Pricing the crisis

Introduction

The Middle East crisis that began in February 2026 has caused a severe price shock in Nepal's construction sector. Diesel prices were revised upward repeatedly, bitumen became both costly and scarce, and the effect spread to cement, reinforcement steel and transport. Industry representatives reported in May 2026 that bitumen had moved from about NPR 75 to NPR 155 per kg, and rebar from about NPR 70 to 72 to above NPR 85 per kg. Road contracts, which depend most heavily on fuel and bitumen, have been the worst affected.

The Government of Nepal, by the amendment to the Public Procurement Act, 2063 published in the Nepal Gazette on 2083/03/25, has statutorily provided for special price adjustment of contracts in consequence of such an increase. The implementing guideline is still awaited. That leaves a practical question for contractors, employers and engineers: how can the impact of extraordinary price escalation be identified and evaluated in a transparent and verifiable manner under the special price-adjustment mechanism?

This article explains why the existing mechanism does not respond to the problem, and sets out a suggestive guideline for evaluating the adjustment in a manner that is fair, verifiable and auditable.

Why the existing formula falls short

Most public works contracts in Nepal adjust prices through a formula linked to Nepal Rastra Bank indices, applied with fixed weightings for labour, materials, equipment and fuel. That approach works tolerably in a stable market. It fails in a sudden shock, for three reasons.

• The indices are broad averages and have not tracked the actual market prices of fuel and bitumen during this period. Contractors have pointed out that some indices even showed a decline while site costs rose.
• The fixed weightings bear no relation to the actual fuel and bitumen content of the work that remains, which in a road contract may be concentrated in the final blacktopping season.
• The adjustment is diluted across the whole payment rather than directed at the items actually affected.

The answer is not to abandon the contract formula but to supplement it, for the crisis period, with a direct calculation based on actual consumption of the affected inputs at their actual market prices.

The legal footing

The starting point is always the contract. Entitlement rests on the change in law clause — adjustment for changes in legislation — and the price adjustment clause of the governing contract, read together with the claims and notice provisions.

The statutory backdrop is the Public Procurement Act, 2063 and the Public Procurement Regulation, 2064. Section 55(1) of the Act allows the competent authority to adjust prices in contracts exceeding twelve months, and its proviso provides that, for public construction works procured through national bidding, where the price of any construction material rises or falls unexpectedly by more than ten per cent of the previous price, the price is to be adjusted after deducting ten per cent of the movement. Section 55(2) bars adjustment where completion is delayed by the contractor, and for lump sum or fixed budget contracts. Rule 119(2) of the Regulation requires the contract to set out the circumstances, formula, price components including fuel, baseline date and interval for adjustment, and confines the formula to labour, materials and equipment used in the work completed. Rule 119(3) places a general ceiling of twenty-five per cent of the original contract price on the total adjustment.

The amendment to Section 55 introduces a separate statutory mechanism for exceptional circumstances.

This recognises that the contractual price-adjustment formula may not, in exceptional market conditions, adequately reflect the contractor's actual increase in costs. Where the prevailing formula fails to capture extraordinary escalation in inputs such as fuel and bitumen, the contractor has a statutory basis to seek special price adjustment for the resulting shortfall, subject to demonstrating the abnormal price increase and its impact on the cost of the works.

Whether the forthcoming guideline will relax the twelve-month condition, the ten per cent deduction, the lump sum exclusion or the twenty-five per cent ceiling is not yet known. Each of these will materially change the outcome for individual contracts.

A suggestive guideline for evaluation

CDRC suggests the following nine-step framework, either for adoption in the guideline or for use by employers, engineers and contractors in evaluating monthly claims in the meantime. It is not presented as the prescribed or legally mandated methodology, but as a practical, evidence-based approach that could be considered in developing and evaluating special price-adjustment claims.

1. Close the account up to the cut-off

   Prepare a statement of quantities executed and certified up to 28 February 2026, or the end of the IPC period covering that date. Value it at contract rates with normal price adjustment, and have it jointly signed with the Engineer so that it is not reopened.

