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A Contractor's Primer on Changed Conditions

Authors: Kenneth I. Levin and John J. Gazzola

November 2016
A Contractor's Primer on Changed Conditions

This article was published in the November 2016 issue of AGC Law in Brief (Volume 2, Issue 6), Practical Construction Law & Risk Issues. It is reprinted here with permission.

Introduction

This article analyzes one of the greatest risks contractors face: differing site conditions. It discusses the reasons for contract provisions regarding differing site conditions and how to identify them. It also explains how these provisions operate and how they may affect contractors and owners on every construction project. Finally, the article outlines strategies for contractors to recover for or avoid the costs incurred when differing site conditions emerge.

Background

Historically, one of the greatest threats to a contractor’s success on a project has been the potential for unknown subsurface conditions to arise, disrupt plans, ruin schedules and eviscerate budgets. For example, if a contractor encounters unanticipated rock on a project, the contractor’s productivity will decrease while his costs increase. The project likely will become more complex, and the equipment needed to complete it will be more expensive. But these are not the only consequences — unforeseen conditions may delay and create inefficiencies in other work on a project.

In common law, the contractor bore the risk of unanticipated subsurface conditions and the effects they had on the scheduling and costs of a project. Because contractors were obligated to complete their work without additional compensation — regardless of the severity or expense imposed by the unanticipated conditions — they would include contingencies in their pricing. In effect, their bids were gambles on the presence of subsurface conditions. If none arose, the contractor enjoyed windfalls. However, if truly severe conditions arose and were outside the scope of the contingencies, contractors were left unprotected and perhaps empty-pocketed.

To address this imbalance, differing site conditions clauses were developed. More than 50 years ago, the federal government first developed a differing site conditions clause that shifted the risks of unanticipated subsurface conditions to the owner. The provisions allowed contractors to bid the project based on (1) the subsurface information provided to them by owners and (2) the conditions disclosed by a reasonable site investigation. In theory at least, owners were able to receive bids uninflated by contingencies for site conditions, and contractors were able to receive compensation for the increased costs that resulted if differing site conditions were later discovered.

For example, section 52.236-2 of the Federal Acquisition Regulation (FAR), titled “Differing Site Conditions,” provides that if a contractor encounters a differing site condition, he must, before the condition is disturbed, promptly provide written notice to the contracting officer of any subsurface physical condition that differs materially from those indicated in the contract or those that are of an unusual nature and differ materially from those ordinarily encountered. Upon receiving the notice, the contracting officer must investigate the site. If the conditions do materially differ and cause an increase or decrease in the contractor’s cost or time for performing the work, an equitable adjustment must be made. This approach is now also embedded in the leading form contracts as well.

The Types and Characteristics of Differing Site Conditions

There are two types of differing site conditions. The first type, “Type 1” conditions, cover subsurface or other conditions at the site that differ materially from those indicated in the contract documents. To obtain relief from the effects of a Type 1 condition, the contractor must prove that the condition materially differs from what was indicated in the contract documents. Variances may arise in a number of ways. For example, assume that a certain material, Type X rock, is not indicated in the contract documents, but is later encountered. Or, Type X rock could be in the contract documents, but its quantity, character or behavior varies from what is indicated. These differences would all constitute variances. But any variation — whether qualitative or quantitative — must be material in order to merit Type 1 categorization. For example, on a project in Maryland County, an underground utility contractor expected some rock based on the borings, but it expected only 10 percent of the excavation to be affected, not 50 percent, as was encountered.

Variances may also arise in the form of direct inaccuracies (e.g., the boring locations are 50 feet away from the locations depicted in the drawings), misleading information, or inaccurate information.

Inferred conditions, such as those inferred from the design features of a contract, can also constitute Type 1 conditions. On a project in central Pennsylvania for the construction of a sewage treatment plant, the drawings depicted a uniform pattern of caissons under concrete tank structures. These drawings were indicative of the expectation that solid rock would not be encountered at or near the surface, as it ultimately was. Another contract in western Pennsylvania called for holes for soldier piles to be drilled with rock-augering equipment. However, the ground was not in fact augerable, and it rejected even state-of-the-art percussive drilling equipment. To penetrate the rock, the contractor had to use a special and rare super-hammer. Using this equipment — of which there were only 10 in the world — was not a strategy predictable under the contract documents.

In Type 1 situations, certain courts have narrowly defined what information the contractor may rely on, construing the term “contract documents” narrowly. See, e.g., Cruz Constr. Co. v. Lancaster Area Sewer Auth., 439 F. Supp. 1202 (E.D. Pa. 1977) (holding that the exculpatory clause of a contract, which noted that the boring information contained therein was solely for the use of the owner and that its accuracy was not guaranteed, expressly precluded the contractor from relying on it); J. E. Brenneman Co. v. Commonwealth, Dep't of Transp., 56 Pa. Commw. 210, 424 A.2d 592 (Pa. Commw. 1981) (rejecting a contractor’s reliance on contract provisions when the contract stated that the subsurface information contained therein was obtained for the exclusive use of the owner and not part of the contract documents for bidding purposes).

