Differing Site Conditions

• Author: Richard F. Smith, Val S. Mcwhorter, and W. Stephen Dale
• Pages: 459-492

Diff erin g Sit e Co 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

17

Differing Site Conditions

RIC HARD F. SMIT H, VAL S. McWHORT ER,

and W. STEP HEN DALE

C H A P T E R

459

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

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).