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Differing Site Conditions Produce Differing Challenges

Construction

From Smith Currie

The saying “The best laid plans of mice and men often go awry” can too often apply in the construction industry. A contractor may receive a description of site conditions that is ultimately found flawed or misleading. The costs associated with addressing these surprise conditions often fall on the contractor to pay. The following article details proactive steps to avoid costly obstacles that may cause a project’s success to go awry.

What are Differing Site Conditions?

There are generally two recognized types of differing site conditions. The first, often referred to as a “Type I Changed Condition,” exists when a specification in the conditions indicated in the contract documents varies from what is represented. The second category, generally referred to as a “Type II Changed Condition,” is a variance so unusual in its nature that it materially differs from conditions ordinarily encountered in performing the type of work called for in the geographic area where the project is located.

Recognizing the possibility of both circumstances, most construction contracts contain notice clauses requiring the contractor to stop work and notify the owner before disturbing a differing site condition so as to give the owner an opportunity to inspect and evaluate. Failure to give the required notice may jeopardize the contractor’s ability to recover an adjustment for the additional cost, time, or both required to address the differing site condition.

How can a Contractor Demonstrate a Differing Site Condition?

To recover for a Type I changed condition, a contractor generally must show that: (1) the conditions were indicated in the contract documents; (2) the contractor relied on the conditions indicated in the contract documents; (3) the nature of the actual conditions encountered; (4) the actual conditions encountered materially differed from those indicated; (5) proper notice was given; and (6) the changed condition resulted in additional performance cost, time, or both, as demonstrated by appropriate documentation.

To recoup costs and time for a Type II changed condition, a contractor generally must show that: (1) the conditions encountered were unusual and differed materially from those reasonably anticipated, given the nature of the work and the locale; (2) proper notice was given; and (3) the change resulted in additional performance cost or time, as demonstrated by appropriate documentation.

What is Required by a Contract that Includes a “Site Investigation” Clause?

Bid and proposal documents sometimes contain a site investigation clause that requires the contractor to investigate and examine existing conditions before submitting its bid or proposal. The language may also require a contractor to inspect existing documents detailing site conditions. Such site investigation clauses become part of the contract.

When the contract contains both a site investigation clause and a differing site conditions clause, the contractor’s ability to recover for cost or time may depend on whether the condition was one that a contractor, experienced in the particular field of work involved, would discover based on a reasonable site investigation. While a “reasonable” site investigation does not require an independent subsurface investigation, if a contractor is warned of certain infrastructure issues, such as roads, water, and site utilities, this information may be sufficient to place the risk on the contractor, especially in the context of a design-build project.

Recovery on an otherwise valid differing site condition claim is questionable if the contractor cannot prove that the unanticipated condition increased its cost or the time of its performance. To avoid liability for such differences, documentation of the contractor’s site investigation effort is imperative. Contractors should consider using a standardized checklist to investigate for concealed conditions before submitting a bid or proposal. The checklist should include a notation section where a contractor can note a description of any unusual site or subsurface condition observed, when such an issue was observed, what geotechnical information, reports, surveys or analyses were furnished or requested, and how the owner was provided notice of such variances.

The Importance of Complying with Notice Requirements

Providing notice of a differing site condition to the owner benefits both the owner and the contractor: it allows the owner to change the design or alter the contractor’s method of performance and it prevents the contractor from absorbing the cost associated with the changed condition. In some instances, a lack of strict compliance may be excused if the contractor substantially complied with the notice requirement or if the owner had actual knowledge of a differing site condition but did not provide such information to the contractor. However, a contractor should not assume such scenarios will excuse it from complying with explicit notice obligations contained in its contract. Contractors should always endeavor to give prompt written notice of differing site conditions and to use delivery methods that show proof of the owner’s receipt. Never think that oral notice to the owner or its representative will suffice.

The Use of Exculpatory Clauses

Many public and private owners use differing site condition clauses, but also include other exculpatory clauses in an effort to shift the risk of differing site conditions back to the contractor. Some courts have held such exculpatory clauses are generally not enforceable and have narrowly construed them and their limited effect. That being said, a contractor should not assume a court will automatically insulate it from the impact of an exculpatory clause. Instead, try to negotiate such language and/or include the risk of encountering such conditions in the bid or proposal price.

What if the Contract Has No Differing Site Conditions Clause?

In the absence of a differing site conditions clause, a contractor may be able to recover the additional cost caused by a changed condition if the contractor can establish misrepresentation, breach of warranty, mutual mistake, or establish an owner’s superior knowledge and a duty to disclose on the part of the owner. Reliance on such theories can, however, be risky. If a contract contains no differing site conditions clause, contractors should consider performing a heightened site investigation or, perhaps, forgoing the project entirely.

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