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Back to Basics – Differing Site Conditions

Construction

From Smith Currie

Encountering an unexpected site condition is one of the more common risks on a construction project.  A “differing site condition”, or it is sometimes called a “changed condition”, is generally understood to be a physical condition that is discovered while performing work and that was not visible or otherwise expected at the time of bidding.  Often, the condition could not have been discovered by a reasonable site investigation.  Examples of common differing site conditions include: soil with inadequate bearing capacity to support the building being constructed, soil that cannot be reused as structural fill, unanticipated groundwater, quicksand, mud, rock formations, or other artificial subsurface obstructions. Differing site conditions may also occur within the walls or ceilings of a renovation project such as the renovation of a hospital or historic building.

Since most differing site conditions involve underground conditions, they are typically encountered early in a project, when they have a greater potential to delay the project and create unplanned costs.  So who bears the risk of those delays and unexpected costs?  As with most construction disputes, it depends on what the contract says.

Traditionally, a contractor performing a fixed-price or lump sum contract was expected to protect itself against unforeseen conditions by including a contingency factor in its bid.  The problem with that approach is that a contractor cannot accurately plan or budget for a true unknown.  When a contractor is forced to plan for any contingency that may occur, bid prices are likely to increase, and the owner ends up paying, even if adverse conditions are not present.  On the other hand, the contractor’s contingency may be wholly inadequate to cover the contractor’s actual increased costs.

Recognizing the inadequacy of the traditional approach to risk allocation, in 1926 the federal government created the Differing Site Conditions clause, which has become a part of almost every federal contract for construction projects over the last 90+ years.  The purpose of the clause is to take at least some of the gamble on subsurface conditions out of bidding.  The Government benefits from more accurate bidding and only pays for unforeseen conditions when they occur.  The contractor likewise benefits from more accurate bidding and is able to recover for costs and delays resulting from unexpected conditions.

Since the federal government adopted the Differing Site Conditions clause, the language of that provision or similar language has been widely used in both private and public contracts.  While they are a common feature in many construction contracts, it is important to keep in mind that not all owners include a differing site condition clause in their contract.  Before preparing their bid, contractors should determine whether a Differing Site Conditions clause will be part of the contract and closely scrutinize the specific language of that clause.

Differing site condition clauses are included in all of the widely used form contracts, such as ConsensusDocs, American Institute of Architects (AIA), Design Build Institute of America (DBIA), Engineer’s Joint Contact Documents Committee (EJCDC), and the Federal Highway Administration (FHWA).  While the specific language of the clause may differ, most contracts recognize two types of differing site conditions.  These are commonly known as Type I and Type II changed conditions.

A Type I changed condition is an unexpected physical condition that differs materially from those indicated in the contract.  A Type I claim requires that representations of the conditions were indicated in the contract, that the contractor reasonably relied on those representations, and that the contractor incurred additional costs as a result of encountering conditions that were materially different from what was represented in the contract.  Surveys, maps, drawings, core samples, and boring logs provided by the owner are common examples of information that is considered part of the contract documents

A Type II changed condition is an unexpected physical condition that is of an unusual nature and differs materially from the types of conditions ordinarily encountered and generally recognized in that particular type of work.  Type II conditions are typically asserted when the contract is silent regarding subsurface conditions.  A Type II condition is harder to prove than a Type I condition because the owner has not made representations about the conditions.  Without representations made by the owner, the contractor is expected to have investigated the project and anticipated a wider range of potential problems.

Since differing site conditions have the potential to significantly impact the project schedule and budget, contractors should ask certain questions before bidding any project where subsurface conditions are an issue.  Is geotechnical/soils data being provided?  Are there any disclaimers about the data being provided?  Will the contract include a Differing Site Condition Clause?  Is there a reason to suspect adverse subsurface conditions?  Is there an opportunity for a reasonable pre-bid site investigation?  Having that information allows a contractor to better evaluate the risk of encountering a differing site condition and to adequately account for that risk in their bid.

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