2. Fix the pre-crisis base prices

   Record in a Base Price Schedule the price of diesel at the Nepal Oil Corporation depot nearest the site, the price of the specified bitumen grade from the Nepal Oil Corporation or an authorised importer, and the prices of other affected materials from supplier invoices and the District Rate, all as at the base date. The base date should be the date immediately before the first crisis-related price revision in February 2026; the exact date should be fixed by the guideline.

3. Break down the remaining works

   Remaining quantity is the BOQ quantity, including approved variations, less the quantity executed to the cut-off. From the bid rate analysis, or the applicable Government norms where that is unavailable, extract for each item the fuel content in litres per unit, the bitumen content in kg per unit, and the content of any other affected material.

4. Identify other affected materials with evidence

   Cement, reinforcement steel, bitumen emulsion and lubricants may be included, but only where the increase exceeds ten per cent and is supported by Nepal Oil Corporation notifications, supplier invoices, import documents, District Rate comparisons or published market bulletins.

5. Monitor the monthly certificates

   For each IPC, multiply the quantity of each item executed that month by its content per unit to obtain the monthly consumption of each affected input.

6. Apply the monthly factor

   For each input, the monthly factor is the price in force during the month divided by the base price, time-weighted if the price was revised within the month. Where the ten per cent deduction applies, only movement beyond that band is adjusted.

7. Prevent double recovery

   Where the contract formula already carries a fuel or bitumen coefficient, either remove those components from the normal formula for post-cut-off work and re-normalise the remaining coefficients, or deduct the amount already paid for them. The first option is simpler to verify.

8. Apply the delay and ceiling tests

   Exclude quantities which, under the approved programme and any extension of time, should have been executed before the cut-off but were delayed by the contractor. Track the cumulative adjustment, normal and special together, against the applicable ceiling.

9. Submit and certify monthly

   Each IPC should carry the Base Price Schedule, the content schedule, the certified quantities, current price evidence and the calculation sheet, with the special adjustment shown as a separate line.

The arithmetic of step six

P₀ is the base price, P_n the price in force during the month, and Q the quantity of the input consumed in the certified works for that month.

A worked example

Assume, purely for illustration, that in one month the certified works consume 2,000 kg of bitumen and 1,500 litres of diesel.

The net bitumen figure is 2,000 × (140.00 − 1.10 × 85.00) = NPR 93,000, and the net diesel figure is 1,500 × (185.00 − 1.10 × 150.00) = NPR 30,000. Any amount already paid for these inputs under the normal formula is then deducted.

The example shows how much turns on the ten per cent deduction: on these figures it reduces the monthly entitlement by about a quarter.

Issues the guideline must settle

For the framework to work without disputes, the guideline should address clearly:

• the cut-off and base dates;
• the reference source for fuel and bitumen prices;
• whether the ten per cent deduction under the proviso to Section 55(1) applies, and how it is to be read;
• the position of contracts of twelve months or less, lump sum contracts and EPC contracts;
• the treatment of work delayed by the contractor;
• the interaction with the existing contract formula; and
• whether the special adjustment counts toward the twenty-five per cent ceiling or is funded separately.

Each of these, if left open, will become a point of contention at the certification stage.

Practical steps now

Contractors should not wait for the guideline before protecting their position. Notice should be served under the claims clause of the contract within the stipulated period — for example twenty-eight days under FIDIC-based conditions, subject to the actual contract — and contemporaneous records kept of fuel and bitumen purchases, invoices and consumption.

Employers and engineers, for their part, will benefit from agreeing the cut-off statement and the Base Price Schedule early, since those two documents fix most of the later arithmetic.

Conclusion

The Government's introduction of special price adjustment is an important step toward addressing the exceptional cost pressures faced by contractors. Its effectiveness, however, will depend on a mechanism that is transparent, practical and capable of capturing the actual impact of extraordinary price escalation. A methodology based on verified base prices, actual input consumption and monthly certified quantities can provide a clear and auditable basis for determining the adjustment.

For contractors, the immediate priority is to preserve contemporaneous evidence and to demonstrate the gap between the actual increase in input costs and the amount recovered through the prevailing price-adjustment mechanism. Ultimately, the special adjustment should provide a fair and evidence-based means of addressing the exceptional costs that the existing formula is unable to capture adequately.

This article provides general information on Nepal law and procurement practice and is not legal advice. It should not be relied on for any specific matter without consulting a qualified professional adviser.

All insights