Why Public Entity Estimates Are High While Contractors Bid Low in Nepal: An In-Depth Analysis
Well, we often use “Public” and “Government” interchangeably in our daily life, especially when discussing infrastructure and public services. This article examines why public entity estimates tend to be high, while contractors bid significantly lower in Nepal, focusing specifically on engineering estimates for construction projects. In Nepal, preparing an estimate is mandatory for any government-funded project.
This article will give a comprehensive look at how these estimates are prepared, broken down and why so called discrepancies are widely debated between : Public Estimates vs Contractor’s Bid. Here we will in depth analyze using a project “ABC Road Construction Works in Falano Municipality-1, Falano District” !
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1. Budget
In General, Public entity running any project in Nepal has a fixed budget ! Well fixed budget, yes. The budget is allocated and the work to be carried out has to be under this budget. Lets enjoy preparing an engineering estimate here for, a Project : ABC Road Construction Works, Location : Falano Municipality-1, Falano District. The budget allocated for this Project is 1 Crore (Nrs. 1,00,00,000). This figure seems a lot for us but lets see how much work we can carry out with this MONEY ! The budget is allocated for a Project either by Federal Government, Provincial Government or Local Government.
2. Preparing Engineering Estimate
See below the summary of cost for our Project, ABC Road Construction Work. The budget allocated was 1 Crore, so the final estimate prepared is exactly or some less than 1 Crore. Here it is NRs. 99,99,800. Remember, this is the Budget which is the Final Upper Ceiling for Engineering Estimate Amount for Public/Government Projects in Nepal.
What is in the Summary of Cost here? Look the image below, the Civil Works to be carried out is Nrs. 71,00,000 ! Only, yes. When you say the Budget is 1 Crore, the estimated work amount is only or around 71 Lakhs. Rest of 29 Lakhs is not direct WORKS ! For basic understanding, if a common man (like you or me) is given a Project “ABC Road construction Work”, we would see the work done worth 71 Lakhs. So what is the rest? Where Does All 29 Lakhs goes???
Provisional Sum, this is the amount provisioned for works like Performance Bond Commission, Insurance, Tests, Relocation of Services, As Built Drawings etc. In general, this amount Nrs. 2,20,000 or somehow less/more will not be invested in direct work that you generally call as WORK ! This amount will spent on something that you may not see happened in the Site, but this happens in the background !
3. Details of Cost Components for Engineering Estimate ?
In the above table, the Provisional sum and Work Cost Estimate constitute 73.20% of the Budget. So where does the rest 26.80% go?
Work Cost Estimate: This is the core cost required to complete the work as specified.
4% Contingency: Added for minor unforeseen expenses, this amount serves as a cushion to address unexpected challenges during the project.
10% Physical Contingency: Accounts for changes in project scope or adjustments due to physical site conditions not accounted for in the initial design.
10% Price Adjustment Contingency: Covers inflation or price fluctuations in materials or labor that may occur over the project duration.
13% VAT: The mandatory value-added tax applied to the total estimated cost.
Whatsoever, in this breakdown the amount NRs. 73,20,000 called as Sum with PS (Provisional Sum) is the amount which the Contractor Bids on ! More specifically, the amount in Provisional Sum is almost fixed and contractor do not compete in that amount. The Contractors Compete in the Sub Total of B, that is NRs. 71,00,000 only for a project with budget NRs. 1,00,00,000.
Why this all ! Because it is according to the LAW. Why this LAW? Because this is the Global Engineering Estimation Practice.
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4. How is Work Cost Estimate Prepared?
In the ABC Road Construction Works above, the Nrs. 71,00,000 is the work cost estimate. This is the actual work cost in this Project. How is this Prepared? Look, for our ABC Road Construction Project the work to be carried out is :
a. RCC Road Drain Construction in both side of the Road !
b. Premix Carpet Blacktopped Road !
These two are the components of our ABC Road Construction Project/Works. But what does it constitute?
For RCC Road Drain Construction Works, following are the key Items in the Estimate :
i. Site clearance works.
ii. Earthwork for Road Drain Works.
iii. Soling Works
iv. PCC works
v. Reinforcement works
vi. RCC for Drain Works.
