Community forestry in Nepal is intended to reduce poverty by sustainable management of forests. Timber is one of the most high-value forest products, especially in the case of Sal (Shorea robusta) forests in the Terai region of Nepal. Despite having several advantages, including high value forests on fertile land, connection with transportation networks, and being close to regional markets, community forests in the Terai region produce little or no timber from their Sal forests. This research looks at what is affecting the production of Sal timber from community forests. Three aspects of community forest user groups (CFUG) are examined using institutional economics, transaction cost economics and micro-economics. First, the scale of CFUG operations is examined in terms of their ability to profitably carry out logging and organise market sales. Second, the capacity of CFUGs to carry out logging in terms of internal physical and human resources, and property rights is examined. Finally, barriers to vertical integration with the market in terms of contracting and cooperation with other CFUGs are investigated. To answer these questions, data was collected from 85 CFUGs and interviews were carried out with 39 key respondents from CFUGs, government agencies, and private firms. The results show that the size of the forest was not an issue for harvesting and marketing logs. However, the organisational capacity of CFUGs was found to be weak because of a lack of financial resources, limited property rights over timber, control over decisions by the District Forest Office, policy constraints, and corruption. In terms of vertical integration, a lack of legal rights to enter into contracts, a high degree of uncertainty about policy and property rights, small and irregular amounts timber harvest, and the interpretation of CFUG rules by the District Forest Office were found to be barriers for the formation of long-term contracts between CFUGs and private firms, and of cooperative developments between CFUGs.