Differing Site Conditions

14 May, 2016 CONSTRUCTION LAW 0

Chapter 12
Differing Site Conditions

One of the more common risks on a construction project arises when a contractor encounters conditions that materially differ from those reasonably contemplated when the contractor bid on the project. Unanticipated site conditions often generate extra costs and can also substantially delay and disrupt the project. Since these delays usually occur at the front end of a job, they can have a greater overall impact on the project.

I. “Differing Site Condition” Defined

In the construction industry a “differing site condition”—or “changed condition,” as it is sometimes called—is generally understood to be a physical condition encountered while performing the work that was not visible and not known to exist at the time of bidding, and which materially differs from the condition believed to exist at the time of pricing the contract.¹ Often this condition could not have been discovered by a reasonable site investigation. Examples of changed conditions or differing site condition problems include: soil with inadequate bearing capacity to support the building being constructed, soil that cannot be reused as structural fill, unanticipated groundwater (static or percolating), quicksand, muck, rock formations (excessive or insufficient quantities of rock), and artificial (man-made) subsurface obstructions.

II. Responsibility for Differing Site Conditions

Under a traditional contract risk allocation analysis, a contractor performing a fixed-price (lump sum) contract would be expected to protect itself against unforeseen conditions by including a contingency factor in its bid. The basic flaw in this approach is that a contractor cannot accurately value a true unknown. Even if included, the bid contingency may end up being totally inadequate or, alternatively, grossly inflated. The one constant is that including any contingency increases bid prices and thus works to the detriment of the owner if adverse conditions are not encountered. In other situations, the contingency may prove wholly inadequate to cover the contractor’s actual increased costs.

Differing site condition clauses are a common feature in many construction contracts to alleviate some of the risks associated with unexpected site conditions. The United States Court of Claims (now the United States Court of Federal Claims) explained that “the purpose of the changed conditions clause is thus to take at least some of the gamble on subsurface conditions out of bidding.”² The court added that “[t]here will be no windfalls and no disasters. The Government benefits from more accurate bidding, without inflation for risk which may not eventuate. It pays for difficult subsurface work only when it is encountered and was not indicated in the logs.”³

Despite this logic, some private and public owners decide not to include a changed conditions clause in their contracts. In fact, some owners go further and include clauses that purport to place all possible risks of differing site conditions on the contractor. These exculpatory clauses, or disclaimers, indirectly invite bidders to include contingencies in their bids.

The absence of a differing site conditions clause in the contract, however, does not necessarily mean that a contractor will be denied relief if adverse site problems arise. The most prominent theories of recovery advanced in such cases include: (1) breach of warranty, (2) breach of a duty to disclose available information, (3) mutual mistake, (4) innocent misrepresentation, and (5) fraud. These theories are discussed later in the chapter following a more detailed review of the standard clauses and types of changed conditions problems.

III. Standard Industry Differing Site Conditions Clauses

Today, virtually all construction industry “standard” form contracts between owners and contractors contain some type of differing site conditions clause. The first such standard clause appeared in 1927 in the federal government’s standard fixed-price construction contract. Uniformly, the purpose of the clause is to place the risk of reasonably unexpected site conditions on the owner by granting a price increase and time extension to contractors in the event that such conditions are encountered.⁴

A. Federal Government Contracts

The text of the current differing site conditions clause used in federal government contracts was adopted in 1984 and is set forth in the Federal Acquisition Regulation at FAR § 52.236–2.⁵ That clause provides:

DIFFERING SITE CONDITIONS (APR 1984)

The Contractor shall promptly, and before the conditions are disturbed, give a written notice to the Contracting Officer of (1) subsurface or latent physical conditions at the site which differ materially from those indicated in this contract, or (2) unknown physical conditions at the site, of an unusual nature, which differ materially from those ordinarily encountered and generally recognized as inhering in work of the character provided for in the contract.
The Contracting Officer shall investigate the site conditions promptly after receiving the notice. If the conditions do materially so differ and cause an increase or decrease in the Contractor’s cost of, or the time required for, performing any part of the work under this contract, whether or not changed as a result of the conditions, an equitable adjustment shall be made under this clause and the contract modified in writing accordingly.
No request by the Contractor for an equitable adjustment to the contract under this clause shall be allowed, unless the Contractor has given the written notice required; provided, that the time prescribed in (a) above for giving written notice may be extended by the Contracting Officer.
No request by the Contractor for an equitable adjustment to the contract for differing site conditions shall be allowed if made after final payment under this contract.