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For Premix Carpet Blacktop Road, following are the item components for our ABC Road Construction Works :
i. Earth Cutting, Filling, Embankment Works etc including proper rolling works.
ii. Sub-Grade Preparation Works (Preparation of ground beneath for road construction).
iii. Sub-base Works (Refined Gravel works with proper rolling works in general, above the sub-grade layer and below the base layer, for your understanding)
iv. Base Works (A Broken Aggregate or base material layer with proper rolling works above subbase works and below wearing coarse which is black top premix carpet layer for our project.)
v. Prime Coat, Tack Coat and then finally Premix Carpet (Blacktop work)
You see above are major items for our ABC Road Construction Works.
Now the above list shows specifically the items in road construction, which shall go according to the Standard Specification for Road and Bridge Works, Not as easy as described here !
Now for each items above. The detail estimated quantity is calculated. The quantity is multiplied with rate and the amount is calculated. Here is the illustration :
As above, in the Abstract of Cost, the Quantity and Rate for each and every item is calculated. The quantity comes from Survey and Calculations ! But how does this Rate come?
The rate for any Construction work is to be calculated based on the Norms. You can download norms here: Norms for Works, Road and Bridges.
Norms :
Rate Analysis :
The detailed Rate Analysis for each item is prepared based on the District Rate for each Items from District Rate and Derived Rates. How the Rate Analysis is prepared? This is in-depth subject not described here. But, the rate analysis for each item includes following components:
a. Labour Cost (Skilled and Unskilled)
b. Material Cost (From District Rate or Derived Rates)
c. Equipment Cost
d. 15% Contractor’s Overhead.
From this Rate Analysis, the Rate for Individual Items for Construction Works is Calculated. Therefore the Abstract of Cost and Summary of Cost is derived accordingly.
Above you see, the Rate for Sub-Base Work in Road is derived as : NRs. 2308.72 per cubic meter. Which include : labour costs, material costs, equipment costs and contractors overhead 15% ! Here the Material Cost and Equipment Cost are also derived from the rates provided by district rate for collection of materials and standard norms.
5. How does Contractor Bid Rates, and how is it too low than estimated?
Here are some factors :
a. Contractor may not intend to gain 15% Overhead? then he can bid low avoiding this overhead amount ! Why he does so, there are reasons like bank loans, freezing equipment and labor retainment.
b. Does contractor value Standard Specifications and Norms as stated? A big Question always remains…
c. Contractor gets material items at lower rate than District Rate from competitive market?
d. Contractor may? or not? pay less Rate to the Labour?
e. Contractor has his own Equipments which may cost lesser than in Lease analysis for equipment.
There may be several reasons why contractor can bid low !
With the reasons as mentioned above, contractor bids less than 20-30-40% below in estimated rates. So, lets go the our project ABC Road Construction again !
6. Public Estimate vs Contractors Bid !
From the detailed insights above, we can clearly state why the Public Estimate is High. This is very straightforward, following the standards District Rates, Norms, Overhead, Provisional Sums, Contingencies and Value Added Tax (VAT). We see here the project with budget NRs. 1,00,00,000 is only NRs. 71,00,000 work cost estimate. The contractor Bids his rate at this NRs. 71,00,000 to as low as NRs. 60,00,000 or even at 50,00,000 ! Which means Contractor will be awarded at :
Contractor Award Amount = Provisional sum + Contractors Bid Amount excl. PS * 1.13 (VAT)
If in Our Project Contractor Bids at NRs. 50,00,000 against NRs. 71,00,000 then the Agreement Amount will be = NRs. 2,20,000 + 50,00,000 * 1.13
Agreement Amount with VAT is = NRS. 58,70,000 only. How much is the budget ? It is NRs. 1,00,00,000.
So The rest of the money is also safe and does follow according to the Law. When you see a project budget is 1 Crore, remember the contractor is to work at NRs. 58,70,000 including VAT. And, the rest money is all belonging to the government ! Not getting lost anywhere.
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7. Conclusion
In analyzing public entity estimates versus contractor bids in Nepal, particularly for construction projects like the ABC Road Construction in Falano Municipality, it becomes evident that seeming discrepancies arise from both structured and variable factors. While the government-mandated estimates are meticulously detailed ! They contain Provisional Sums, contingency costs, VAT and Work Costs following global practices and legal standards.
The budget may be NRs. 1,00,00,000 but the Contractor may be working at NRs. 58,70,000 with fullest Quality and Standards controlled by Government offices. Despite contractor bids often deviated, showing significantly lower figures. This is due to contractors’ strategies, which may include cutting overhead, negotiating lower material costs or employing their own resources to reduce expenses.
