When a contractor encounters differing site conditions on a project, an equitable adjustment for additional costs and/or time can more often than not be justified under the Differing Site Conditions contract provision. Frequently, however, the unanticipated conditions result in the highway department making changes in the work; for example, by altering the paving section, rerouting or adding drainage pipes or requiring undercut excavation. In such an instance, the contractor will likely be paid under the contract Changes clause. On one hand, the contractor should not care whether the highway department characterizes the matter as constituting a differing site condition or a change in the work. Indeed, getting paid and receiving additional contract time, if appropriate, is most important. On the other hand, however, if other work on the project is impacted as a result, the contractor might want to avoid claiming under the Differing Site Conditions clause and seek to characterize the matter as a change in the work under the Changes clause. Why . . . and in what instance?
According to federal law, every state highway construction project approved for federal funding must include certain provisions in the contract between the state highway department and the contractor. Of these, the most relevant are the Differing Site Conditions (DSC), Suspension of Work, and Significant Changes in the Character of the Work (Changes) provisions. The statute prescribes specific language for each contract clause, but provides limited flexibility to state highway departments to omit any of the three provisions or to use alternative language, but only if specifically mandated by state law. To illustrate, pursuant to state law, the North Carolina Department of Transportation (NCDOT) has eliminated altogether the DSC clause from its contracts and purports to place on the contractor the risk that actual conditions differ from those represented in geotechnical data the department provides and/or from those conditions ordinarily encountered.
The federally mandated Changes clause states that the contractor is entitled to an equitable adjustment “[i]f the alterations or changes in quantities significantly change the character of the work under the contract, whether such alterations or changes are in themselves significant changes to the character of the work or by affecting other work cause such other work to become significantly different in character.” This means that a contractor is entitled to recover its increased cost of performing any work that is significantly changed and any increased cost incurred performing other work that, while not physically altered, is nevertheless impacted by the changes. The latter is typically referred to as “changes to the unchanged work.”
Conversely, the federally mandated DSC clause contains the following final sentence: “No contract adjustment will be allowed under this clause for any effects caused on unchanged work.” Immediately following this language in the statute is a parenthetical that expressly allows state highway departments to omit the last sentence, thereby giving to each state the flexibility to decide whether or not contractors encountering differing site conditions will be compensated for changes to the unchanged work. Accordingly, in some states, contractors encountering differing site conditions are paid for changes or impacts to the unchanged work, and in other states they are not.
Given the linear nature of highway construction and the importance that time and resources play in determining the success of a project, little room for error exists. For example, a significant delay or additional work added to a heavy excavation operation is likely to impact the installation of storm drainage. Similarly, if the progress of a contractor’s subgrade preparation operation is adversely impacted by unanticipated conditions, its aggregate placement and/or paving operations will likely be impacted. For this reason, only the most minor changes or insignificant differing site conditions will have no impact on other “unchanged work.” In reality, it is entirely possible that impact costs could greatly exceed the costs incurred performing the changed work.
Contractors must be aware of which approach their particular state highway department has chosen. If the DSC clause does not expressly exclude costs incurred performing unchanged work, the contractor can expect to be treated the same as if a change in the work occurred. Otherwise, upon discovering differing site conditions, the contractor should develop a strategy of consistently addressing the matter as a change in the work and should formally seek an adjustment under the Changes clause.