Variation in Public Contracts in Nepal: Legal Rules and Hidden Risks (2026) 

A variation  refers to any authorised change to the scope, quantity, design, specifications, or method of execution of works originally agreed under a construction contract. Such changes may involve additional or reduced work, or a modification in the nature or sequence of performance. The variation process is not new in construction industry and is adequately dealt in standard contract forms such as FIDIC, NEC.  

In public procurement, variations are a significant legal and practical issue because public contracts are governed by legislation and involve expenditure from the public exchequer. This article discusses the legal framework governing variations under Nepalese law and examines the key procedural and practical challenges faced in implementing and enforcing variation claims. 

Variation under Nepalese Law  

Public Procurement Act, 2063  (“PPA”) and Public Procurement Rules, 2064 (“PPR”) primarily govern variation in Nepal’s public procurement regime. These documents clarify key confusions regarding the issuance of variation in the context of Nepal’s public procurement regime. Among other things, they specify the authorities relevant for issuing variation orders, the set of criteria required to fulfil prior to the issuance of variation orders, and exceptions and limitations concerning the issuance of variation orders in Nepal. 

Authorities Eligible for Issuing Variation Order 

Section 54 of the PPA lists out the authorities qualified to issue variation orders based on specific variation amounts. It is also specified, under the same provision, that the authorities, while issuing such orders, must clearly specify the reason for doing so. The following list illustrates how the eligible authorities are selected based on the specific variation amounts: 

Criteria For the Issuance of Variation Orders

Rule 118 of the PPR mandates the order issuing authority to clarify key aspects while issuing variation orders based on the recommendation provided by a group of experts subject to the required examinations. Other requirements as per procurement type are as follows:

Constructive Variation?

Contractors should be aware of the rigidity the courts and authorities would put in deeming variation due to public expenditure being involved. The discussion in Mahakali Irrigation Project vs. Swachchhanda Nirman Sewa Pvt. Ltd. (NKP 2066), Decision No. 8156 (“Mahakali Case”), serves as a stark warning regarding the intersection of physical performance and administrative legality. In this case, the contractor performed significant extra work (topsoil stripping and filling) beyond the original Bill of Quantities (BOQ), yet the Supreme Court of Nepal denied payment because the work lacked a formal, written variation order from the “eligible authority” mandated by Section 54 of the PPA. The court prioritized procedural rigidity over the reality of work-done, ruling that since variation authorities are strictly tiered based on cost percentages, an instruction from an unauthorized official or a mere oral directive cannot create a financial liability for the state.

To mitigate the rigidity of this precedent, contractors must treat the variation process as a continuous legal negotiation rather than a retrospective claim exercise. Careful legal advice is essential when navigating the “No Oral Modification” (NOM) trap. A proactive strategy should involve implementing a strict “Reservation of Rights” protocol as well as exploring other legal mechanism. Further, careful advice should be taken on whether any acts are deemed waiver of one’s right either by conduct or performance of the variation acts.

There have been significant legal developments in law since the precedent. So, a careful reference must be taken of other laws like Muluki Civil Code 2074 (“Code”) which may impact the holding of the Mahakali Case. The new Code provides broader principles of obligation which may offer a potential “safety net” for contractors where the state has enjoyed the benefit of extra work. When combined with the 14th Amendment to the PPR, which tightens the rules for Engineering, Procurement, Construction (“EPC”) and Design-and-Build (“D&B”) agreements, it becomes clear that “work-first, talk-later” is no longer a viable project model in Nepal. Because the interaction between these new legal protections and strict procurement thresholds is highly technical, contractors must seek specialized legal counsel to ensure that their project conduct translates into a legally enforceable right to payment.

Variation under D&B Contract

Under Rule 118(6) of the PPR which was introduced through 14th amendment, variation in Design-and-Build contracts is permitted only where unforeseen physical conditions arise due to natural causes or where the public entity itself requires additional or modified work. Based on the Mahakali Case precedent, contractors must carefully measure and document any subtle or unapproved changes, as performance alone does not create payment entitlement. Commercially, this exposes D&B contractors to margin erosion where necessary on-site adaptations proceed without timely approval from the competent authority. Variation under EPC Contracts Under Rule 118(7) of the PPR, variation orders in EPC procurement are generally prohibited except where the employer assigns additional work or amends the existing work. Consistent with the Mahakali ruling, even employer-driven changes carry payment risk unless formally authorised, requiring contractors to treat informal instructions with caution. From a commercial perspective, this forces EPC contractors to absorb most execution risk upfront, often leading to higher bid pricing and constrained flexibility during implementation

Conclusion

Variation in public procurement is not merely a matter of statutory compliance but a practical exercise shaped by how projects are implemented on the ground. Beyond the formal rules in the PPA and the PPR, issues such as constructive variation, informal instructions, sequencing of approvals, and conduct of the parties often determine whether additional work is ultimately payable. Many of the risks arise not from the absence of legal provisions, but from the gap between technical necessity and procedural authorisation. For this reason, timely identification of variation, careful documentation, and informed legal advice at the execution stage are critical to preventing otherwise legitimate work from becoming commercially unrecoverable.

Contact Us 

For further information on navigating Nepal’s procurement regime or to discuss the legal frameworks mentioned above, feel free to reach out to our team at Niti Partners. 

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