Construction Contracts

Top Ten Construction Clauses - the Differing Site Conditions Clause

Garry R. Boehlert, George E. Rahn, Jr., Donald A. Rea and Doreen M. Zankowski | Saul Ewing LLP
April 30, 2015

This clause is intended to address equitable adjustments to contract clauses when site conditions are different than anticipated under the contract terms.  AIA Document A201-2007, General Conditions ¶3.7.4 provides that if the conditions are found to “differ materially and cause an increase or decrease in the Contractor's cost of, or time required for, performance of any part of the Work, (the architect) will recommend an equitable adjustment in the Contract Sum or Contract Time, or both.” ConsensusDOCS 200, Standard Agreement and General Conditions Between Owner and Contractor, paragraph 3.16.2,  similarly states that contractors “shall stop Work and give immediate written notice” to the owner and the architect/engineer when they encounter differing site conditions and are not required “to perform any work relating to the unknown condition without the written mutual agreement of the Parties.”  Changes related to pricing, work schedule and notice of claims, all due to the unknown condition, are governed by other sections of the contract.

Legal pitfalls

The differing site conditions clause is a product of federal construction contracts that arose from the federal government’s attempt to lessen site inspection burdens on its contractors and reduce “worst case scenario” bidding that unnecessarily increased site development costs.  See F.A.R. § 36.236-2, 48 C.F.R. § 52.236-2, and F.A.R. § 52.236-3, 48 C.F.R. § 52.236-3 (providing federal contract clause language for differing site conditions and inspections). However, the clause evolved into a source of litigation over “material” differences in physical site conditions and “materiality” is truly in the eye of the beholder.  The clause allocates the risk of unanticipated site conditions – typically subsurface conditions – to the owner absent an inspection by the contractor.  The clause permits equitable adjustments in the contract for differing physical conditions at a site and typically divides claims into two categories:  Type I and Type II.  Type I claims are akin to common law misrepresentation and implied warranty claims that provide relief for physical site conditions that vary “materially” from indications provided in the contract documents.  Type II claims encompass the common law doctrine of mutual mistake for completely unknown or unusual site conditions. Unfortunately, claims for “equitable” adjustments can often dwarf the original contract amount.

Regardless of the type claimed (or whether any type is claimed at all), the key factor of proof is materiality, which is one of those generally indeterminate terms that often precludes summary judgment.  A recent and all-too-typical example is found in Weston/Bean Joint Venture v. United States, 115 Fed. Cl. 215, 216 (2014).  There, the court was presented with cross-motions for summary judgment, and the “gravamen of [the] complaint consists of a ‘Type I’ differing site conditions claim based on the alleged existence of ‘subsurface or latent physical conditions at the site which differ materially from those indicated in [the] contract.’”  Despite both parties moving for summary judgment, the court denied the cross-motions on the grounds that “the ‘better course’ here is to deny the cross motions for summary judgment and proceed to a full trial.”

The Weston/Bean court did provide the following “six indispensable elements of proof for a differing site condition claim:

  1. that the contract affirmatively indicated subsurface conditions upon which the contractor's claims are based;
  2. that the plaintiff acted as a reasonably prudent contractor in interpreting the contract documents;
  3. that the contractor reasonably relied on the indications of subsurface conditions in the contract;
  4. that the subsurface conditions actually encountered differed materially from subsurface conditions indicated in the contract;
  5. that the subsurface conditions encountered were reasonably unforeseeable; and
  6. that the contractor's claimed excess costs were solely attributable to the materially different subsurface conditions.”

Thus, litigation concerning differing site conditions is often too fact intensive to resolve on motions and, thus, represents significant costs and exposure.

Mitigating litigation risks

Inasmuch as the majority of differing site condition claims arise out of subsurface conditions, the single most important recommendation is to provide as thorough and detailed a geotechnical report as possible for the site as part of the contract documents.  Although different courts view the contractor’s site inspection responsibilities differently in light of site inspection requirements in the contract documents, it is advisable for the contract documents to provide (i) that all inspections and geotechnical information are provided for informational purposes; and (ii) the burden remains on the contractor to inspect the readily available and observable site conditions itself.  Finally, notice requirements for identification of differing site conditions when encountered are usually (but not always) enforced by the courts as well, so contract administration remains critical.

The content of this article is intended to provide general information and as a guide to the subject matter only. Please contact an Advise & Consult, Inc. expert for advice on your specific circumstances.

SOURCE: www.saul.com

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