Protecting Yourself from Differing Site Condition Impacts

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Construction Law
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At the start of a construction project, the contractor has certain expectations of the physical conditions to be encountered at the project site.  Those expectations may be born of the representations of the owner, a review of site inspection reports, the contractor’s inspection of the site or the contractor’s existing familiarity with it.  If, for whatever reason, those expectations prove to be inconsistent with actual site conditions, this may result in substantially increased costs and schedule impacts – a situation that pleases neither contractor nor owner.  This article will examine how a contractor may best protect itself from differing site conditions (“DSC”) and the potentially crippling costs that come with them.

A.  The Two Types of Differing Site Conditions.

There are two types of DSCs, aptly named Types 1 and 2.  Type 1 is a condition that is materially different from the conditions represented in the contract.  Boring logs that indicate a soil quality that is materially different from the soil quality encountered at the site, for example, would be a Type 1 DSC.  A Type 2 DSC exists where the condition encountered is materially different from what one would normally expect to encounter in this particular situation.  So if the project is the renovation of a mansion built in the 1800s, one would not expect to find asbestos in it as asbestos was not typically used in home construction until the early twentieth century.

B.  Addressing Differing Site Conditions With a Construction Contingency.

A construction contingency is an amount of money, typically five to ten percent of the contract price, that is included in the contract to cover unforeseen conditions that may arise during the course of the project.  Even if no unforeseen condition arises, the contractor will typically still be entitled to the full amount of the contingency.  On the other hand, should an unforeseen condition arise that proves far more costly than the amount of the contingency, the contractor will typically be precluded from recovering those higher costs. 

Relying upon a contingency clause to address DSCs has drawbacks.  First, the owner’s construction costs are increased regardless of whether any unforeseen conditions actually arise.  Second, they act as a disincentive for owners to thoroughly inspect the site and provide such information to contractors as the owner has effectively already paid contractor for accepting the risk of an unforeseen condition.  And third, they act as an arbitrary cap on the costs that a contractor may recover as a result of encountering an unforeseen or differing site condition.  Such costs could ultimately amount to a multiple of the contingency amount.        

Notwithstanding these shortcomings, construction contingencies are still routinely included in construction contracts. 

C.  The Differing Site Condition Clause.

In 1926, the federal government, acting through the Federal Board of Adjustments and Contracts, required that all federal construction contracts include a “changed conditions” clause.  The purpose of the clause was to provide a mechanism by which the contract could be modified and the contractor equitably compensated should the contractor incur costs or suffer delays due to conditions that differ materially from conditions indicated in the contract.  The clause was subsequently expanded to include conditions which differ materially from conditions ordinarily encountered i.e. Type 2.  And in 1963 it was renamed the “differing site condition” clause. 

Eventually, the construction industry as a whole recognized the value of the clause and began including it in private construction contracts as well.  Iterations of the clause are now included in most of the industry’s form contracts including those of the American Institute of Architects (AIA), the ConsensusDocs and the Design Build Institute of America (DBIA). 

D.  Does a Differing Site Condition Clause Alone Afford the Contractor Adequate Protection?

The short answer is no, a DSC clause is not enough.  The remainder of the contract must be carefully examined for clauses that may erode or significantly qualify the protections of the DSC clause. 

  1. Disclaimers of Responsibility for Site Conditions.

Construction contracts may include clauses in which the owner, even after providing detailed site data to the bidders, states that it makes no warranty with respect to the site conditions and obligates the contractor to conduct any and all site inspections that it deems necessary.  Including such a disclaimer in a contract containing a DSC clause would likely create a contradiction of terms.  A contractor seeking to trigger the DSC clause would inevitably be faced with the owner’s argument that contractor had accepted the risk of any DSCs.  The contractor here has the better side of the argument.

Contractors have the right to assume that the information with which the owner provides them is accurate.  They need not conduct additional testing to confirm that the owner’s representations are correct.  Where the contract contains a site inspection obligation, Courts have interpreted this as requiring only a “reasonably conducted physical inspection.”  Jack B. Parson Const. Co. v. State by and Through Dept. of Transp., 725 P.2d 614, 617-18 (Utah 1986).  See also Travelers Cas. And Sur. Co. of Amercia v. U.S., 75 Fed. Cl 696 (2007) and Robert E. McKee, Inc. v. City of Atlanta, 414 F. Supp. 957, 959 (N.D. Ga. 1976).  Even when the contract requires a site inspection, a contractor will not be faulted for failing to conduct it if it would not have revealed the DSC at issue.  U.S. v. Atlantic Dredging Co., 253 U.S. 1 (1920). 

The courts are also disinclined to enforce general disclaimers of responsibility for site conditions such as “contractor accepts the site as is.”  Specific disclaimers, however, such as one concerning a particular site condition, are much more likely to be enforced.  For example, a clause stating that “contractor acknowledges that rock ledge and boulders are found on the site at various depths and in unknown quantities” would likely be sufficiently specific and therefore enforceable.  But rather than relying upon the court or an arbitrator to resolve a disclaimer in your favor, it is far better to delete or at least pare back such clauses during contract negotiations.