Disclaimer clauses, however, have only limited effect in federal government contract situations. These disclaimers have been consistently disregarded by the Court of Claims and federal contract administrative boards on the ground that modifying or deleting the differing site conditions clause is the proper way to place the risk on the contractor, rather than by including disclaimers. See Metcalf Constr. Co. v. United States, 742 F.3d 984 (Fed. Cir. 2014) (holding that the contract did not place the risk of errors in the pre-contract documents on the contractor and noting that the FAR provision exists to take some of the gamble of subsurface conditions out of the bidding process by allowing the parties to deal with conditions when the work begins and more accurate information is available).

The second type of changed conditions, or “Type 2” conditions, are unknown physical conditions of an unusual nature that differ materially from those ordinarily encountered and generally recognized as inherent in the work of the character called for in the contract. Type 2 conditions are alleged less frequently than Type 1 conditions and are more difficult to prove. To recover on Type 2 conditions, a contractor does not need to compare the conditions encountered with the conditions outlined in the contract documents. Instead, the contractor must prove that the condition encountered was unknown, unusual and materially different from the conditions reasonably anticipated.

A survey of cases suggests that, to qualify as a Type 2 condition, a contractor must expect to encounter the condition in fewer than 10 percent of cases. Although this is not a bright-line rule, it may be a rule of thumb. An example of a Type 2 condition arose in a case in western Pennsylvania, where a rig operator with 20 years of experience in the industry testified that the rock encountered — and not anticipated — was the hardest he had ever seen and was so hard that it was impenetrable by rock augers, rotary tricones and oilfield hammers. Another condition qualified for Type 2 categorization when an expert concluded that the presence of an artesian water condition experienced at a site had less than a 1 percent chance of occurring in the area. The rarity and unexpectedness of these conditions provided the basis for the argument that they were Type 2 conditions.

Site Investigation Clauses

In the federal contract situation, a typical site investigation clause generally requires only that the contractor conduct a reasonable investigation of the site and discover only what a reasonable, experienced and intelligent contractor could discover, rather than what a trained geologist or other specialized expert might be able to discover.

These clauses do not require the contractor to anticipate conditions that a geotechnical engineer would anticipate. For instance, in the Maryland case discussed above, the owner presented a geotechnical engineer who, through references to specialized topographical maps and local engineering textbooks, argued that the inferences that the contractor drew from the boring logs were wrong. However, the key issue in the case was what a reasonable contractor would anticipate, not what a geotechnical engineer would anticipate. Over the course of the engineer’s two-day deposition, he was asked to execute an anticipated rock profile that was based on boring logs and field notes that he had prepared in light of his recent site investigation. His profile was thoroughly at odds with where the rock was actually encountered, and — not surprisingly — the case settled shortly thereafter.

These clauses also typically do not require the contractor to conduct independent technical investigations and obtain subsurface boring and core samples. Instead, the contractor will be required to show that he reviewed boring logs, examined the cores themselves if available, and, if there was reason to, walked the site and took into account rock outcroppings. It is imperative that the contractor document this field investigation and record his findings and conclusions. At trial, a photograph or video is worth a thousand words — maybe more.

Strategies to Employ When a Differing Site Condition Emerges

If a contractor uncovers a differing site condition on a project, he can avoid the associated pitfalls by employing a handful of strategies and safeguards. First, the contractor should promptly notify the owner about the condition before it is disturbed and allow the owner to address the situation and possibly modify the design. This allows the owner and his engineer to investigate, consider possible redesigns to mitigate costs, and, if necessary, to track the condition’s impact on performance.

Failure to provide prompt notice can be fatal. However, federal government contract cases have held that constructive notice – proof that the government became aware of the condition prior to notice — may mitigate the effect of late notice.

Second, the contractor must document the condition by photographing, surveying, measuring or even videotaping it. Recording any relevant measurements and locations will be incredibly helpful if disputes arise. At a trial or hearing, a these recordings are priceless.

Third, the contractor should consider enlisting the services of a geotechnical expert before conditions are disturbed to document the nature of the condition and how it varies from what was expected. This also relates to trial strategy: An expert will be more effective if he can base his testimony on first-hand experience rather than on suppositions, pictures and second-hand information. For example, in one case, by calling in a geotechnical expert immediately after uncovering the differing subsurface condition, we were able to document the quantum and nature of the condition and establish definitively that the boring locations were 40 feet away from the location shown on the site plan. The owner ended up overruling his engineer and paying for increased efforts expended as a result of the differing condition within 10 days of receiving notice of its existence. In another case, because we enlisted the help of a geotechnical expert right away, we were able to dig test pits, monitor rising water levels, and establish that the contractors had encountered an unusual artesian condition rather than just ordinary subsurface water.

Moving promptly to establish proper and convincing proof can lead to an early resolution or, at the very least, limit the possibility at trial of conflicting factual testimony over the nature, extent and severity of the problems encountered. The simplicity of these strategies should not discount their worth or effectiveness.

Conclusion

Differing site conditions have impeded progress, ruined profit projections, disrupted projects, and even bankrupted contractors. With a better understanding of the contract language that is available to mitigate their effects, and strategies to employ when these conditions arise, there now exists a strategy for managing this still very dangerous risk.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.