This article was originally published in the December 23, 2020 edition of the Daily Journal of Commerce Oregon.
Construction contractors frequently encounter site conditions which differ from those depicted in the plans. When this occurs, the contractor can incur unanticipated costs. For example, in the case of a contract involving excavation, if the plans show that the area to be excavated contains soil, but the contractor hits solid rock, the contractor may have a claim for differing site conditions for the increased cost of excavating solid rock.
In general, bidders are entitled to rely on representations of the site conditions made by the owner in the bidding documents. Many construction contracts allocate the risk of liability arising from site conditions differ from those represented in the plan through a differing site conditions clause. The purpose of the differing site conditions clause is to allow contractors to submit more accurate bids by eliminating the need for contractors to inflate their bids to account for contingencies that may not occur.
Generally, pursuant to differing site condition clauses, the owner is obligated to pay the contractor for the increased cost if the contractor follows the procedures provided for in the clause. Such procedures include stopping work upon encountering the differing site condition, notifying the owner of the condition, and giving the owner an opportunity to determine how to proceed in the face of the condition. Contractors may inadvertently waive entitlement to additional compensation arising from the differing site condition if they fail to fulfill these procedural steps. For example, if the contractor simply proceeds with the work upon encountering the differing site condition and fails to provide notice to the owner, the owner may defend against a differing site condition claim by alleging that it was prejudiced by lack of notice and that it would have chosen to address the differing site condition in a different manner. Therefore, it is important—absent emergency circumstances—that the contractor strictly follow the procedures provided for in the differing site conditions clause.
Owners sometimes try to disclaim any representations regarding site conditions, but courts in various jurisdictions have held that such disclaimers have no effect on the contractor’s right to rely on the representations. Depending on the claim jurisdiction, a contractor typically must prove four elements in order to establish entitlement to compensation due to a differing site condition. First, the contractor must prove that the conditions indicated in the contract differ materially from those it encounters during performance. Second, the contractor must prove that the conditions were reasonably unforeseeable based on all the information available to the contractor at the time of bidding. Third, the contractor must show that it reasonably relied upon the contract documents. Fourth, the contractor must show that it was damaged as a result of the material variation between the expected and the encountered conditions.
An important caveat is that conditions which are discoverable by a reasonable site visit and review of the contract documents cannot be the basis of a differing site conditions claim.
Returning to the example of the excavation contract mentioned above, if the contractor walked the project site prior to bid and noted hard rock protruding from the soil, then it seems unlikely that the contractor would be able to successfully bring a differing site conditions claim, as it would be obliged—based on its observations—to investigate further whether the material to be excavated was actually just soil.
A related doctrine is the doctrine of superior knowledge, which deals with the situation in which the owner is aware of a differing site condition, but fails to disclose it to the contractor.
Pursuant to this doctrine, a contractor has a claim against the owner when (1) a contractor undertakes to perform without vital knowledge of a fact that affects performance costs or duration; (2) the owner was aware the contractor had no knowledge of and had no reason to obtain such information; (3) any contract specification supplied misled the contractor or did not put it on notice to inquire; and (4) the owner failed to provide the relevant information. Such a claim can be brought in addition to a claim for differing site conditions as an alternative means of cost recovery.
As the above discussion indicates, contractors performing work in which the actual project site conditions might vary from those depicted in the plans and specifications should confirm that the contract contains a differing site conditions clause and, if not, seek to negotiate its inclusion in the contract language. With the risk properly allocated, a contractor has some assurance that should it encounter differing site conditions, it will have entitlement to recovery for increased project costs. If the contract does not contain such a clause, the contractor should carefully price its bid taking unknown conditions into account and nevertheless stop work and notify the owner if it encounters a differing site condition.
Brent Carpenter is a shareholder at Jordan Ramis PC and focuses his practice on construction law. Contact him at 503-598-7070 or email@example.com.