inviolable is what sets an administrative contract apart from a private one. In a private contract, the parties bear the risks inherent in the deal. In an administrative contract, the contractor is guaranteed that the initial relationship between obligations and compensation will be preserved throughout performance.

When Imbalance Occurs and How Balance Is Restored

Economic and financial imbalance can have several causes. The teoria da imprevisão (the unforeseeability doctrine, similar to hardship or impracticability) applies when extraordinary, unforeseeable events beyond the parties’ control significantly change the conditions under which the contract is performed. Severe economic crises, pandemics, wars, and natural disasters are examples of situations that can support a rebalancing request under this doctrine.

The fato do príncipe (roughly, “act of the sovereign”) occurs when a general act of the government, not directly related to the contract, affects its performance. Examples include tax increases, changes in regulatory rules, bans on importing supplies, and changes in labor legislation. In this case, the Administration is fully responsible for the financial impact on the contractor.

The fato da administração (an act of the contracting authority itself) occurs when the contracting Administration does something that makes performance more difficult or impossible. Typical examples are late payments, unilateral changes to the subject matter of the contract, failure to release the site for construction work, and failure to meet ancillary obligations. In these cases, besides financial restoration, the contractor may seek damages and even termination of the contract.

Law 14.133/2021, Brazil’s new Public Bidding and Administrative Contracts Law, regulates this right in several provisions, especially Articles 124 through 136.

Extraordinary forces of nature, meaning acts of God and force majeure, also justify restoring the balance when they directly affect performance of the contract. Floods, earthquakes, fires, and other unforeseen natural events that raise the cost of performance allow the contract terms to be revised.

Price Adjustment, Repricing, and Contract Review: Three Different Tools

Economic and financial balance is maintained through three main tools: price adjustment, repricing, and contract review. Each has its own requirements, procedures, and effects, and confusion among them is a frequent source of disputes.

Price adjustment (reajuste) is the periodic updating of the contract price to offset the effects of inflation. Law 14.133/2021 requires the bid notice to state the adjustment index and how often it applies, which cannot be less than one year. The adjustment is automatic. It depends only on applying the index set out in the contract and does not require negotiation between the parties.

Repricing (repactuação) applies specifically to ongoing service contracts that require dedicated labor. It consists of renegotiating prices to reflect new labor costs resulting from collective bargaining agreements. Repricing requires a detailed demonstration of the change in costs, using an itemized cost spreadsheet.

Contract review (revisão), unlike price adjustment and repricing, is not tied to a preset schedule and can occur at any time, as long as there is proof of a later event that substantially changes the conditions of performance. Review is the proper tool when the imbalance results from the unforeseeability doctrine, the fato do príncipe, or the fato da administração.

How to Request Rebalancing

A contractor who identifies an economic and financial imbalance must submit a formal request to the contracting Administration, documenting the change in the contract’s original conditions. The request must include a detailed description of the later events, proof of the financial impact in the form of spreadsheets and supporting documents, and a proposal for restoring the balance.

The Administration has a duty to review the request within a reasonable time and issue a reasoned decision. The review involves verifying that the alleged event occurred, confirming that it was unforeseeable and extraordinary, quantifying the financial impact, and determining how the balance will be restored. Technical and legal opinions support the administrative decision.

The contractor may not suspend performance of the contract while waiting for a decision on the rebalancing request, except where payment is more than two months late, as provided by law. A unilateral suspension may amount to breach of contract and lead to administrative sanctions.

If the Administration denies the rebalancing request or offers inadequate compensation, the contractor may appeal administratively or go to court. A mandado de segurança (a writ of mandamus) is appropriate when the right to rebalancing can be proven with documents alone. An ordinary action allows broad production of evidence, including an accounting expert examination to quantify the financial impact.

Companies that hold contracts with the Public Administration should seek specialized legal counsel to monitor the economic and financial equation of their contracts and act promptly when they spot an imbalance. Lawyers experienced in administrative contracts can prepare well-supported requests and, when necessary, defend the contractor’s interests in court.

Frequently Asked Questions

Does a rise in the dollar justify a request to rebalance an administrative contract?

Exchange rate changes can justify a rebalancing request when the contract involves imported supplies or inputs priced in dollars, and the change is extraordinary and unforeseeable. Ordinary currency fluctuations are treated as a risk inherent in the business and do not allow review. The contractor must show that the change exceeded normal parameters and significantly affected the cost of performing the contract, and must provide supporting documentation.

Can the Administration unilaterally reduce the contract price?

The Administration may unilaterally change the contract, including by reducing its price, within the limits set by Law 14.133/2021. Changes in quantity may not exceed 25% of the original contract value, except for building renovations, where the limit for increases is 50%. Any change that alters the economic and financial equation obliges the Administration to restore the contract’s balance in the contractor’s favor.

What is a risk matrix in administrative contracts?

A risk matrix is a tool introduced by Law 14.133/2021 that allocates risks in advance between the Administration and the contractor. It identifies the anticipated risks, states which party is responsible for each one, and sets out the financial consequences if those risks materialize. A risk matrix in the contract may limit the right to rebalancing, because risks previously allocated to the contractor do not justify contract review.

As informações deste artigo são de caráter informativo e não substituem consulta jurídica individualizada. Cada caso possui particularidades que exigem análise específica.