B. The American Institute of Architects

In 2007, the American Institute of Architects (AIA) updated AIA A201, General Conditions of the Contract for Construction, which contains the following differing site conditions clause:

3.7.4 Concealed or Unknown Conditions. If the Contractor encounters conditions at the site that are (1) subsurface or otherwise concealed physical conditions that differ materially from those indicated in the Contract Documents or (2) unknown physical conditions of an unusual nature that differ materially from those ordinarily found to exist and generally recognized as inherent in construction activities of the character provided for in the Contract Documents, the Contractor shall promptly provide notice to the Owner and the Architect before conditions are disturbed and in no event later than 21 days after first observance of the conditions. The Architect will promptly investigate such conditions and, if the Architect determines that they differ materially and cause an increase or decrease in the Contractor’s cost of, or time required for, performance of any part of the Work, will recommend an equitable adjustment in the Contract Sum or Contract Time, or both. If the Architect determines that the conditions at the site are not materially different from those indicated in the Contract Documents and that no change in the terms of the Contract is justified, the Architect shall promptly notify the Owner and the Contractor in writing, stating the reasons. If either party disputes the Architect’s determination or recommendation, that party may proceed as provided in Article 15.⁶

With the 2007 revision, the AIA made significant changes to A201 in addition to moving the differing site conditions clause from section 4.3.4 to section 3.7.4. The revisions:

Placed the burden of discovering differing site conditions and notifying the owner and architect solely on the contractor.
Clarified that the architect is the only party responsible for making the initial determination of whether a differing site condition differs materially from what was expected on the site and whether the condition causes an increase or decrease in the contractor’s costs or time.
Removed from the differing site conditions clause the 21-day deadline for the owner or contractor to oppose the architect’s determination regarding the effect or lack of effect of a differing site condition to the project.⁷
Removed the provision regarding the automatic equitable adjustment to the contract sum and contract time in the event the architect determined that a differing site condition was materially different from what was expected.⁸

Section 3.7.5 is a new provision that addresses the responsibilities of parties when unanticipated human remains, archaeological sites, or wetlands are encountered on a project. Unlike the “prompt” notice requirement in the AIA’s standard differing site conditions clause, section 3.7.5 requires the contractor to “immediately suspend” any operations that would affect the unanticipated remains or features and to recommence operations only after receiving further instructions from the owner.⁹ Interestingly, the clause specifies that the contractor “shall continue with all other operations that do not affect those remains or features.”¹⁰

C. ConsensusDocs

ConsensusDocs 200, Standard Agreement and General Conditions Between Owner and Constructor (Lump Sum Price) (© 2011, revised 2014) contains a differing site conditions clause under section 3.16 WORKSITE CONDITIONS, which states:

3.16.1 WORKSITE VISIT The Constructor acknowledges that it has visited, or has had the opportunity to visit, the Worksite to visually inspect the general and local conditions which could affect the Work.
3.16.2 CONCEALED OR UNKNOWN SITE CONDITIONS If the conditions encountered at the Worksite are (a) subsurface or other physical conditions materially different from those indicated in the Contract Documents, or (b) unusual and unknown physical conditions materially different from conditions ordinarily encountered and generally recognized as inherent in Work provided for in the Contract Documents, the Constructor shall stop affected Work after the condition is first observed and give prompt written notice of the condition to the Owner and the Design Professional. The Constructor shall not be required to perform any Work relating to the unknown condition without the written mutual agreement of the Parties. Any change in the Contract Price or the Contract Time as a result of the unknown condition shall be determined as provided in ARTICLE 8.¹¹

That form also contains another clause under Article 4, Owner’s Responsibilities, which discusses work site information and states:

4.3 WORKSITE INFORMATION To the extent the Owner has obtained, or is required elsewhere in the Contract Documents to obtain, the following Worksite information, the Owner shall provide at the Owner’s expense and with reasonable promptness:
1. 4.3.1 information describing the physical characteristics of the Worksite, including surveys, Worksite evaluations, legal descriptions, data or drawings depicting existing conditions, subsurface conditions, and environmental studies, reports, and investigations…¹²

ConsensusDocs 300, Standard Tri-Party Agreement for Integrated Project Delivery (© 2007, Revised 2014) (see section 13.14), and ConsensusDocs 500, Standard Agreement and General Conditions Between Owner and Construction Manager (© 2011, Revised 2014) (see section 3.13), contain similar differing site conditions clauses.

