I recently attended an ABA conference in Newark, New Jersey in which the theme was “Finding Common Ground in Drafting and Negotiating Design Clauses” in construction contracts. One of the speakers presented a segment regarding differing site conditions in which he articulated the major risks that differing site conditions present to both owners and contractors and the potential impact of an “unfavorable” drafting of this clause. His presentation laid the “groundwork” (pun intended) for the challenges of owners and contractors in finding “common ground” (yep, another bad play on words) in the site conditions contract clause.
On the one hand, the owner’s goal is to ensure that the design and the construction means and methods are compatible with the site conditions and that the site-related costs are captured in the project’s budget. The Contractor’s goal is to ensure that its bid either incorporates a contingency to cover the risk of an unforeseen site condition or has assurances that the contract provides a mechanism to allow for reimbursement for the work.
No Clause, Contractor Bears All Risk, or Some Middle Ground?
Since the common law rule generally places the risk on the contractor, barring a material misrepresentation or material omission from the owner, the owner may elect to delete all site conditions clauses or draft a clause whereby the “contractor bear all risks.” A contractor bears all risk clause would require that the contractor has exclusive site inspection obligations and provides a total disclaimer of information provided by the owner. The effect of this approach, however, is that the contractor must bear the high cost of site investigations, with few if any, experienced resources available to conduct the testing, which needs to be completed within short bid time. As a result, the contractor may be unlikely to conduct the testing, submit a bid with an arbitrary contingency amount or bear the risk and plan to submit change orders in the event a site condition problem arises. This is an unfavorable situation for the contractor. Additionally, under a “contractor bears all risks” approach, the owner should expect to bear the cost of the unknown in the form of higher bid pricing, which may result in a profit windfall for the contractor.
So, there is in fact some common ground between the owner and contractor on this issue. Both the owner and the contractor wish to avoid costly, and time consuming site investigations and minimize economic inefficiencies. Therefore, the owner and contractor are more likely to agree to include a differing site condition clause whereby the contractor is compensated for legitimately differing conditions, and the owner is relieved of bearing the cost of an unused contingency.
Form Contract Clauses
The AIA, Consensus Docs and EJCDC form documents all contain risk shifting clauses for differing site conditions. The ABA’s Second Edition of The Construction Contracts Book: How to Find Common Ground in Negotiating Design and Construction Contract Clauses articulates the frequently used differing site condition clauses among these form contracts. Despite the differences among commonly used site condition clauses, the most popular provisions contemplate both Type I and Type II differing site conditions in an effort to balance risk among the parties.
Proving Type I and Type II Claims
To recover in Type I conditions, the contractor must establish that the conditions encountered differ from what was represented in the contract documents and that the contractor reasonably relied on this information. The contractor must show that the conditions are: 1) subsurface or concealed; 2) physical in nature; 3) materially differ from the contract documents; and 4) the contactor reasonably relied upon this information. A Type II condition focuses on conditions that are different from those normally expected in connection with the type of work being performed. The contractor must show that it encountered an: 1) unknown physical condition; 2) of an unusual nature; and 3) which was different from those ordinarily encountered. A Type II condition seeks a change based on the common law doctrine of mutual mistake, and is more difficult to prove than a Type I, and places a heavy burden on the contractor. Unlike a Type I claim where the proof is a comparison with the contract documents, for Type II claims, the contractor must demonstrate a difference from what is “ordinarily encountered.”
Owner Risk-Shifting Alternatives
Since the owner is required to provide the contract documents, it would on first blush seem as though a contractor is well protected in Type I claims, however, in order to minimize risk, owners frequently include a contractor site inspection clause and/or disclaimer clause(s) to negate the owner’s responsibility for the accuracy of the site information provided or the exclusion of information. The use of these clauses, thereby limits the contractors ability to prove that it “reasonably” relied on the contract documents for a Type I clause, and restricts a Type II claim for unknown or unusual site conditions to those not reasonably ascertainable by a visual inspection. However, the enforceability of these clauses will depend on the specificity of the clause and whether or not it excludes reasonable reliance on the information contained in the contract documents.
Contractor Risk-Shifting Alternatives
In addition to the alternatives described above, which generally shift the owner’s risk to the contractor, the contractor may consider requiring high levels of specificity regarding what will be included and excluded from its site inspections. In lieu of, or in addition to the modification of the site inspection or disclaimer clauses, the contractor may also consider adding a clause for the development of a Differing Site Conditions Contingency. A contingency of a specified amount, would be earmarked for payments related to increased costs resulting from differing site conditions. In contrast to a generic differing site conditions clause which does not articulate the possible expense, this clause provides the owner with a budgeted amount, which is additional, separate and distinct from a bid contingency. However, should the owner resist, the contractor may consider adding language which provides that differing site condition costs in excess of the contingency amount, will be the responsibility of the contractor.
While contractors and owners may elect to ignore the possibility of differing site conditions, as drafters of construction contracts, construction attorneys and design professionals, it is incumbent upon us to contemplate the worst case scenario, balance the risk between the parties, and find the common ground.