Differing Site Conditions

AuthorRichard F. Smith, Val S. Mcwhorter, and W. Stephen Dale
Diff erin gSit eCo ndit ions 459
17.01  in tRo duC tio n
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
pricing 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 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 therefore 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, which refer to unknown physical conditions encountered at the job site
Differing Site Conditions
The authors wish to thank Kathryn T. Muldoon for her valuable assistance in the preparation
of this chapter.
460 CO N S T RU C T I O N L A W
that differ materially from the conditions reasonably expected.1 For example, a
differing site condition may exist where a contractor unexpectedly encounters
rock rather than sand in its excavation, or a geologic formation 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 contractual 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 Differing Site Conditions clause and other similar provi-
sions 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 investigations
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 investiga-
tions on its own, and contracts rarely provide a reimbursement tool for expen-
sive investigations. 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
1. See Federal Acquisition Regulation (FAR) 52.236-2(a).
Diff erin g Sit e Co ndit ions 461
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,
the 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.
17.02  Com mon  Law
A. Contrac ts witho ut a S ite Indi cations or Risk Allocat ion Clau se
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 saying: “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 administra-
tive 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
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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