An owner typically does not want the contractor to bear all of the risk of differing site conditions because of the owner’s fear that the contractor will inflate its bid or include contingencies in its price to account for the possibility of differing site conditions that may not actually exist. On the other hand, the owner wants to limit its exposure to risk for unknown conditions that, with due diligence, could have been reasonably discovered by the contractor. In theory, by accepting the risk of differing site conditions that could not reasonably be discovered by the contractor’s exercise of due diligence, an owner will get a price that more closely approximates the contractor’s actual cost of performance.
Consequently, construction contracts frequently contain a “site inspection” clause, which requires the contractor to exercise due diligence to discover reasonably foreseeable physical conditions and disclaims any warranty about the project conditions; and a “differing site (changed) conditions” clause, which allocates to the owner the risk if actual conditions turn out to be materially different from expected conditions and provides a procedure by which the contractor can apply for and obtain an equitable adjustment for materially unforeseen site conditions.
COVERAGE OF DIFFERING SITE CONDITIONS CLAUSES
Differing site (changed) conditions typically arise in two situations: (1) the conditions encountered at the site differ materially from those indicated in the contract (Type I), or (2) the conditions encountered at the site differ materially from those normally encountered (Type II).
Type I Differing Site Conditions Claims
An owner may be required to provide an equitable adjustment for a Type I differing site condition if: (1) the contract indicated the conditions that the contractor could expect to find at the site; (2) the conditions indicated in the contract differed materially from the actual conditions; (3) the actual conditions were reasonably unforeseeable based upon all the information available to the contractor at the time of bidding; (4) the contractor acted as a reasonably prudent contractor in interpreting the contract documents; (5) the contractor reasonably relied on its interpretation of the contract and contract-related documents; and (6) the contractor incurred additional costs as a result of the difference between the expected conditions and the actual conditions.
In H.B. Mac, Inc., 153 F.3d 1338 (Fed. Cir. 1998), a SDB contractor was awarded a $6.2 million contract to construct two buildings in Hawaii that were 300 yards apart and 700 yards from the ocean. The contractor did not visit the site before submitting its bid; rather, it relied upon eight soil borings that were included in the bid package. The contractor presumed that the borings were representative of the site, even though they were all taken by only one of the building sites. The actual conditions at the other building sites were substantially different, resulting in the contractor incurring additional costs for piling, delays and dewatering operations. Consequently, the contractor sought an equitable adjustment for a Type I differing site condition. Ruling in favor of the owner, the court explained that the owner was not required to satisfy a Type I differing site conditions claim because the borings could not reasonably be interpreted as indicating the subsurface condition of a building location 300 yards away in an area that was geologically diverse.
Similarly, in Meyers Cos., Inc. v. U.S., 41 Fed. Cl. 303 (1998), a contractor was awarded a Corps of Engineers contract to construct a levee along the Mississippi river in 150 days. The nature of the work required that it be performed from a barge; however, a barge could not be used if the depth of the water was below a certain level (the “low water level”). The Corps controlled the depth of the water through locks and dams. Bidders were provided a historical record of the depths of the river in the area where the project was located over a sixteen year period. The records showed that the depth of the water often fell below the low water level for prolonged periods of time. The contractor testified that he did not believe that the Corps would allow the depth of the river to fall below the low water mark during the performance of the project because the contract did not allow any extra time for shut downs. The Corps dropped the depth of the river to below the low water lever soon after the contractor started work, which resulted in the contractor shutting down its operations for 69 days. The Corps granted the contractor a time extension, but refused to increase the contract price. The Court found that the contractor was not entitled to an equitable adjustment based on a Type I differing site condition because the information available to the contractor at the time of bidding indicated that it was reasonably foreseeable that it may have to stop work for shallow water.
Type II Differing Site Conditions Claims
An owner may be required to provide an equitable adjustment for a Type II differing site condition if: (1) the contractor did not know about the actual condition found at the site; (2) the contractor could not reasonably have anticipated the actual condition at the site from inspection or general experience; and (3) the actual condition varied from the norm in similar contracting work.
In Reliance Ins. Co. v. County of Monroe, 604 N.Y.S.2d 439 (App. Div. 1993), a contractor on a sewer project was required by the contract to install pipe in an open trench above the Genesee River. The contract anticipated that contaminated soil may be encountered and included a provision for containment of contaminants. After the award, the contractor proposed and the county accepted a modification to install the pipe in a tunnel 30 feet beneath the riverbed at no additional cost. Digging the tunnel, the contractor encountered toxic creosote leaking into the tunnel, which resulted in a work stoppage. The county refused to pay for the cost of removal alleging that, by proposing the modification, the contractor assumed the risk of differing site conditions. The Court, however, found that the contractor did not waive its right to make a claim for unforeseen site conditions and granted its request for an equitable adjustment because the contractor did not know about the toxic substance found in the subsurface, the contractor could not have anticipated this condition from inspection or general experience and the condition varied from the norm found in similar tunnel boring operations.
In Martin Paving Co. v. Widnall, 98-1047,1998 WL 670030, a re-paving contract required a contractor to accept responsibility for disposal of all removed asphalt. The contractor planned to recycle the removed asphalt, but it later discovered that the existing asphalt could not be recycled because it contained contaminants. At the completion of the project, the contractor sought an equitable adjustment for the additional costs to purchase uncontaminated asphalt, alleging that the existence of the contaminants was a Type II differing site condition. Dismissing the contractor’s claim, the Court held that the contractor assumed the risk that the existing asphalt would be unsuitable for recycling when it accepted responsibility for disposal of the removed asphalt.