ConsensusDocs 410, Standard Design-Build Agreement and General Conditions Between Owner and Design-Builder (© 2011, Revised 2014) (Cost of the Work Plus a Fee with a GMP), contains a differing site conditions clause which under section 9.4 states:

9.4 CONCEALED OR UNKNOWN CONDITIONS If the conditions encountered at the Worksite are (a) subsurface or other physical conditions materially different from those indicated in the Contract Documents, or (b) unusual or unknown physical conditions materially different from conditions ordinarily encountered and generally recognized as inherent in Work provided for in the Contract Documents, the Design-Builder shall stop affected Work after the condition is first observed and give prompt written notice of the condition to the Owner and the Design Professional. The Design-Builder shall not be required to perform any Work relating to the unknown condition without the written mutual agreement of the Parties. Any change in the Contract Price or the Contract Time as a result of the unknown condition shall be determined as provided in this article.¹³

ConsensusDocs agreements consistently include a differing site conditions provision under the heading of concealed or unknown site conditions. This even includes the ConsensusDocs 410 owner/design-builder agreement despite the fact that under the design-build project delivery method, the design-builder often accepts more risk.

D. Design-Build Institute of America

The Design-Build Institute of America (DBIA) has issued DBIA Document No. 535, Standard Form of General Conditions of Contract between Owner and Design-Builder (Second Edition, 2010 © Design-Build Institute of America) that contains a differing site conditions clause reflecting the concepts found in the FAR clause, as well as other industry standard forms. The DBIA is an organization that states that its goal is to provide education on the design-build project delivery system and promote best practices in the use of design-build. Section 4.2 of DBIA Document No. 535 provides:

4.2 Differing Site Conditions

4.2.1 Concealed or latent physical conditions or subsurface conditions at the Site that (i) materially differ from the conditions indicated in the Contract Documents or (ii) are of an unusual nature, differing materially from the conditions ordinarily encountered and generally recognized as inherent in the Work are collectively referred to herein as “Differing Site Conditions.” If Design-Builder encounters a Differing Site Condition, Design-Builder will be entitled to an adjustment in the Contract Price and/or Contract Time(s) to the extent Design-Builder’s cost and/or time of performance are adversely impacted by the Differing Site Condition.
4.2.2 Upon encountering a Differing Site Condition, Design-Builder shall provide prompt written notice to Owner of such condition, which notice shall not be later than fourteen (14) days after such condition has been encountered. Design-Builder shall, to the extent reasonably possible, provide such notice before the Differing Site Condition has been substantially disturbed or altered.

E. Engineers Joint Contract Documents Committee

The Engineers Joint Contract Documents Committee (EJCDC) issued updated standard contract forms in 2013 that contain differing site condition provisions. The (EJCDC) is a coalition of stakeholders in the project delivery process consisting of the American Council of Engineering Companies (ACEC), the American Society of Civil Engineers (ASCE), and the National Society of Professional Engineers (NSPE). EJCDC C-700, Standard General Conditions of the Construction Contract, provides:

5.03 Subsurface and Physical Conditions

Reports and Drawings: The Supplementary Conditions identify:
1. those reports known to Owner of explorations and tests of subsurface conditions at or adjacent to the Site;
2. those drawings known to Owner of physical conditions relating to existing surface or subsurface structures at the Site (except Underground Facilities); and
3. Technical Data contained in such reports and drawings.
Reliance by Contractor on Technical Data Authorized: Contractor may rely upon the accuracy of the Technical Data expressly identified in the Supplementary Conditions with respect to such reports and drawings, but such reports and drawings are not Contract Documents. If no such express identification has been made, then Contractor may rely upon the accuracy of the Technical Data (as identified in Article 1) contained in any geotechnical or environmental report prepared for the Project and made available to Contractor. Except for such reliance on such Technical Data, Contractor may not rely upon or make any claim against Owner or Engineer, or any of their officers, directors, members, partners, employees, agents, consultants, or subcontractors with respect to:
1. the completeness of such reports and drawings for Contractor’s purposes, including, but not limited to, any aspects of the means, methods, techniques, sequences, and procedures of construction to be employed by Contractor, and safety precautions and programs incident thereto; or
2. other data, interpretations, opinions, and information contained in such reports or shown or indicated in such drawings; or
3. any Contractor interpretation of or conclusion drawn from any Technical Data or any such other data, interpretations, opinions, or information.¹⁴

