Nepal has amended its Public Procurement Act 2007, introducing criminal liability for contractors who misuse advance payments, shortening bidding timelines and changing the way public contracts are awarded in a bid to improve project delivery and reduce delays.

The amended Act also includes provisions on price adjustment, a long-standing demand of construction companies.

Under Section 58A(3) of the amended law, contractors, suppliers and consultants may face criminal prosecution for fraud and forgery if they are found to have deliberately used advance payments or other funds provided by public agencies for purposes unrelated to the contracted work.

The law allows action against contractors who misuse mobilisation advances despite being capable of completing the contracted work, or who divert funds allocated for contract implementation towards other purposes.

“If an investigation or inquiry finds that false information or documents were submitted to receive payments, work was abandoned after receiving payments, or actions caused financial losses to the state or public agencies, the directors, representatives and responsible officials involved will be prosecuted under prevailing criminal laws, including those related to fraud and forgery,” the amended Act states.

This is the first time such a provision has been included in Nepal’s public procurement law.

Previously, contractors were allowed to receive advance payments of up to 20 percent of the total contract amount in two instalments. Authorities say some contractors misused such payments by investing in areas such as land purchases rather than construction, leaving projects incomplete and turning contracts into liabilities for the state.

The amended law also allows public agencies to provide price adjustments in construction contracts under exceptional circumstances. Even if a contract agreement does not include such provisions, agencies may revise prices if they verify that unusual increases in the cost of construction materials, labour, fuel, equipment or transportation were caused by international crises, wars, supply chain disruptions, pandemics, blockades or other extraordinary situations.

Such adjustments will have to be made in accordance with procedures approved by the Cabinet.

Construction companies have welcomed the move, saying it addresses a major concern of the industry. The Federation of Contractors’ Associations of Nepal said the introduction of an average bid evaluation system instead of the lowest-price system would encourage fair competition and improve the quality of construction projects.

The amended Act replaces the previous practice of awarding contracts to the bidder offering the lowest price. Under the new system, the average value of all submitted bids will be calculated, and the contract will be awarded to the bidder whose quoted amount is closest to that average, provided the bid does not exceed the official cost estimate.

Bidders quoting more than 30 percent below the estimated cost will be removed from the evaluation process.

The government has also reduced the time required for tender submissions to speed up procurement. Under the revised law, national-level tenders will have a submission period of 21 days, down from the previous 30 days. For re-tendering, the period has been reduced from 15 days to seven days.

For international tenders, the deadline has been reduced from 45 days to 30 days, while the re-tender period has been shortened from 21 days to 15 days.

The amended Act has also decentralised authority for approving variation orders. Officials equivalent to gazetted third-class officers can approve variations of up to 5 percent of the contract value, while gazetted second-class officers can approve changes of up to 10 percent. Officials equivalent to gazetted first-class officers can approve variations of up to 15 percent, and changes beyond that can be approved by department heads.

Previously, approval authority for variation orders ranged from under-secretaries to the Cabinet, depending on the size of the change.

The revised law also assigns greater responsibility to public agencies for preparing construction sites and ensuring necessary infrastructure is available before projects begin.

Government bodies must now provide construction sites, facilitate the supply of construction materials, allow the use of forest areas where required, relocate infrastructure such as electricity, drinking water, sewerage and telecommunications systems, and ensure access roads for construction activities.

The Public Procurement Monitoring Office said such responsibilities were not clearly defined under the previous law.

The Act also introduces penalties for officials and agencies that fail to make required decisions, approvals, recommendations or arrangements within their authority and on time. Such officials may face departmental action, while government grants to non-compliant agencies may also be suspended.

The revised law changes the process for recovering losses when contracts are cancelled due to contractor failure. Authorities will now seize the contractor’s performance security and recover the remaining amount by deducting the original contract value from the updated cost estimate for completing the unfinished work. The recoverable amount will be treated as government dues.

Previously, contractors were liable for the entire cost required to complete the remaining work, a provision that construction companies had repeatedly opposed.

The amendment also introduces incentives for contractors and officials involved in timely project completion. Contractors who complete nationally important, transformative or government-designated projects before the deadline while maintaining quality standards may receive bonuses, certificates of appreciation and other rewards. Employees responsible for facilitating early completion may also receive incentives.

The law further provides for technical guidelines on Engineering, Procurement and Construction (EPC), Design and Build, and Turnkey contracts.

It also establishes a Government Procurement Service under the Office of the Prime Minister and Council of Ministers to provide technical assistance to government agencies in selecting suppliers and procuring goods.

Ram Prasad Acharya, joint secretary and spokesperson at the Public Procurement Monitoring Office, said the amended law introduces several major reforms.

“The Act has come into implementation after being published in the Nepal Gazette,” Acharya said. “We will now prepare the required regulations, procedures and standards based on the amended law.”