Brazil’s new procurement law and its possible impacts on government procured construction contracts

Ana Carolina Barretto, Mauro Hiane de Moura and Francisco de Andrade FigueiraTuesday 27 September 2022

Ana Carolina Barretto
São Paulo

Mauro Hiane de Moura
Porto Alegre

Francisco de Andrade Figueira
São Paulo

Introduction

The national public procurement process in Brazil became extremely rigid following the 1993 public procurement statute, which was approved to establish a detailed procurement procedure to prevent administrative wrongdoings. Under statute, procurement contained several internal and external stages and a number of procedural limitations imposed on public agents. As a result, construction contracts would need to be procured with detailed engineering designs and bidders were required to produce in-depth documents and certification of their compliance with law, proof of good standing regarding federal, state and local taxes and labour management, before they could have their bids considered.

Marginal adjustments have been introduced in the last decade, mainly in the form of a more agile procurement procedure aimed at the public works related to the 2014 World Cup and the 2016 Summer Olympics. More drastic improvements, however, have been made in the last couple of years: a 2020 statute imposed limits and conditions for administrative or judicial decisions rendering administrative contracts null and void; and, in particular, a 2021 statute,^[1] which will come into force in April 2023, overhauls the national system for government procurement and contracts.

The new statute

The new statute, which was approved by Congress and enacted in April 2021, will come into force in April 2023. Consequently, after April 2023, all public tenders in Brazil will have to conform to its measures. In the meantime, public authorities can choose whether they will structure public tenders according to the 1993 or the 2021 statute. In the interim period, the government has been producing regulatory norms and ordinances that further develop the new statute’s key concepts.

For international bidders, the new statute means an easier path to bidding in public procurement, as it simplifies rules and bans any preferential treatment to Brazilian enterprises except when specifically mentioned in the appropriate government policy, or when there is a tie in the bidding session, in which case, a Brazilian company would be favoured.

The general steps to facilitating the general procurement process, not specific to international bidders are:

• accreditation documents will no longer be requested from all bidders before the economic bids;

• the law separates standardised from non-standardised goods and services, forcing a longer period of procurement for the latter (ie, common services should have less technical requirements and smaller term between publication of the request for quote (RFQ) and the bidding session, whereas special goods and services should prompt the bidding period after the publication of the RFQ to increase to, at least, 25 business days); and

• every RFQ must be published online on a web portal created by the federal government (the Portal Nacional de Compras Públicas or National Public Procurement Website).^[2]

Technical accreditation documents

The new statute simplifies the conditions imposed on foreign bidders for the presentation of their technical documents. The 1993 statute allowed the presentation of apostilled or certified documents. However, it was not unusual to see the RFQ require registration of the company at the Regional Engineering Council (a professional board) of the place of execution of the project and the technical accreditation documents to be translated and approved by the Regional Engineering Council. This onerous requirement would often make international companies decide not to participate in public tenders in Brazil. The new law specifically states that an application for company registration in the Regional Engineering Council should only be requested at contract signing phase, and authorises the presentation of technical certificates issued by foreign companies when accompanied by the appropriate translation. The new law also specifically allows subcontractors to present technical accreditation documents under certain conditions. This innovation will allow international groups to bid by means of their Brazilian subsidiaries and present accreditation documents based on their group’s international experience.

International procurement

The new law creates a new type of procurement in which the RFQ allows international bidders to bid in foreign currencies. Such a change in the law is compatible with recent legislation which updated the Brazil’s Foreign Exchange Law (Federal Law 14.286/2021) and granted Brazil’s Central Bank greater authority to regulate the market.

Construction procurement: overcoming design obstacles

Brazil’s public procurement based on the 1993 statute was originally two-phased: the public authority would procure the engineering design and, once the detailed design was received and reviewed, the public authority would then publish a new RFQ for the construction contract. The creator of the engineering design would not be allowed to participate in the construction procurement.

This dual system created several consequences for the second procurement. As the designer would be forbidden to bid on the construction RFQ (due to natural advantages they could have when bidding for the construction phase against other bidders), most of the construction know-how would be reserved for the construction bid. As the final bid would be based on a pre-approved detailed design, any deviation from the design would create change orders for the construction company. In construction work, the procurement would occur before the environmental permitting process was concluded, and therefore any additional conditions arising from the environmental permitting phase would either change the implementation procedure or even resize the construction altogether. This would lead to new change orders and price adjustments.

The new statute establishes two instruments to overcome the challenges of the traditional form of contracting: integrated contracts and competitive dialogue.

Integrated contracts

Integrated contracts and semi-integrated contracts will go for bid before the final detailed engineering design is produced. The RFQ should then: (1) include a risk matrix, and (2) forbid any price adjustments except for force majeure, changes to the project at the government’s request and additional events that are listed as the government’s responsibility in the contract. Bidders can therefore choose their own engineering solution for such performance, subject to the approval of the government authority of the detailed engineering design.

Such contracts have been in use in Brazil over the past few years in specific sectors and by government-owned enterprises. According to government data, standard construction contracts have had change orders of more than 10 per cent of the contract price in 52 per cent of the cases in which they were employed, whereas integrated contracts have had no change orders affecting the price in 87 per cent of the cases in which they were employed.^[3]

Competitive dialogue

Inspired by a European Union Directive, the competitive dialogue can be used when the government intends to: (1) contract a technological or technical innovation, is incapable of finding a technical solution in the market, or to sufficiently define its solution for an RFQ; or (2) explore market conditions for technical solutions, technical requirements, or financial or legal contractual conditions. The process starts with a call to bidders with the approval of any company that meets certain criteria specified by the government. Afterwards, the government can hold individual discussion rounds with the different candidates. After the negotiation rounds have been completed, the government elects one of the proposed solutions and publishes a new RFQ for the final contract.

Efficiency contracts

So-called ‘efficiency contracts’ are a means by which government can engage in contracts aimed at generating public authority savings, in the form of reducing the current expenses and the contractor being paid based on such reductions. Bidders will present their proposals, the estimated savings and price proposals. The actual payment will be based on the offered price plus any effective savings generated. However, if the economic return from the bid does not occur, then the value of the savings which should have been generated will be deducted from payments to the contractor. It is expected that certain recurrent costs, such as energy supply contracts, will be used in this new mechanism.

Final remarks

The new statute has followed the recent trajectory of government policy to facilitate the participation of foreign bidders in public tenders. As such, foreign bidders may take part in tenders with fewer bureaucratic hurdles. The new statute also allows improved engineering services and construction contracts, with better engineering solutions and greater adaptability to performance. It is hoped that, in fostering increased competition and more efficient contract designs, the new statute will contribute to modernising public procurement in Brazil and cut government expenditure.