EJCDC C-800, “Supplementary Condition,” is intended to be inserted after Paragraph 5.03.B and used for the purpose of identifying the known site condition documents:

C. The following reports of explorations and tests of subsurface conditions at or adjacent to the Site are known to Owner:

[LIST ALL SUCH REPORTS]
D. The following drawings of physical conditions relating to existing surface or subsurface structures at the Site (except Underground Facilities) are known to Owner:

[LIST ALL SUCH REPORTS]

[Use one of the following two subparagraphs:]
1. a. All of the information in such drawings constitutes Technical Data on whose accuracy Contractor may rely, except for _________________________ appearing on Drawing No. _____ and ___________________ appearing on Drawing No. ______.
  
  [or]
2. None of the contents of such drawings is Technical Data on whose accuracy Contractor may rely.
E. Contractor may examine copies of reports and drawings identified in SC 5.03.C and SC 5.03.D that were not included with the Bidding Documents at _______________________________ [insert location] during regular business hours, or may request copies from Engineer.

If there are no known Site-related reports or drawings, use the following version of SC-5.03:
1. SC 5.03 Delete Paragraphs 5.03.A and 5.03.B in their entirety and insert the following:
  1. No reports of explorations or tests of subsurface conditions at or adjacent to the Site, or drawings of physical conditions relating to existing surface or subsurface structures at the Site, are known to Owner.¹⁵

EJCDC C-700 paragraph 5.04, Differing Subsurface or Physical Conditions, provides:

Notice by Contractor: If Contractor believes that any subsurface or physical condition that is uncovered or revealed at the Site either:
1. is of such a nature as to establish that any Technical Data on which Contractor is entitled to rely as provided in Paragraph 5.03 is materially inaccurate;
  or
2. is of such a nature as to require a change in the Drawings or Specifications;
  or
3. differs materially from that shown or indicated in the Contract Documents;
  or
4. is of an unusual nature, and differs materially from conditions ordinarily encountered and generally recognized as inherent in work of the character provided for in the Contract Documents;
then Contractor shall, promptly after becoming aware thereof and before further disturbing the subsurface or physical conditions or performing any Work in connection therewith (except in an emergency as required by Paragraph 7.15), notify Owner and Engineer in writing about such condition. Contractor shall not further disturb such condition or perform any Work in connection therewith (except with respect to an emergency) until receipt of a written statement permitting Contractor to do so.
Engineer’s Review: After receipt of written notice as required by the preceding paragraph, Engineer will promptly review the subsurface or physical condition in question; determine the necessity of Owner’s obtaining additional exploration or tests with respect to the condition; conclude whether the condition falls within any one or more of the differing site condition categories in Paragraph 5.04.A above; obtain any pertinent cost or schedule information from Contractor; prepare recommendations to Owner regarding the Contractor’s resumption of Work in connection with the subsurface or physical condition in question and the need for any change in the Drawings or Specifications; and advise Owner in writing of Engineer’s findings, conclusions, and recommendations.
Owner’s Statement to Contractor Regarding Site Condition: After receipt of Engineer’s written findings, conclusions, and recommendations, Owner shall issue a written statement to Contractor (with a copy to Engineer) regarding the subsurface or physical condition in question, addressing the resumption of Work in connection with such condition, indicating whether any change in the Drawings or Specifications will be made, and adopting or rejecting Engineer’s written findings, conclusions, and recommendations, in whole or in part.
Possible Price and Times Adjustments:
1. Contractor shall be entitled to an equitable adjustment in Contract Price or Contract Times, or both, to the extent that the existence of a differing subsurface or physical condition, or any related delay, disruption, or interference,
  causes an increase or decrease in Contractor’s cost of, or time required for, performance of the Work; subject, however, to the following:
  1. such condition must fall within any one or more of the categories described in Paragraph 5.04.A;
  2. with respect to Work that is paid for on a unit price basis, any adjustment in Contract Price will be subject to the provisions of Paragraphs 13.03; and
  3. Contractor’s entitlement to an adjustment of the Contract Times is conditioned on such adjustment being essential to Contractor’s ability to complete the Work within the Contract Times.
2. Contractor shall not be entitled to any adjustment in the Contract Price or Contract Times with respect to a subsurface or physical condition if:
  1. Contractor knew of the existence of such condition at the time Contractor made a commitment to Owner with respect to Contract Price and Contract Times by the submission of a Bid or becoming bound under a negotiated contract, or otherwise; or
  2. the existence of such condition reasonably could have been discovered or revealed as a result of any examination, investigation, exploration, test, or study of the Site and contiguous areas expressly required by the Bidding Requirements or Contract Documents to be conducted by or for Contractor prior to Contractor’s making such commitment; or
  3. Contractor failed to give the written notice as required by Paragraph 5.04.A.
3. If Owner and Contractor agree regarding Contractor’s entitlement to and the amount or extent of any adjustment in the Contract Price or Contract Times, or both, then any such adjustment shall be set forth in a Change Order.
4. Contractor may submit a Change Proposal regarding its entitlement to or the amount or extent of any adjustment in the Contract Price or Contract Times, or both, no later than 30 days after Owner’s issuance of the Owner’s written statement to Contractor regarding the subsurface or physical condition in question.¹⁶

