You’ve contracted to install underground utilities. Once the work begins, you discover soils with inadequate bearing capacity, large amounts of unanticipated rock, groundwater at levels higher than anticipated, buried debris, or hazardous wastes. None of these conditions were expected. As a result, the cost you promised to the owner to install the utilities is no longer feasible. Who bears this risk?

A “differing site condition” (also known as a “changed condition”), which is abbreviated in this article as a “DSC,” is an unknown and hidden, concealed, or latent physical condition encountered at a site that differs materially from the reasonably anticipated conditions. Physical conditions are conditions you can actually touch, like soil, rock, and concrete; and not intangible, such as the availability and cost of labor, materials, and equipment.

Some contractors mistakenly believe they are always entitled to more time and money when they discover a DSC.  They aren’t. Entitlement to more time and money for a DSC usually depends upon whether the applicable contract includes a differing site conditions clause.

Absent a differing site conditions clause, the doctrine of sanctity of contract[1] places the risk on the contractor if the work is more difficult, costly, or time-consuming than expected, unless due to the owner’s breach of contract, performance is rendered impossible by an Act of God, change in the applicable law, or the facts and circumstances support an equitable defense to this rule.

Differing site condition clauses typically recognize two distinct types of DSCs, aptly called Type 1 and Type 2. A Type 1 DSC is an unknown and hidden, concealed, or latent physical condition, which a contractor encounters at the site that differs materially from the conditions indicated in the contract documents. The existence of a Type 1 condition depends upon whether the drawings, specifications, and other contract documents make representations that either expressly or impliedly indicate the expected conditions. For example, a Type 1 DSC may exist if unsuitable soil is encountered on the site when the drawings and specifications “indicate” that the site contains suitable soil.

A Type 2 DSC is an unknown, unusual, and hidden, concealed or latent physical condition, which the contractor encounters at the site that differs materially from the conditions that an ordinary contractor in the general vicinity of the project would expect to encounter while performing work of the same type and character called for in the contract. The existence of a Type 2 DSC thus depends upon the physical conditions in the general vicinity of the project. For example, a type 2 DSC may exist if the contractor discovers rock in an area where rock is not normally encountered.

Why would an owner agree to a differing site conditions clause if the contractor generally accepts the risk of DSCs absent such a clause?  Money. The US Government started using a differing site conditions clause in 1927, after realizing that they could save money on public works project by accepting some of the risk of DSCs.  A DSC is a true unknown. As a result, the only practical ways for a contractor to deal with the risk of DSCs is to either conduct extensive pre-bid inspections, which would be passed through in the bids, or include a fat contingency in the bid, or risk going out of business.  The Government found that the bids were lower if it made geotechnical reports available to bidders and accepted the risk of material differences between the expected and actual conditions encountered.

Differing site conditions clauses are now contained in the major standard contract forms published by the industry, such as the AIA, EJCDC, DBIA, and ConsensusDocs, as well as the Federal Acquisition Regulations (“FAR”) and most state and local government contracts. In fact, FAR incorporates its differing site conditions clause into a contract even if inadvertently left out.

Perhaps it is because the differing site condition clause is so widely used that some contractors believe they are always entitled to more money and time if they encounter a DSC. In any event, it is vitally important that contractors bidding on jobs (especially private jobs) where the risk of encountering DSCs could result in large losses or financial ruin, understand what their contracts say about differing site conditions. Simply put, your company is taking a huge risk if you don’t insist upon a differing site condition clause in all of your contracts.

The contractor in American Demolition, Inc. v. Hapeville Hotel Limited Partnership, 202 Ga. App. 107, 413 S.E.2d 749 (1991) learned this lesson the hard way. In American Demolition, the Georgia Court of Appeals denied the contractor’s claim for damages for a DSC on a contract to demolish a hotel because the parties had struck through the “concealed conditions” provision[2] in their AIA-based contract. The Court also found that the contractor accepted the risk of a DSC because the contract included a “site inspection” clause, which provided the “contractor hereby acknowledges that it has visited the site, examined all conditions affecting the Work, is fully familiar with all of the conditions thereon and affecting the same . . .” Specifically, the court stated

“[T]o determine whether American can recover additional money for the unforeseen performance costs involved in the contract, it is necessary to determine from the contract itself who bore the risk of unknown obstacles. The contract here contained no changed conditions clause, unequivocally limited the contract payment to a sum certain, and contained an inspection clause. It is clear from these provisions that the contract imposed the risk of uncertainty of subsurface conditions on American Demolition . . . Because the contract placed the risk of extra expense on it, American Demolition is not entitled to recover additional compensation just because the work required to be performed was more expensive than it had anticipated.”

Id. at 109, 752

[1] “It is a well-settled rule of law that if a party by his contract charges himself with an obligation possible to be performed, he must make it good unless its performance is rendered impossible by Act of God, the law, or the other party. Unforeseen difficulties, however, great, will not excuse him …. [T]he rule rests upon a solid foundation of reason and justice. It regards the sanctity of contract. It requires parties to do what they have agreed to do. If unexpected impediments lie in the way and a loss must ensue, it leaves the loss where the contract places it. If the parties have made no provision for dispensation, the rule of law gives none. It does not allow a contract fairly made to be annulled, and it does not permit to interpolated what the parties themselves have not stipulated.” Dermott v. Jones, 69 U.S. 1,2 7; 17 L. Ed. 762 (1864).

[2] The differing site conditions clause in AIA A201-2007 provides:

• 3.7.4 Concealed or Unknown Conditions.  If the Contractor encounters conditions at the site that are (1) subsurface or otherwise concealed physical conditions that differ materially from those indicated in the Contract Documents or (2) unknown physical conditions of an unusual nature that differ materially from those ordinarily found to exist and generally recognized as inherent in construction activities of the character provided for in the Contract Documents, the Contractor shall promptly provide notice to the Owner and the Architect before conditions are disturbed and in no event later than 21 days after first observance of the conditions.  The Architect will promptly investigate such conditions and, if the Architect determines that they differ materially and cause an increase or decrease in the Contractor’s cost of, or time required for, performance of any part of the Work, will recommend an equitable adjustment in the Contract Sum or Contract Time, or both.  If the Architect determines that the conditions at the site are not materially different from those indicated in the Contract Documents and that no change in the terms of the Contract is justified, the Architect shall promptly notify the Owner and contractor in writing, stating the reasons.  If either party disputes the Architect’s determination or recommendation, that party may proceed as provided in Article 15.

For more information on Differing Site Conditions, contact Scott Cahalan or Darren Rowles

Article published for Georgia Utility Contractors Association’s (GUCA) monthly publication “Underground Connection”.