Risks of Differing Site Conditions

Contractors frequently experience site conditions differing from those anticipated in their bids. An example would be existing facilities, which are to form part of the contract work, that differ in their location, makeup, or state of repair from information in the bid documents or from what would be apparent to a contractor making a responsible, prebid inspection. If the differing site conditions should have been discovered or anticipated by the contractor and the contractor failed to do so, the chances of receiving additional compensation through a change order are very low. However, if the condition differs from what was indicated in the plans and specifications or what was apparent from inspections, the likelihood of receiving additional compensation for changes in the work can be quite high.

Differing site conditions (also known as changed conditions) are frequent sources of dispute between owners and contractors. Many contractors proceed with work under changed conditions with the misconception that conditions at the site, which they neither expected nor included in their bid, automatically constitute extras and should be addressed as such. Unfortunately, this assumption can lead to a costly lesson in contract law. A contractor does not have an implied right to receive additional compensation for unanticipated site conditions. Any such rights must flow from the contract, or from other conditions that may arise from the differing condition, such as changes to the work or impossibility of performance.

Normally, recovery of additional costs incurred due to differing site conditions is governed by the express language in the contract. A contract may contain a differing site conditions clause, as federal construction contracts do; or it may be silent on the topic; or it may contain an explicit disclaimer making such costs the responsibility of the contractor. Applicable language will usually be found in the general conditions of the contract. The specifications often will contain further language providing limited disclaimers or changed conditions coverage (such as a clause making the contractor responsible for underground utilities or one providing payment adjustment for a specific item that had to be bid on the basis of assumed conditions). The lack of specific contract language or the limitations imposed by specific disclaimers can be crucial to a contractor’s entitlement.

When the owner provides information to the contractor for bidding, one of the objectives is to reduce contingency costs included in bids for uncertainties regarding site conditions. In doing so, the owner assumes a corresponding liability for conditions encountered that differ materially from the information the owner provided. In most cases, a contractor’s claim may be supported by showing that the conditions encountered were different from those represented by the owner in the bid documents. A contractor’s claim becomes problematic when the differing site conditions are not at variance with what is shown or indicated in the contract documents. The latter type of claim may prevail only where the contract contains language such as that found in the federal differing site conditions clause, which includes, “unknown physical conditions at the site, of an unusual nature, differing materially from those ordinarily encountered and generally recognized as inherent in work of the character provided for in this contract.”

How can a CONTRACTOR reduce the risks of differing site conditions?

• Try to negotiate for a differing site conditions clause in the contract and against an owner’s disclaimer of these conditions.
• Be knowledgeable of the benefits and limitations of the contract language and of the extent and limitations of the information supplied by the owner. Inadequate subsurface information accompanied by a disclaimer should be considered a red flag.
• Conduct a thorough and responsible investigation of the site prior to bid and document the investigation and its results.
• Promptly notify the owner or general contractor of any unforeseen site conditions encountered, even if you are not yet certain that you will be submitting a change order request. Lack of notice is a strong defense against differing site conditions claims, as owners must be given an opportunity to seek the most economical course of action.
• If the owner has attempted to disclaim responsibility for site conditions in the contract, a change order still may arise from a design change forced by the condition, e.g. a deeper foundation. And the owner may be held responsible for specific representations in the contract documents in spite of disclaimers.

What should an OWNER do to minimize the cost of differing site conditions?

• Ensure that the designer receives or obtains adequate information, specifically subsurface information, for a reliable design.
• Include a differing site conditions clause in the contract. This advice may appear to be backwards; however, federal government studies have shown that disclaimers do not discourage claims for differing site conditions, but they do deter early resolution of such claims and lead to costly disputes. These same studies have demonstrated that in most claim situations, early resolution is the most economical option for owners.
• Enforce the notice clause in your contract and respond promptly when given notice of a differing site condition. If the condition is not the responsibility of the contractor, work with the contractor to determine the best course of action and issue change orders accordingly.

Differing site conditions can undermine a project’s success faster and with greater financial impact than most other disruptions. If differing site conditions are not dealt with promptly, expensive claims for constructive change and constructive acceleration are likely to follow. Knowledge of the contract provisions and site conditions can provide considerable rewards to both contractor and owner.

Source: Interface Consulting

Released: July 30th, 2007 11:15 AM

Phone: (713) 626-2525

Fax: (713)626-2555

Email: contact@interface-consulting.com

Category: construction claims analysis

Subcategory: interface