Below the surface

Jan. 3, 2018

A recent case addresses the changed conditions clause

In most states, courts have ruled that a contractor who agrees to perform work for a lump sum will not be entitled to additional compensation due to unforeseen difficulties. Consequently, absent a specific contract provision to the contrary, a contractor is generally responsible for absorbing costs associated with unforeseen subsurface conditions.

In the early 1970s, the federal government observed that bid prices on construction projects included contingencies by contractors who sought to cover this significant risk. Further study revealed that while contingencies were sometimes needed, they often were not, which resulted in windfalls for contractors. This led to the establishment of the changed conditions clause, which effectively shifted a significant portion of the unforeseen site conditions risk to the government. The changed conditions clause later became known as the differing site conditions clause and is in wide use in both public and private contracting today. 

Despite its consistent use for nearly 50 years, contractors, owners and even courts are often confused over the effect of the clause when other seemingly contradictory language appears in the specifications. For example, what happens when the specifications define “unclassified excavation” as “excavating to the elevations shown or indicated in the drawings regardless of the character of the materials encountered?” A recent case decided in the Civilian Board of Contract Appeals illustrates the majority view on the subject. 

The Matter of Orleans Parish Sheriff’s Office, 17-1 BCA ¶ 36,796 (Civilian BCA), CBCA 3377-FEMA (WL 2999936, July 11, 2017) involved a project to restore a detention facility in New Orleans, La., from flooding that occurred during Hurricane Katrina. The contractor contracted directly with the Orleans Parish Sheriff’s Office, which had received a grant from the Federal Emergency Management Agency (FEMA) for the project. 

The contract included a differing site conditions clause, which entitled the contractor to a contract adjustment and/or an extension of time if it “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.”

During the project, the owner issued two change orders totaling a little over $500,000 for stumps and root masses and an unknown wooden structure the contractor discovered during excavation for new piles and foundations. The contractor and owner agreed these conditions were unforeseen, and thus recovery was allowed under the differing site conditions clause.  The owner, in turn, filed a claim for reimbursement with FEMA, which denied the claim in its entirety. 

On appeal, FEMA argued that even though the contract contained a differing site conditions clause, all of the work for which the contractor was given additional compensation was included in the original lump sum price. Specifically, FEMA pointed to Contract Specification 02200, which provided that “excavation is unclassified and includes excavation to subgrade elevations indicated, regardless of character of materials and obstructions encountered.” That section also defined excavation as including “removal of pavements and other subsurface obstructions, underground structures, utilities, and other items which are encountered, unless such items are indicated to remain.” FEMA argued that this is reiterated in Specification Section 02100, which obligated the contractor to “remove obstructions, trees, shrubs, grass, and other vegetation to permit installation of new construction . . . [and] removal includes digging out stumps and obstructions and grubbing roots.”

The owner generally agreed with FEMA that the contractor was responsible for excavating stumps, roots and structures under its lump sum price, but argued that the contractor’s duties in that regard were limited to what was reasonably expected based on the geotechnical report contained in the contract. The owner’s contract representative testified that the obstructions the contractor encountered could not have been anticipated at the locations they were discovered based on the report. The board agreed.

Most courts deciding this issue have agreed that provisions purporting to make a contractor responsible for all conditions it encounters during excavation must be read in concert with the differing site condition clause, and together they merely require excavation of all materials reasonably anticipated based upon contract representations and/or materials of a usual nature.

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].

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