Trouble below deck

Aug. 11, 2016

Contractors, owners must know risks of subsurface conditions

As one who must “cubbyhole” everything in life, I view all heavy-highway risks as falling in one of two categories: business/corporate and project. Business/corporate risks are big picture issues executives must deal with; they include cash flow, return on investment, optimizing heavy equipment use, backlog, overhead management and acquisition of quality managerial personnel. Project risks are typically managed by project executives/sponsors, and include estimating, productivity, weather, subcontractor performance and quality control. A significant factor affecting these latter risks is conditions below the earth’s surface, and project success is often determined when the first cutting edge penetrates the surface. For this reason, I often revisit in my writings the risks undertaken by contractors and owners for subsurface conditions, notably the differing site conditions clause.

In nearly all public contracts and in the majority of private contracts, the owner assumes the risk of unforeseen subsurface site conditions, because owners figure that even the low bidder will include an excessive contingency in its bid if the risk is on the contractor. The differing site conditions clause is the contractual mechanism through which a contractor may seek a contract adjustment when conditions differ materially from (1) those represented by the owner in the contract documents (Type I); or (2) those ordinarily encountered (Type II). This month’s column focuses on a Type I differing site conditions claim—one that is based on a material difference between conditions the owner represents and those actually encountered.

Aside from the contractor’s failure to give written notice to the owner of a Type I differing site condition before conditions are disturbed, the two most successful arguments offered by owners in response to differing site conditions claims are: (1) the contractor failed to obtain all subsurface conditions information made available by the owner; and (2) the contractor unreasonably interpreted such information. Two prominent Boards of Contract Appeals cases highlight these two arguments.

In Appeal of Bean Stuyvesant, L.L.C., ASBCA No. 53882, a dredging contractor on a U.S. Army Corps of Engineers project considered boring data within the proposed dredging area that were included in the bid documents. The information reflected predominately sand, but with the presence of rock fragments. However, unlike the other two bidders on the project, the successful low bidder did not exercise its option to review additional information in the Corps’ possession that provided data obtained from bores performed outside, but adjacent to, the planned dredging area. This additional data indicated that rock was more consolidated and “competent.” The Board held that while the rock fragments in the borings taken within the dredging area “suggested” the presence of rock, the adjacent borings made available to all bidders confirmed that rock would be encountered, and thus denied the contractor’s claim on the grounds its reliance on the supplied data was unreasonable and that it erred in its interpretation of the information.

In PCL Construction Services, Inc. v. General Services Admin., GSBCA No.: 16588, a design-build contractor utilized the GSA’s geotechnical report provided in the bid documents to devise a caisson/pier design, which turned out to be inadequate. At trial, both parties presented expert testimony concerning the owner-provided information. The Board sided with the GSA’s expert, who contended that the contractor gave insufficient weight to a single boring that it characterized as accurately depicting the conditions the contractor eventually encountered. In essence, the owner attacked the contractor’s interpretation of the data it provided—and prevailed. 

In order to successfully present a claim for Type I differing site conditions, a contractor must prove that (1) the owner represented the site conditions on the project; (2) actual conditions encountered differed materially from those represented; (3) the conditions were not reasonably foreseeable based on the information provided; (4) it reasonably relied upon the owner’s representations; and (5) it was damaged as a result. If the contractor either ignores or unreasonably interprets information made available by the owner, the owner will succeed in arguing that the contractor’s reliance was unreasonable or that the actual conditions encountered were foreseeable. Contractors asserting claims for differing site conditions must internally scrutinize their use and interpretation of owner-provided information and be prepared to defend their actions.

About The Author: Caudle is a principal in Kraftson Caudle LLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Caudle can be contacted via e-mail at [email protected].