F. Federal Highway Administration

The U. S. Department of Transportation, Federal Highway Administration (FHWA) has also published a standard differing site condition clause and guidance for its application to federally funded highway projects at 23 C.F.R. Part 635. The clause and the applicable guidance provide:

Except as provided in paragraph (b) of this section, the following changed conditions contract clauses shall be made part of, and incorporated in, each highway construction project approved under 23 U.S.C. 106:
1. Differing site conditions.
  1. During the progress of the work, if subsurface or latent physical conditions are encountered at the site differing materially from those indicated in the contract or if unknown physical conditions of an unusual nature, differing materially from those ordinarily encountered and generally recognized as inherent in the work provided for in the contract, are encountered at the site, the party discovering such conditions shall promptly notify the other party in writing of the specific differing conditions before the site is disturbed and before the affected work is performed.
  2. Upon written notification, the engineer will investigate the conditions, and if it is determined that the conditions materially differ and cause an increase or decrease in the cost or time required for the performance of any work under the contract, an adjustment, excluding anticipated profits, will be made and the contract modified in writing accordingly. The engineer will notify the contractor of the determination whether or not an adjustment of the contract is warranted.
  3. No contract adjustment which results in a benefit to the contractor will be allowed unless the contractor has provided the required written notice.
  4. No contract adjustment will be allowed under this clause for any effects caused on unchanged work. (This provision may be omitted by the STD’s at their option.)

The reference in paragraph (a) to paragraph (b) (23 C.F.R. § 635.109(b)) is critical for highway contractors, for it authorizes the omission of the FHWA’s changed conditions clause by a state department of transportation if the applicable state’s legislation authorizes its omission.¹⁷ In other words, each state highway department may omit the FHWA’s differing site conditions clause if it can obtain the passage of a state statute authorizing that election.

IV. Comparison of DSC Provisions

The differing site condition clauses in the widely used form contracts reveal some basic similarities but also some important differences. The FAR and the FHWA clauses define differing site conditions as “subsurface or latent physical conditions,” while the EJCDC clause refers to “subsurface or physical conditions.” The ConsensusDocs, AIA, and the DBIA clauses refer to the site conditions as “concealed or unknown” or “concealed or latent.”¹⁸ Generally, all of the standard differing site conditions clauses cover similar situations, although circumstances might arise where the wording in a particular clause could make a difference.

A. Type I and Type II Changed Conditions

The FAR, ConsensusDocs, AIA, DBIA, EJCDC, and FHWA contract provisions all identify two distinct types of unanticipated conditions that are compensable. These are commonly labeled as Type I and Type II changed conditions.

The FAR describes a Type I changed condition as conditions “differing materially from those indicated in the contract.”¹⁹ The FHWA clause uses the same terminology. ConsensusDocs 200 similarly describes such conditions as “materially different from those indicated in the Contract Documents.”²⁰

The ConsensusDocs, FAR, DBIA, and FHWA clauses describe a Type II changed condition as unusual or unknown physical conditions at the site, which differ materially from those ordinarily encountered and generally recognized as inhering in work of the character provided for in the contract. The AIA and EJCDC form documents describe Type II changed conditions similarly to the FAR, FHWA, and ConsensusDocs clauses.

