I Know What I Know Really Reminds Me of Money

• Author: By Christian C. Trevino and Robert J. MacPherson
• Pages: 9-27

Published in The Construction Lawyer Volume 43, Number 1, ©2024 by the American Bar Association. Reproduced with

permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any

means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

Forum on Construction Law The Construction Lawyer Volume 43, Number 1

9

I Know What I Know—Really Reminds Me of Money

By Christian C. Trevino and Robert J. MacPherson, Cokinos | Young in San Antonio, Texas, and Saddle

River, New Jersey

Attorney Christian C. Trevino, ctrevino@cokinoslaw.com, and Principal Robert J. MacPherson,

rmacpherson@cokinoslaw.com, are based out of the law offices of Cokinos | Young in San Antonio, Texas,

and Saddle River, New Jersey, respectively. Trevino focuses primarily on construction law and commercial

litigation. McPherson acts as construction contract and disputes counsel for contractors, subcontractors,

suppliers, and owners involved in building and heavy civil construction for public and private work. He

is a Fellow of the American College of Construction Lawyers and former Chair of the American Bar

Association’s Forum on Construction Law.

Background

Much like casinos, construction projects are all about risk vs. reward. What is a party’s risk tolerance

and how will it allocate that tolerance to maximize its prot? From bidding projects to nalizing contract

negotiations, a signicant portion of a party’s risk portfolio is determined before breaking ground on a

project. From there, owners, general contractors, and subcontractors alike live in a world of constant

adjustments to comply with contractual obligations and complete the project within a certain time and

budget. But what happens once ground is broken? What happens when you nd that the ground beneath

you isn’t really what you thought it was? Who pays for it? Why?

Allocating for unexpected conditions continues to be a hot point in construction contracts despite major

strides in the industry—whether it be site conditions, force majeure, or the currently pressing material

price escalations. In a constant battle to shift the risk, legislatures and courts have created safeguards to

keep business moving forward.

Today, there are generally four dynamics for risk allocation with respect to unexpected physical conditions

at a job site:

1. Contractor bears all the risk;

2. Owner produces a geotechnical report of the conditions with disclaimer(s);

3. Owner produces a geotechnical report of the conditions without disclaimer(s); or

4. There exists a differing site conditions clause and/or change order relief.1

The developments of scenario 2–4 have been relatively recent in nature as contractors were traditionally

expected to shoulder the burden of unexpected risk.

Differing site condition (DSC) claims are always interesting—factually and legally—and tend to involve

relatively large dollars. A DSC claim is a unique window into the world of construction law. DSC claims

involve contract interpretation, issues as to whether the plans and specifications are complete and

accurate, scope of work issues, claim and notice issues, damage calculation issues, and more.

Most importantly, DSCs are perhaps the best example of how risk allocation in a construction contract

should work. The basic principle is that risk should always be allocated to the party best able to control

Published in The Construction Lawyer Volume 43, Number 1, ©2024 by the American Bar Association. Reproduced with

permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any

means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

Forum on Construction Law The Construction Lawyer Volume 43, Number 1

10

that risk. When it comes to conditions at the project site, the owner of that site (with the assistance of its

design and construction professionals) is typically in the best position to investigate those conditions and

determine what can be built on that site and how. A contractor asked to prepare a competitive bid within

a short period of time is typically not in a position to do that. Even a design-builder is typically brought

in after an owner has made the initial decision about what kind of project will be constructed on the site,

usually after the owner’s consultations with design and other construction professionals.

If the site has conditions that will require special attention (e.g., in the case of high groundwater levels or

an existing building for which there is no reliable as-built information), an owner, in theory, is only able to

factor a budget for dealing with those conditions after determining—to the best of its ability—the extent

of those conditions. The owner is in control. It can do whatever investigation of the site is warranted

based on its proposed project, and based on the results of that investigation to determine whether the

planned project is viable.

If an owner asks the contractor to assume all site condition risks, the contractor would likely include in its

bid price a contingency to cover the risk of unanticipated or unusual site conditions. If no such conditions

are encountered, the contractor stands to recover the potentially large contingency via payments against

the contract price.

If the owner accepts the site condition risks, however, the owner will only pay the contractor for dealing

with unanticipated or unusual conditions actually encountered. And in any event, the owner will pay no

more than it would have paid had the conditions been known at bid time.

A DSC clause relieves the contractor of assuming the risk of encountering unanticipated or unusual site

conditions and provides a remedy—typically a change order or claim—if such conditions are encountered

while eliminating over-inflated contingencies and bids. DSC claims are construction law in a nutshell, and

an examination of differing site conditions can lead to a better understanding of construction law.

Differing Site Conditions

One of the rst strides forward in risk allocation came in 1921 when the single largest construction owner

in the country—the federal government—began to accept the risk of adverse subsurface or latent physical

conditions to “take at least some of the gamble on subsurface conditions out of bidding.”2 In 1926,

the Federal Board of Contracts began requiring DSC clauses in its construction contracts.3 The Federal

Acquisition Regulations (FAR) dene a differing site condition as any condition encountered that differs

materially from those (a) indicated in the contract or (b) ordinarily encountered and generally recognized

as inherent in work of the character provided for in the contract.4 DSCs are not limited to instances of

inadequate soil and can include cases of unanticipated water conditions (static or permeable), quicksand,

muck, rock formations (that are either excessive or insufcient), and articial (manmade) subsurface

obstructions.5

The DSC clause relieved the contractor from assuming the risk of encountering conditions differing

materially from those indicated or ordinarily encountered and provided a contractual remedy so that

the matter could be handled as an item of contract administration.6 This action was taken not out of

generosity or goodwill on behalf of the federal government but rather to “eliminate the contingency factor

for subsurface conditions and to limit the latent costs incurred by contractors for pre-bid subsurface

explorations.”7 Simply put, by accepting the risk for differing site conditions, the federal government

was able to receive lower bids because contractors did not have to inflate their contingencies to account

for the risk of the unknown. Contractors were also spared the added cost of exhaustive site inspections,

consultant fees, and the additional time to bid a project necessitated by considering potential site