Against a backdrop of growing international instability, particularly with the escalation of the conflict in the Middle East, signs of pressure on construction costs are beginning to emerge. Rising energy prices, even if initially reflected primarily in transport costs, tend to persist and to have a direct impact on the production costs of essential materials such as steel, cement, glass and ceramic products.
The issue is not merely the increase in costs, but their duration. Recent experience shows that these shocks are not necessarily temporary: the increases seen in 2022 and 2023 have become entrenched and were never fully reversed. In this context, construction contracts are once again under pressure, and the way in which risk has or has not been allocated ceases to be a theoretical issue and instead has an immediate impact on the contract performance.
Contractors with increasingly squeezed margins, project owners faced with requests for price revisions, delays and the risk of non-compliance. Thus, the question is no longer merely who bears the risk, but whether the contract is still sustainable and, if not, how to adjust it without causing it to break down.
In lump-sum contracts, the possibility of obtaining a price revision may, in practice, prove more demanding for the contractor than in remeasurement contracts. This is due to the greater concentration of risk and, above all, the lower level of price breakdown, which often makes it more difficult to demonstrate the specific impact of cost increases.
The issue arises when what would otherwise be normal fluctuations become significant and abnormal changes affecting the economic basis of the contract.
In relation to public works contracts, the legislator has sought to address scenarios of instability through a structured and, to a large extent, mandatory framework. The Portuguese Public Contracts Code (Código dos Contratos Públicos – CCP) provides for specific price revision mechanisms of an objective and index-linked nature, as well as instruments aimed at restoring the financial balance of the contract in situations of abnormal and unforeseeable change of circumstances, with a view to preserving its economic and financial equilibrium. The same cannot be said of private construction contracts. That said, it is not uncommon for private contracts to adopt solutions inspired by the public regime, whether through price revision clauses based on objective indices, contractual rebalancing mechanisms in the event of significant changes in circumstances, or even by expressly referring to the application of the CCP.
In the absence of such mechanisms, or where they are insufficient, the doctrine of change of circumstances becomes particularly relevant. Under Article 437 of the Portuguese Civil Code, where an unforeseeable change seriously affects the basis of the contract and exceeds the normal risks assumed, the affected party may seek its modification or termination.
In construction contracts, this may result in an adjustment to the price or the conditions of performance. The key issue lies in evidence: it is not sufficient to invoke increased costs; it must be demonstrated that such increase is abnormal, unforeseeable and seriously undermines the economic balance of the contract.
From the contractor’s perspective, action should involve properly documenting the impact of cost increases, avoiding situations of delay, and, where possible, engaging in negotiations before adopting more rigid positions. From the employer’s side, an outright refusal of any adjustment may prove counterproductive. In many cases, a controlled rebalancing of the contract is preferable to the risk of delays, disputes or an overall increase in project costs.
When negotiating new contracts, the current context makes one point clear: works contracts without any adjustment mechanism are increasingly problematic.
In this regard, it is essential to provide for: i) price revision clauses based on objective criteria (such as cost indices or specific materials), with clear limits; ii) renegotiation mechanisms in the event of a significant imbalance; and iii) well-defined rules governing variations, additional works and deadlines.
In a scenario of prolonged instability, construction contracts cannot be interpreted in a static manner. Rather than debating, in abstract terms, who bears the risk, it is crucial to assess whether the contract remains workable on the terms originally agreed and, if not, whether there is legal and commercial scope to rebalance it.
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