Traditionally, when an administrative contract is entered into, the contractor is guaranteed to obtain the economic benefit projected in its proposal, so that when this benefit is altered for reasons that are attributable to the Public Administration, or for reasons not attributable to it, but which are nevertheless subsequent, the contractor has the right and the Administration the duty to restore the financial balance of the contract, generally known as “price adjustment”, so that what was previously agreed upon is paid.

Within the world of public procurement, we typically speak of construction contracts, supply contracts and services contracts, with a characteristic model of payment for goods and services that includes price adjustment. However, more recently, we have come to use contracts under other dynamics and payment schemes such as Turn Key Contracts (TKC), Engineering, Procurement and Construction Contracts (EPC or IPC), Build, Operate and Transfer Contracts (BOT), in short, contracts with a fixed lump-sum price, which implies a total, fixed and invariable global price for the total execution of the work, in which the contractor must project from his offer the integrity of the final costs, even foreseeing their possible variations, in view of the fact that these, in principle, will not be recognized.

Precisely because of the dynamics inherent in these non-traditional contracting schemes, the bidder must not only have a broad knowledge of the market in which the contractual object operates, but must also define the economic terms of its bid with great expertise, since any deficiency in its calculation will be at its own risk. Thus, these businesses offer greater freedom to the bidder to define the cost of the various elements that make up the price since, as has been pointed out, they are not adjustable from the outset.

Does the contracting dynamic in the case of contracts under EPC, turn-key, lump sum and similar schemes, violate the principle of equity intangibility?

No, in this type of contract, the conceptual scheme is based on the assumption that imbalances or possible variations in the price are recognized from the initial offer itself, since the bidder must have projected them as part of a single price in case they occur, so the principle of economic intangibility is protected in the sense that, if the bidder has known how to make an adequate projection or escalation of the price, it will have its rights protected when those possible variations in these components occur.

Are contracts under EPC, turn-key, lump sum and similar schemes, that expressly restrict or deny a possible price adjustment, valid?

Yes, they are considered valid on the understanding that, due to their nature, they are not subject to price adjustments from a conceptual point of view, since -it is insisted- the contractor, when preparing its bid, had to foresee all possible escalation of the inputs or components to be included in the price, so that the Administration covers a single amount that cannot be revised later.

In these contracts, the bidder is free to define the cost of the various elements that make up the price of its offer, where all probable variations that could occur due to market behavior must be considered; and if the imbalances projected by the bidder do not occur, these will still be taken into account as part of the global price to pay by the contracting party, and conversely, if they do occur, they are already absorbed or reflected in the price.

Now, as the General Comptroller of the Republic of Costa Rica (CGR) has repeatedly insisted, although it is true under this contractual scheme that, in theory, the contract should not be economically rebalanced, it is also true that, in the presence of variations in the price caused by justified and unforeseeable reasons, that exceed the level of risk and escalation set by the contractor, the contractor should not suffer them on its own. For these cases, by means of a detailed study of each individual case and at the request of the contractor, the Administration could recognize these exorbitant variations to the initial projection, provided that it has been able to demonstrate that these have not occurred due to the contractor’s lack of skill or error in its definition, given that in these cases, we could be in the presence of a violation to the principle of patrimonial intangibility (of constitutional nature). For this reason, the Administration must bear in mind extreme cases that could arise during the execution of the contract.

Hence, the CGR repeatedly acknowledges that the Administration covers a single amount that cannot be reviewed, but it admits exceptional cases referred to as force majeure, fortuitous case and/or disproportionate price differences, in which the contractor will not be held responsible for the economic impact on the contract, caused by events or circumstances of such magnitude or nature.

In summary, even if for the particular case the tender poster or the contract have prohibited readjustment, it is feasible to file the corresponding claim so that inalienable constitutional rights are maintained, regarding the patrimonial intangibility and consequent balance, as long as they are supported by evidence and in the interest of recognizing those exorbitant variations to the initial projection.

Could the effects derived from the COVID-19 and its consequences on the equation and economic balance in public contracts be the cause for a financial readjustment or rebalancing of the contract?

We consider that it is possible, since the effects caused by the COVID-19 health pandemic and its impact on economic markets result in exorbitant variations to the initial projection made by the contractor, and constitute extreme cases that do not arise from inexperience or error in the definition of the price or its components. These cases embody the condition of force majeure and/or fortuitous case, which are concepts that include, in a generic sense, an insurmountable event or situation that cannot be foreseen, or that is inevitable.

The current pandemic is an external cause that interrupts the normal course of events and which could well give rise to a request for recognition of imbalances, as long as they are duly demonstrated and escape the normal scope of the risks involved with this type of contract.

 

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