CONTRACTOR’S DUTY TO INSPECT
An owner need not satisfy a Type I differing site condition claim unless “the conditions actually encountered were reasonably unforeseeable based on all the information available to the contractor at the time of bidding.” Similarly, an owner is not required to satisfy a Type II differing site condition claim unless “the contractor could not reasonably have anticipated the actual condition at the site from inspection or general experience.” A contractor thus has a duty to perform a reasonable inspection of the site to determine the existing conditions. In addition, contracts frequently contain a “site inspection” clause, which requires the contractor to conduct a reasonable inspection of the site. Reasonableness in either case is determined by looking at “what a rational, experienced, prudent and intelligent contractor in the same field of work could discover.” Thus, the issue turns on whether a reasonably prudent contractor would have discovered the condition, not the actual efforts of the contractor asserting the differing site condition claim.
In Hoffman Constr. Co., 40 Fed. Cl. 184, a subcontractor sought to recover the additional cost of removing 12,000 feet of rigid ducts and insulation on a renovation project. The specifications required the removal of all existing duct, but the plans did not show these particular ducts. Ceiling grilles and registers for these ducts were in plain view and the bidding documents indicated that the original drawings for the building were available to bidders. The subcontractor apparently did not realize that the grilles indicated the existence of the ducts, nor did it review the original plans for the structure. As a result, it brought a pass-through claim against the owner for the recovery of its additional cost of removing both the insulation and the ducts, alleging that they constituted a differing site condition because they were not shown on the renovation plans. Dismissing the claim, the Court held that a reasonably prudent contractor would have reviewed the original drawings and realized that the ceiling grilles and registers indicated the existence of the ducts.
Similarly, the Court in H.B. Mac. Inc. held that a reasonably prudent contractor would have conducted a site investigation and found geologic features indicating a likelihood of highly variable subsurface conditions, such as the existence of a variety of sedimentary soils and the close proximity of the site to the ocean and to the nearby streams.
However, an owner should keep in mind that a contractor is not required to take extraordinary or expensive steps to investigate the existing conditions. For example, the Board in Pitt-Des Moines, Inc., ASBCA 42,838, 96-1 BCA 27,941 held that an owner was required to satisfy a Type I differing site condition claim where it was discovered that walls of an existing structure were substantially thicker than represented on the drawings provided to bidders because the contractor was not obligated to conduct a costly investigation. Similarly, in P.J. Dick, Inc., GSBCA No. 12,036, 94-3 BCA 27,073, a contractor made a Type I differing site condition claim after it discovered that the slab it was required to remove was 30″ thick (not the anticipated 6″ to 8″ thick) and that the slab provided the only lateral means of support of the building. The Board held that a reasonable inspection would not require the contractor to retain a structural engineer or conduct expensive tests, such as core drilling or destructive testing, to determine the thickness of the slab.
To protect itself against this possibility an owner may include in a contract a clause disclaiming any responsibility for the accuracy of pre-bid information. For example, the Court in Millgard Corp. v. McKee/Mayas, 49 F.3d 1070 (5th Cir. (Tx) 1995) held that a subcontractor was not entitled to recover for the additional costs that it encountered trying to sink piles in “quicksand-like materials,” despite the soil tester’s statement at the pre-bid hearing and in his report that the subsurface conditions were dry, because the soil report contained a disclaimer that “the report is not a warranty of subsurface conditions, nor is it a part of the Contract Documents.” Even though the subcontractor visited the site and observed drilling on an adjacent lot before submitting its bid, the Court concluded that the report shifted the risk of subsurface water problems to the subcontractor and that a reasonable contractor would have drilled its own borings before submitting a bid.
OWNER’S DUTY TO DISCLOSE SUPERIOR KNOWLEDGE
An owner has an implied duty to disclose superior knowledge of site conditions when: (1) a contractor undertakes to perform without vital knowledge of a fact that affects performance costs or duration; (2) the owner was aware the contractor had no knowledge of and had no reason to obtain such information; (3) the contract specifications misled the contractor, or did not put it on notice to inquire; and (4) the owner failed to provide the relevant information.
For example, the Board of Contract Appeals held in Piedmont Painting Contractors, IBCA 3,772, 98-1 BCA 29,618 that the owner withheld superior knowledge of the deteriorated condition of a 50,000 gallon water tank to avoid making it apparent that the repair of existing welds would be a major portion of work in a contract to paint the tank. In Triad Mechanical, Inc., DOTTCAB No. 2,782 (Feb. 12, 1997), the Government was held to have superior knowledge of a subsurface clay liner at the site which made the contractor’s dewatering operation more difficult because the Government’s archived records for the site reflected that it had previously installed the liner at the site.
However, under this doctrine, the owner cannot be held liable for failing to provide information readily available to a contractor from other sources. For instance, the contractor in Bradley Constr., Inc. alleged that the Government withheld vital information from bidders about a $25,050 sewer connection fee that the Shoshone-Bannock tribe planned to assess against the winning bidder. The court denied the claim because, notwithstanding any proof that the contractor may have had that the Government knew about the proposed fee, the information was available from the tribal leader, who was identified in the invitation to bidders in a statement cautioning bidders that the tribe may impose certain requirements on the winning bidder, including taxes, fees, ordinances, etc.
Most differing site condition clauses require prompt notice and a review of the conditions before they are disturbed. Prompt notice of a differing site condition is very important because of the prejudice that would result to an owner if it was not permitted to investigate the unforeseen condition and determine for itself whether the condition warrants an equitable adjustment.
An owner should realize, however, that failing to follow the notice provision is not always fatal to a differing site conditions claim; instead, it may simply result in a heightened standard of proof for the contractor.
Thomas H. Asselin is a partner and Scott D. Cahalan is a senior associate with the Atlanta, Georgia law firm of Smith, Gambrell & Russell, specializing in construction law.