  1. The Importance of Strictly Complying with the Terms of the Differing Site Condition Clause and Proving the Impact of the DSC.

A DSC clause is not a talisman.  Its mere existence will not shield a contractor from the impact of overcoming a differing site condition.  As with so many powerful laws and contract terms, to avail oneself of its protection, one must not only comply with its conditions but take additional steps to document and preserve its claim. 

On its face, the requirements of the AIA’s DSC clause appear straightforward: 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 14 days after first observance of the conditions.

AIA Document A201 – 2017, § 3.7.4 Concealed or Unknown Conditions (emphasis added).

While the fourteen day deadline for providing notice is objectively clear, the determination of whether a particular condition encountered is materially different from what was expected is inherently subjective.  For example, how different must the soil encountered be from that indicated in the boring reports for that difference to be considered “material”?  And for how long must one encounter the different soil before it is a DSC and not just a fleeting anomaly?  Because there are no clear answers to these questions, one is wise to err on the side of caution.  Put the owner on early notice of the perceived DSC.  Should it prove to be insignificant or a brief anomaly in the soil conditions, the notice provided to the owner can always be withdrawn. 

Also critical to the preservation of the DSC claim is the immediate stoppage of work at the area of the DSC.  Failure to do this gives the owner the argument that it was denied an opportunity to inspect and assess the DSC in its original state and possibly have another contractor address the DSC at a lower cost.  In addition, any added costs that contractor incurs prior to notifying owner of the DSC may be more difficult to recover as owner may ultimately not agree that it is a DSC.

  1. Memorializing the DSC.

A picture may be worth a thousand words but a video is priceless.  Very often, the difficulty of working through a DSC cannot be adequately captured with photos alone.  Actual video is required to show, for example, the difficulty of excavating rock that was either never supposed to be present or proves to be much harder than the original geological reports indicated.  In light of the proliferation of smart phones and how easy they make it to create high quality videos, it is surprising how few contractors take advantage of them to memorialize site conditions, the progress of their work and, ultimately, claims.  Instead, they rely far too much on their daily reports to record site conditions.  While these reports are important, they are written by the contractor’s employees who will not necessarily be objective, accurate or thorough. 

A video, by comparison, is generally unassailable in its objectivity and accuracy.  And keep in mind its ultimate purpose is as evidence to be presented to a judge or arbitrator who may or may not be well-versed in construction.  They will much prefer a video depiction of the site conditions over an expert’s sterile recitations of, for example, soil boring results and rock hardness tests alone.   

Also critical to the preservation of a DSC claim (and indeed any construction claim) is the documentation of ones costs and schedule impacts.  If possible, a separate cost code should be established for the DSC-specific costs and any resulting delays should be clearly indicated in the schedule updates.  And if manpower levels permit, one or more persons should be assigned to tracking and maintaining these costs and delays.

E.  Alternative Bases for Recovery in the Absence of a DSC Clause.

Preferably, your contract will have a clear DSC clause that is neither diluted nor emasculated with disclaimers.  But in the absence of it, is the contractor out of luck should he encounter and suffer a DSC?  In short, not necessarily.  There are alternative legal theories for recovery that are not based on the actual terms of the contract.

  1. Misrepresentation. 

This is a (i) statement of fact by the owner which proves to be untrue; (ii) which the owner made negligently; and (iii) which the contractor reasonably relied upon to its detriment.  A simple example of this would be an owner representing a building as being free of asbestos despite the fact that owner never inspected the building or perhaps did only a woefully inadequate inspection of it. 

  1. Fraud.

This is very similar to a misrepresentation claim with the only difference being that the owner made the statement of fact despite actually knowing it to be false.  This is typically very difficult to prove.

  1. Breach of Duty to Disclose/Superior Knowledge Doctrine.

Used primarily in contracts with government bodies, this requires a showing that (i) the contractor was lacking certain vital information at the outset of the contract; (ii) owner was aware contractor lacked this information and would not have known to obtain it; (iii) something in the contract either misled contractor, or failed to put him on notice of the need to inquire further; and (iv) owner never provided the information at issue.  

  1. Breach of Implied Warranty/Spearin Doctrine.

This is based on the widely recognized premise that the owner warrants that the plans and specifications are accurate, complete and satisfactory to adequately perform the work.  The challenge in using this in the DSC context is in characterizing a DSC as being actually a deficiency in the plans.  A differing soil condition may, for example, require pilings to be driven further into the ground than indicated in the plans.  This arguably renders those plans inaccurate and inadequate to perform the work. 

Each of these alternative theories of recovery are more difficult to prove than proceeding with a DSC claim under the, hopefully, plain wording of the contract.  They are accordingly more “last resort” than compelling alternatives.

CONCLUSION

The first bulwark against the vast majority of construction claims and disputes is a carefully drafted contract.  This is especially true when it comes to preserving DSC claims.  But this is only the first step.  Even the strongest DSC claim will fail if it is not supported by documented costs, clear visual representations of the DSC and likely expert testimony.