B. Notice Requirements

All of the standard industry form clauses contain specific notice provisions related to the discovery of a possible differing site condition. Although basically similar, there are differences in the notice requirements, which could be significant depending upon the factual circumstances. The FAR clause obligates the contractor to provide written notice to the Contracting Officer “promptly” and “before the conditions are disturbed…”²¹ That clause does not expressly authorize the contractor to stop work.
The FHWA clause requires prompt written notice to the owner before the site is disturbed and the affected work is performed.
Subsection 3.16.2 of ConsensusDocs 200 states that the constructor (contractor) “shall stop affected work” following observation of the condition and “give prompt written notice” to the owner and design professional. Further work relating to the condition requires written mutual agreement of the parties.
Section 3.7.4 of AIA A201 states that the contractor shall “promptly provide notice to the Owner and the Architect before conditions are disturbed.” In addition, that provision adds a 21-day overall notice requirement after “first observance of the conditions.”²² There is no provision stating that the contractor may stop work.
Paragraph 5.04A of EJCDC C-700 states that the contractor shall notify the owner and engineer in writing “promptly” after becoming aware of the condition and “before further disturbing” the condition. The contractor is not to further disturb such condition or perform any work in connection therewith (except in an emergency) until it receives a written statement permitting the contractor to do so.
Section 4.2.2 of DBIA Document No. 535 states that the design-builder shall provide “prompt written notice” to the owner, which notice “shall not be later than 14 days” after the condition was encountered. In addition, the design-builder shall to the “extent reasonably possible” provide that notice before the condition has been substantially disturbed or altered.

A comparison of the notification provisions in the six clauses illustrates the types of issues which could be addressed in any differing site conditions clause. These include:

Timing of Notice: “Prompt” notice is a common concept. However, if it is supplemented by an additional calendar or work day deadline, what is the purpose of the latter?
Form of Notice: Must the notice be in writing? Even if not expressly required, written confirmation is desirable.
Work Stoppage: The clauses typically seek to allow the other contracting party an opportunity to examine the condition before it is disturbed. However, does the clause expressly authorize a work stoppage? Is there an express exception for emergencies?
Resumption of Work: Does the clause expressly address when and under what conditions a contractor is to resume work affecting the condition?

V. Operation of the Differing Site Conditions Clause

Although a differing site conditions clause provides a mechanism for dealing with an unanticipated site condition, a contract adjustment is not guaranteed. To obtain an adjustment under the clause the claimant, typically a contractor, must first establish that the changed condition falls within the scope of the clause. Before examining what typically must be proven, it is important to remember what the claimant is not required to prove.

For a contractor, notification of a suspected differing site condition does not mean that it is attempting to establish fault, bad faith, or defective design by the owner or its design/engineering representative. There are simply some situations where differing, unanticipated conditions are encountered. This is especially true when dealing with subsurface work or work on older structures where a limited construction history is available.

Differing site conditions clauses are routinely found in the terms of agreements between soils engineers and owners because unexpected site conditions are common on subsurface construction projects. The clauses often state that the client knows subsurface conditions may vary from the locations where borings, surveys, or explorations were conducted and that the geotechnical engineer based its analysis on the available information.

The presence of a differing site conditions clause allows the contractor to be reimbursed for its reasonable additional costs, regardless of the owner’s knowledge or ignorance of actual conditions. By agreeing to a differing site condition provision in the contract, the owner assumes a portion of the risk of such conditions in exchange for the contractor not feeling compelled to protect itself by including a contingency in its bid.

The converse is also true: the owner is entitled to a cost reduction if site conditions prove less onerous than expected. Although downward adjustments are not common, they do occur.²³ Such credits are consistent with the clauses’ central purpose, which is to base the owner’s cost and the contractor’s compensation on the reasonable value of the work actually performed, thereby eliminating unnecessary risks to each party.

A. Recovery for a Type I Changed Condition

To recover for a Type I changed condition, which is where actual conditions are materially different than the conditions “indicated” by the contract documents, it is necessary that the party claiming an adjustment under the clause show that:

Certain conditions were indicated by the plans, specifications, and other contract documents;
The contractor relied on the physical conditions indicated in the contract;
The nature of the actual conditions encountered;
The existence of a material variation between the conditions indicated and the conditions actually encountered;
Notice was given as required by the contract or was otherwise satisfied; and
The changed condition affected performance costs, time, or both, as demonstrated by satisfactory documentation or proof.

The initial emphasis in Type I changed condition situations is on those conditions that are “indicated” in the contract. The contract must contain some statement or representation as to the conditions to be expected, and the actual conditions must differ from that statement or representation.

