On apportioning risk in design-build contracting

This column published as "Risky Business" in April 2020 issue

Jon Straw / April 01, 2020
Jon Straw

Design-build contracting does not automatically shift all the risk to the contractor.

Decision makers, whether they are arbitrators, judges, or juries, must still weigh the evidence to determine how much risk each party agreed to bear and, as this example shows, apportion the result.

Under a design-build contract with the U.S. Army Corps of Engineers, a contractor agreed to construct a U.S. Navy Biological Defense Research Laboratory at Fort Detrick, Maryland (Appeal of John C. Grimberg Co. Inc., Armed Services Board of Contract Appeals, No. 58791 [Oct. 25, 2018]). The contract included the standard FAR clause 52.236-2 for differing site conditions (DSC). As is typical in design-build contracting, no unit prices for rock excavation were set, because the foundation plans were not finalized at the time of contract award. Because the contractor had performed several other projects at or near this site, it knew of widespread karst geology. In fact, a prior project with significant karst was only 400 yd away. The board carefully described karst as:

“A geological formation shaped by the dissolution of a layer or layers of soluble bedrock, usually carbonate rock such as limestone, dolomite, or gypsum, but also for weathering-resistant rocks, such as quartzite, under the right conditions. Karst is a recognized geohazard known for its variability and its degree of inconsistency, both vertically and horizontally over extremely short distances. Karst is unique in that the existence of a solid appearing outcrop right at the location of a footing or pier does not guarantee that good rock will appear below the outcrop.”

For these reasons, the RFP advised that “offerors should anticipate that conditions at one location can differ from conditions at another location.” In other words, karst is “consistently inconsistent.”

The contractor argued it encountered a Type I DSC during drilling of the caissons for the foundation. Under FAR 52.236-2, a Type I DSC may be shown when “subsurface or latent physical conditions at the site differ materially from those indicated in the contract.” The contractor must prove: (1) the conditions indicated in the contract differed materially from those actually encountered; (2) the actual conditions were reasonably unforeseeable based on all information available at bid time; (3) the contractor reasonably relied upon the contract documents; and (4) the contractor was damaged due to the material variation between expected and actual conditions. 

The contractor primarily relied upon two borings nearest to the building footprint; neither indicated any potential problems with rock. Ultimately, however, the contractor drilled more than 375% of its estimate. 

The government argued that although the RFP included borings near to and farther from the project site, the contractor reviewed it but should not have relied upon it. The contract, however, included no such disclaimers, “instead specifically providing in several locations throughout the RFP that the contractor was entitled to rely upon the government’s Geotechnical Report in formulating its offer.”

The board reiterated that a “design-builder does not forfeit its rights under the DSC clause to rely on solicitation representations of subsurface site conditions.” It held that the contractor’s reliance on only those two borings was unreasonable, but also more reasonable than relying on additional borings located 300-500 ft away. The board explained that, although the contractor’s reliance upon only two borings was not wholly reasonable, even if the contractor had also relied upon the only other pre-bid borings that were up to 500 ft away from the foundation, the contractor still would have encountered far more rock than even those farther borings indicated.

In weighing the evidence to determine how much risk the contractor agreed to bear, the board found the contractor expected perfection and the government argued the contractor should have expected the worst. As such, the board allowed the contractor to recover about 75% of its DSC claim, since neither party was completely right or reasonable. The board’s allowance “reflects a fair and reasonable estimate of what [it concluded] was realistically indicated regarding the extent of rock” at the project site. Often, there is no “right” answer. Rather, the best answer is the most reasonable option after considering all possibilities, even the seemingly ridiculous choices.

About the Author

Straw is a partner with Kraftson Caudle, PLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Straw can be contacted via e-mail at [email protected]

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