Laws · Analysis

Price adjustment in design-and-build contracts: the Act bars it for lump-sum contracts, the Rules now build it into cost estimates

Unclear wordingMedium confidenceEnacted ActRegulation

Section 55(2) of the Public Procurement Act 2063 says price adjustment may not be made where a contract is on a lump-sum or fixed-budget basis. The Act does not say whether design-and-build contracts are lump-sum. The Auditor General found that, before a 2082 rule change, 22 offices paid Rs 44.86 crore of price adjustment on 75 design-and-build contracts that it considered lump-sum, and so not eligible. The 14th amendment to the Public Procurement Rules (2082/1/15) now includes a 10 per cent price-adjustment contingency in the design-and-build cost-estimate format.

Laws and sections involved

सार्वजनिक खरिद ऐन, २०६३ · Public Procurement Act, 2063 s.55(1), (1क), (1ख), (2)
Our paraphrase: unless the contract provides otherwise, price adjustment may be made in contracts longer than twelve months (s.55(1)); a special price adjustment may be made under a Cabinet-approved procedure for abnormal cost increases from war, pandemic, blockade and similar causes (s.55(1क)–(1ख), added by the Second Amendment Act 2083); but price adjustment may not be made where delay is the contractor's fault or where the contract is on a lump-sum ('lump sum contract') or fixed-budget basis (s.55(2)).
Law Commission consolidated text (authenticated 2063/09/30); five amending Acts listed, the latest the Public Procurement (Second Amendment) Act 2083 (2083/03/25), which followed the Second Amendment Ordinance 2083 (Gazette 2083/01/17). s.55 on PDF pp.55–56. Official text
सार्वजनिक खरिद नियमावली, २०६४ · Public Procurement Regulation, 2064 r.2(य) (definition); r.10(8); r.119; Schedule 1ख; Schedule on contract types, item (ङ)
Our paraphrase: a design-and-build contract is one under which the same contractor does design and construction (r.2(य)); cost estimates for design-and-build works must follow Schedule 1ख (r.10(8)); Schedule 1ख adds a "price adjustment contingency" of 10 per cent to the estimate; r.119 requires any contract allowing price adjustment to state the conditions, formula and cap (normally 25 per cent of contract value); public bodies may use design-and-build for medium, large and complex infrastructure.
Law Commission consolidated text (2064/05/03), amended sixteen times, the latest the 16th amendment (2083/05/03); the 14th amendment (2082/01/15) is the change the Auditor General refers to. r.2(य) PDF p.4; r.10(8) PDF p.12; r.119 PDF pp.143–144; Schedule 1ख PDF p.176; contract-type item (ङ) PDF p.188. Official text

The apparent issue

The Act bars price adjustment for lump-sum contracts but does not define whether design-and-build contracts are lump-sum. The Auditor General treats them as lump-sum; contracting offices had included price adjustment clauses; and the Rules, since 2082, add a price-adjustment contingency to design-and-build cost estimates. If design-and-build contracts are lump-sum, a rule that budgets for price adjustment in them may sit uneasily with s.55(2), since rules cannot override the Act.

Evidence

The Auditor General reported that the Act and Rules did not spell out how price adjustment applies to design-and-build procurement, that the Public Procurement Monitoring Office had not prepared bidding documents for it, and that the Public Accounts Committee had directed further legal provision on variations and price adjustment. It said the 14th amendment to the Rules on 2082/01/15 set a cost-estimate format in Schedule 1(ख) that includes the price adjustment amount for design-and-build contracts. Office of the Auditor General Chapter 3 (summary of main audit findings), para 39, printed pp.28–29 (PDF pp.58–59)
For contracts signed before that amendment, the Auditor General found that 22 offices under the Ministry of Physical Infrastructure and Transport paid Rs 44.86 crore of price adjustment on 75 design-and-build contracts, and said that because these are lump-sum contracts, payment does not appear permissible under the Act. Office of the Auditor General Para 39, printed pp.28–29 (PDF pp.58–59)
s.55 of the Act and r.2(य), r.10(8), r.119 and Schedule 1ख of the Rules were read in the Law Commission texts. The Rules define design-and-build by who performs the work, not by payment basis, and neither text states that design-and-build contracts are lump-sum. Nepal Law Commission Act PDF pp.55–56; Rules PDF pp.4, 12, 143–144, 176

Possible readings

Reading 1 (the Auditor General's view): design-and-build contracts are lump-sum by nature, so s.55(2) bars price adjustment in them; contract clauses or rules providing otherwise cannot override the Act.
Reading 2: "design-and-build" describes who designs and builds, not how the price is set; such a contract can be lump-sum or re-measured. Where it is not lump-sum and runs over twelve months, s.55(1) allows price adjustment, and the 2082 Rules simply ensure it is budgeted.
Reading 3: s.55(1) begins "unless the contract provides otherwise", so the parties' contract decides; payments made under contracts that expressly included price adjustment may be defensible even if the contract was described as design-and-build, though s.55(2) may still prevail for a true lump-sum contract.

Why it matters in practice

Uncertainty can lead to inconsistent contract terms, audit objections (beruju), disputes and arbitration, and either overpayment to contractors or unfair risk for them when material prices rise sharply. The new special price-adjustment power in s.55(1क) adds a further route whose relationship with s.55(2) is also not spelled out.

Hypothetical example

Hypothetical: a road office signs a three-year design-and-build contract for a bridge. Steel prices rise 30 per cent in year two. The contractor claims price adjustment under a clause in the contract; the auditor says s.55(2) bars it because the contract is lump-sum; the contractor points to the Rules' price-adjustment contingency and to s.55(1).

Possible improvements and trade-offs

Amend s.55 to state expressly whether, and on what conditions, price adjustment applies to design-and-build and EPC contracts.
Settles the question at the level of the Act; requires a policy choice on risk-sharing for long contracts.
Have the Public Procurement Monitoring Office issue standard design-and-build bidding documents that state the payment basis and any price-adjustment formula.
Practical and fast (the Auditor General noted these were missing); cannot resolve a conflict with the Act if one exists.
Decide how to treat payments already made under pre-2082 contracts (recovery, regularisation or case-by-case review).
Resolves audit objections; recovery may lead to disputes with contractors.

Questions for legal review

Is a design-and-build contract a "lump-sum contract" within s.55(2) of the Act, or does that depend on the payment terms of each contract?
Is the 10 per cent price-adjustment contingency in Schedule 1ख consistent with s.55(2)?
Does the special price adjustment in s.55(1क) apply to lump-sum contracts despite s.55(2)?

Research status

Researched: 2026-10-12
Confidence: Medium confidence — The provisions were read in the official texts and the Auditor General documents the problem and the amounts. Confidence is not high because the Rules' contingency could be read as consistent with the Act (Reading 2), and the 2083 amendments and any Monitoring Office guidance after 2082 were not reviewed in full.
Review: Not yet reviewed by a qualified lawyer.

Still unresolved

Whether the Public Procurement Monitoring Office has since issued design-and-build bidding documents was not checked.
The Second Amendment Act 2083 text itself was not read; we relied on the consolidated Act.
No court or arbitration decision on this point was searched for.