The meaning of “indicated in the contract” has been considered in numerous court decisions. In some instances, it is not required that the indications (on which the contractor is reasonably entitled to rely) be affirmatively expressed on the plans or in specific contract provisions. Instead, such indications may be a reasonable inference based on reading the contract as a whole. Thus, the contractor may be able to compare actual conditions not only with the express representations in the contract documents, but also with all reasonable inferences and implications that can be drawn from those documents.²⁴ As one court explained, the contract indications are not required to be “explicit or specific, but only enough to impress or lull a reasonable bidder not to expect the adverse conditions actually encountered.”²⁵

In certain situations, a contract indication may be found from documents that are not a part of the contract. For example, one federal court of appeals held that soil borings were a “contract indication” even though the borings were contained in an appendix to the plans and specifications that was expressly excluded as a contract document. The court stated that the differing site condition clause “entitles the contractor to reimbursement when there are ‘conditions at the site differing materially from those indicated in this contract.’ Even though the logs may not be included in the contract, they are ‘indicated’ in the contract…”²⁶

By contrast, a different federal court of appeals was not persuaded that “conditions indicated by the Contract Documents” could include soil reports that were not part of the actual contract documents.²⁷ That court strictly enforced the owner’s written disclaimer of responsibility for soil conditions and refused to consider any document that was not specifically incorporated into the contract.²⁸

1. Express Contract Representations

a. DSC Recognized

Examples of situations where express representations of conditions in the contract documents were found to have differed materially from the actual conditions encountered include:

Variance from actual field conditions. During construction of a highway retaining wall, a contractor discovered that the actual interface point for two portions of the wall varied significantly from the point indicated in the specifications from the state department of transportation (DOT).²⁹ In order to build the wall as required by the plans, the contractor had to remove a substantial amount of rock that was unforeseen at the time of its bid.³⁰ The court found that the contractor was entitled to additional compensation for the differing site condition because the contractor justifiably relied on the DOT’s representation in the specification.³¹
Muddy versus dry conditions. The contract documents stated that when “test holes were drilled in the area, no water was noted in any of the test holes.” During construction, the contractor encountered “subsurface mud covered by a cracked and deceptively dry looking surface…” The Supreme Court of Idaho found the subsurface mud to be materially different from the dry conditions indicated by the contract documents and affirmed the contractor’s recovery for a Type I differing site condition.³²
Variance from anticipated blow counts. Soil conditions with actual blow counts that were one-third to one-half the strength indicated by the contract borings constituted a changed condition. The contractor that encountered this condition during the construction of two underground garages was entitled to additional compensation.³³
Limitations on access. A playground construction contract called for the contractor to furnish a certain brand of playground equipment, and included a drawing showing the placement and orientation of the equipment. The contractor, in reliance on the drawing, believed that it would be possible to use a dump truck and backhoe to bring in and spread sand after the equipment was in place. This proved impossible, however, and the sand had to be spread by hand. Since the contractor used the specified brand-name equipment, it was justified in relying on the government’s drawing and was entitled to an equitable adjustment for a Type I changed condition.³⁴
Hard clay versus soft mud. The contract specifications required the contractor to remove soft mud, silt, and sand in a river-dredging project. When the contractor encountered hard, undisturbed clay instead of the soft materials specified, the contractor was entitled to an equitable adjustment for a Type I differing site condition.³⁵
Excavated materials not suitable as fill. The contract specifications required that soil materials located on-site were to be excavated and reused as fill, but the specified excavation and re-compaction was prevented by the physical properties of the soil, which differed materially from the contract indications.³⁶ The Armed Services Board of Contract Appeals concluded that the contractor was entitled to an equitable adjustment for a Type I changed condition even though the problem was further impacted by an abnormal amount of rainfall.³⁷
“Balanced” excavated materials. A contract for airport service roads and taxiways contained specifications which incorrectly stated that the project was a “balanced project,” meaning the amount of dirt excavated from portions of the project site was roughly equivalent to the amount needed for fill-in requirements elsewhere.³⁸ The court held that the contractor encountered a Type I differing site condition and could recover its costs for the purchase of the additional soil necessary to comply with the contract’s fill requirements.³⁹
Roofing materials. A contractor was entitled to equitable adjustment for a Type I claim when the renovation contract drawings plainly showed synthetic rubber membrane roofing materials and the contractor relied on the incorrect materials by including $50,000 for the rubber membrane materials.⁴⁰ The court took judicial notice of the rubber membrane roofing materials being materially different than the existing bitumen or built-up roofing material and that there was nothing in the contract to put the contractor on notice that the existing roofing material was bitumen.⁴¹
Artesian conditions. A subcontractor met the six factor test for a differing site condition claim against the contractor based on artesian soil conditions.⁴² The court found there was a vast and material difference in the soil conditions represented in the contract documents as “wet materials” and the artesian condition that existed at the job site.⁴³ In addition, the wet materials reference did not put the subcontractor on notice of an artesian condition, leading to soil conditions with high moisture content and high hydraulic conductivity, which caused increased dewatering efforts and higher costs than anticipated.⁴⁴
Removing concrete footings. The court upheld a differing site condition claim due to problems removing concrete footings and structures that did not conform to the bid documents.⁴⁵ The court ruled that the risk for differing site conditions in a fixed price contract that contained a differing site conditions clause remained with the owner, but the contractor carried the risk in a fixed price contract without a differing site conditions clause.⁴⁶
Incorrect soil bores. The subcontractor was entitled to extra compensation for delay and equipment damage caused by soil bores not matching the actual conditions.⁴⁷ The soil bores in the bid documents showed sands, silts, some gravel, and trace amounts of cobble, but the subcontractor actually encountered substantial cobbles while drilling bore holes.⁴⁸ The contractor also promised the subcontractor additional compensation for change orders that occurred while drilling the holes.⁴⁹

