Differing Site Conditions

• Author: Carol J. Patterson - Ross J. Altman - Stephen A. Hess - Allen Overcash
• Pages: 457-495

15.01 INTROdUCTION

Many construction projects involve work below the visible surface of the earth,

or rely in some part on the conditions that exist below ground. Planning and pric-

ing the work from a contractor’s perspective requires some determination of what

those subsurface conditions entail and how they will impact the work. In many

situations, however, neither the owner nor the contractor truly knows the precise

subsurface conditions when entering into an agreement. Often the subsurface

conditions that would affect the work and, therefore, the cost of the work, do not

manifest themselves until after the project has begun. Since the nature of these

site conditions can dictate the resources needed to perform the work and, there-

fore, the price of the contract, both owners and contractors share a keen interest

in managing the risk of unknown subsurface conditions.

The phrases “differing site condition” and “changed conditions” are terms

of art; the terms refer to unknown physical conditions encountered at the

job site that differ materially from the conditions reasonably expected.1 For

The authors wish to thank Julia S. Kopcienski for her valuable assistance in the preparation of

this chapter.

1. See Federal Acquisition Regulation (FAR) 52.236-2(a) (APR 1984).

15

Differing Site Conditions

RICHARD F. SMITH, VAL S. MCWHORTER,

AND W. STEPHEN DALE

CHAPTER

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CONSTRUCTION LAW

458

example, a differing site condition (DSC) may exist where a contractor unex-

pectedly encounters rock rather than sand in its excavation, or a geologic for-

mation that should not have been present in the region, or where the soil

reects a moisture content higher than expected. Regardless of whether the

unexpected condition is latent or obvious, natural or manmade, the contrac-

tual question arises as to how the risk associated with unexpected conditions

should be allocated between the parties, and how to resolve disputes between

the parties when such conditions are encountered. The DSC clause and other

similar provisions help allocate this risk and provide a vehicle for resolving

disputes between project owners and contractors relating to these unexpected

conditions.

Contractors, owners, and the courts have developed several mechanisms to

cope with the lack of perfect information about subsurface conditions. These

mechanisms, as discussed in this chapter, typically seek a balance between

a variety of competing factors, including (1) the extent of pre-bid investiga-

tions that both parties must undertake; (2) the degree of risk each party must

bear; (3) the amount a contractor should include as contingency in its bid; and

(4)the likelihood of unexpected problems.

As a general rule, in the absence of a specic contract clause addressing

subsurface conditions, common law allocates the risk to the contractor and

generally places the burden of discovering and/or overcoming unexpected sub-

surface conditions on the contractor. In practice, however, the bidding process

rarely allows time for a contractor to conduct extensive subsurface investi-

gations on its own, and contracts rarely provide a reimbursement tool for

expensive investigations by each prospective bidder. This inability to conduct

investigations forces contractors to add contingencies to their bids to cover

eventualities that may never occur. This practice articially inates bid prices

to incorporate these contingencies and causes the government or the owner to

pay for contingencies, regardless of whether the adverse subsurface problems

ever materialize.

To combat the practice of adding these kinds of contingencies into bid

prices, standard contract clauses adopted by federal and state governments and

trade organizations place a heavier contractual focus on information provided

by the government or owner to the contractor. These clauses seek to reduce

the contingency included by contractors in their bids by encouraging contrac-

tors to rely on information provided by owners and promising an adjustment

in the contract price for material deviations from the information provided.

This practice allows the government or owner to avoid paying for expensive

contingencies that never occur, and allows the contractor protection against

unforeseen problems that could impact project cost. In addition, it allows the

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Differing Site Conditions 459

owner to evaluate bids from contractors on the same pricing basis, rather than

on unknown contingencies.

To provide context for the modern clause-based approach to changed

subsurface conditions, this chapter rst reviews the common law heritage of

the Differing Site Conditions clause and the evolution of risk allocation for

subsurface conditions. The common law tradition employed general contract

principles, including warranty, misrepresentation, mutual mistake, and other

conceptual frameworks to allocate responsibility for price increases due to

unexpected conditions. After reviewing the various common law approaches,

this chapter turns to an overview of governmental and commercial contract

clauses designed to address these issues as well as their application in the fed-

eral, state, and private context.

15.02 co mmon l aW

A. Contracts without a Site Indications or Risk Allocation Clause

Where xed-price construction contracts include no special provision for sub-

surface conditions, the contractor normally bears the risk of unforeseen con-

ditions. In that context, the U.S. Supreme Court summed up the allocation of

risk in such circumstances stating: “Where one agrees to do, for a xed sum,

a thing possible to be performed, he will not be excused or become entitled

to additional compensation, because unforeseen difculties are encountered.”2

This method of contract risk allocation has been echoed in decisions from

state and federal courts as well as in the Federal Acquisition Regulation (FAR).

The FAR declares that a rm, xed-price contract without more

provides for a price that is not subject to any adjustment on the basis of the

contractor’s cost experience in performing the contract. This contract type

places upon the contractor maximum risk and full responsibility for all

costs and resulting prot or loss. It provides maximum incentive for the

contractor to control costs and perform effectively and imposes a minimum

administrative burden upon the contracting parties.3

This concept of “maximum contractor risk” governed construction contracting

until the advent of special risk-allocating clauses and other legal theories that

allowed a contractor to recover increased costs due to unexpected subsurface

conditions.

2. Spearin v. United States, 248 U.S. 132, 136 (1918).

3. Dalton v. Cessna Aircraft Co., 98 F.3d 1298, 1304 (Fed. Cir. 1996), discussing FAR

16.202-1 and rm xed-price services contracts (emphasis added).

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