Price Adjustment In Nepal Public Procurement: A Guide To Compliance In 2026

Navigating market volatility in public contracts can be a financial minefield. In Nepal, the Public procurement laws provide a specific legal framework for price adjustments due to inflation and rising material costs. Understanding these "express terms" is vital for contractors to protect their margins and ensure project viability in an unpredictable economy.

Legal Provisions Price Adjustment:

Public Procurement Act, 2063("PPA") and Public Procurement Rules, 2064 ("PPR") primarily govern price adjustment in Nepal's public procurement regime. These documents clarify key confusions regarding the implementation of price adjustment in the context of Nepal's public procurement regime. Among other things, they specify the scope, criteria and limitations concerning price adjustment in Nepal.

The Scope of Application of Price Adjustment in Nepal

Section 55 of the PPA mandates that if the procurement contract does not mention otherwise, the qualified authority can initiate price adjustment in those procurement contracts with a duration of more than 12 months. Where a procurement contract has been concluded to procure a public construction work following the invitation of national competitive bidding and the price of any construction materials is increased or decreased unexpectedly by more than ten percent of the previous price, price shall be adjusted as prescribed by deducting ten percent in the amount so increased or decreased. As an exception, price adjustment cannot be done if the cost increment has occurred due to delay from the contractor's side. The exception also includes lump sum contracts, which cannot invoke price adjustment.

Key Criteria to be Fulfilled Before Implementing Price Adjustment

The price adjustment provision in a procurement contract must contain the following specifications:

1. The situation in which price adjustment can be made.
2. The formula to be used for price adjustment. The formula should factor the price adjustment of only the labor, material, and equipment costs.
3. The maximum amount of price adjustment.
4. The price structure (concerning labor, fuel, equipment, material,etc) to be used in the aforementioned formula.
5. Price index of each category used in the price structure.
6. The baseline date used for the aforementioned formula.
7. The duration of the aforementioned formula's use.
8. The minimum amount increment created by the aforementioned formula, and the criteria and exceptions concerning the price adjustment clause.

Limitations Concerning Price Adjustment

Rule 119(3) of the PPR clearly states that the price adjustment amount cannot be more than 25% of the initially agreed amount. However, if it does exceed by more than 25%, the procurement contract can be terminated by the procuring body. As an alternative, if the procurement contract is not terminated, the procuring body must negotiate with the contractors to bring down the agreed amount within the approved budget. Additionally, provision to include additional budget can be included in the procurement contract.

Price Adjustment in Public Contracts

Typical contracts with public bodies in our experience tend to provide that the contractors shall furnish the indices and weightings for the price adjustment formulae clarifying the pre-assigned percentage and coefficients used in calculating price adjustment subject to change in cost factors such as inflation, labor, materials, fuel, or exchange rates. Further, procurement contracts also clearly provide that bidding documents shall contain figures of price adjustment, and those that are excluded for the purpose of price adjustment.

Challenges Associated with Price Adjustment

In the past public authorities often mischaracterized price adjustments as variations; however, as an "express term" of the contract, price adjustment is a distinct mechanism, making standard variation procedures and approval hierarchies inapplicable. While these adjustments are automatic contractual rights designed to address market volatility, the specific thresholds and processes provided in the contract data, as well as under applicable law, must be carefully reviewed to avoid legal repercussions.

The risk of contractual silence and/or ambiguity is particularly high because the legal framework does not recognize general doctrines such as "commercial impracticability" or "hardship" to excuse performance. Unlike some international jurisdiction sthat allow for contract renegotiation when a fundamental economic disturbance occurs, the National Civil Code, 2017, as provisioned under Section 531, requires strict adherence to the literal terms of the agreement. Section 531 provisions that fundamental change in circumstances can constitute justifiable grounds for non-performance of a contract or contractual terms. The provision further enlists examples that constitute fundamental changes inter alia, impossibility due to natural calamity,impossibility due to destruction of the subject matter of the contract. Notably, price volatility has not been included as a situation constituting fundamental change in circumstances, and as such is not a justifiable ground for non-performance. Instead, Section 531(3)(a),(b)&(e) explicitly mandate that difficulty in performance of the contract, the resulting financial loss due to the performance of the contract cannot excuse non-performance of a contract. Consequently, if a price adjustment clause is omitted or drafted with ambiguity, the contractor is legally deemed to have assumed the entire risk of market volatility. It is also imperative to carefully review the impact of change-in-law and if such law-induced change in cost is accommodated as a separate remedy under the contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.