b. DSC Not Recognized

Examples of situations where express representations of conditions in the contract documents were not found to have differed materially from the actual conditions encountered include:

Soil conditions. Soil conditions that the subcontractor claimed were wetter than anticipated did not constitute a differing site condition.⁵⁰ The ASBCA reached this conclusion because the geotechnical reports specifically warned that soil conditions could differ from those found at the test boring locations; the contract documents stated that different characteristics and profiles would be encountered; the soil did not materially differ from that information contained in the contract documents; and the moisture content of the soil conformed with what the contract documents stated.⁵¹
Soil clay content. The contractor could not recover for differing site conditions under a pass-through breach of contract claim because the subcontractor could not have reasonably relied on a soil report that stated that clay content in the soil was less than 10%.⁵² The subcontractor could not rely on the soil report because the contract stated the soil report was not representative of overall soil composition; the soil report showed clay amounts much greater than 10 percent; the soil report stated the subcontractor’s method of soil extraction may not be suitable for this type of soil; and the subcontractor had direct knowledge of flaws in the soil sampling methodology.⁵³
Elevated water levels. Elevated water levels did not constitute a Type I differing site condition on the construction of a highway bridge over a lake because the water levels were “not a subsurface or latent physical condition” that existed when the contract was executed.⁵⁴
Dewatering methods. To significantly reduce its bid, the contractor bid the project on the assumption that it would dewater the site from outside the excavation areas instead of inside the excavation area as the bid specification required.⁵⁵ The court denied the contractor’s claim for differing site conditions when the water pollution and control authority would not allow the different method of site dewatering, since site conditions did not differ materially from conditions represented in the contract documents and did not require a change in dewatering plans.⁵⁶
Undiscovered utility lines. The court enforced explicit contract language that allocated the risk to the contractor of undiscovered foreign crossings (buried utility lines, etc.) that could be encountered while replacing a pipeline.⁵⁷ Even though the foreign crossings substantially increased the amount of work, the court stated that someone had to bear the loss of increased costs, the parties were competent to contract, the contract was not unfair, and the court was obligated to construe the contract in accordance with its language.⁵⁸ The court enforced the contract language despite the owner’s agreement to practice due diligence in locating the foreign crossings and even though hundreds of foreign crossings were discovered.⁵⁹

2. Implied Contract Representations

Examples of non-express or implied contract indications, which have been treated as differing site conditions, include:

Owner’s awareness of lead paint. Although a state school system did not include a lead paint abatement provision in a renovation contract for one of its university buildings, the owner issued a separate notice to contractors that “[a]ll asbestos and lead containing materials affected by the project will be addressed.”⁶⁰ In reliance on the state’s representation, the contractor performed the abatement after the discovery of lead paint stalled the renovation work.⁶¹ The state’s awareness of a problem unknown to the contractor was sufficient to justify additional compensation for work not contemplated in the contract.⁶²
Hidden roof system not disclosed. An additional roof system not referenced in the contract specifications and drawings was determined to be a valid Type I differing site condition claim. Further, an inspection of the roof revealed no evidence that any additional roofing work had been performed after the as-built drawings had been prepared.⁶³
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