Differing Site Conditions: Can You Recover Increased Costs?

In some parts of the country, subsurface conditions create great financial risks for contractors.  The Differing Site Conditions clause is one of the tools owners use to remove some of the risk and, therefore, maintain competition in the bidding process.

Generally, a Differing Site Conditions clause lessens a contractor’s risk of incurring additional costs for delays and additional work resulting from unforeseeable subsurface or latent physical conditions.  Unforeseeable subsurface or latent physical conditions can comprise numerous conditions, but a few tend to be more common than others.  Unexpected subsurface rock formations, and unforeseeable water or artesian wells are typical conditions that become the basis for a claim.

In federal government contracts, the “Differing Site Conditions” clause in the Federal Acquisitions Regulations, title 48, section 52.236-2 provides that an equitable adjustment and/or contract modification may result if the contractor encounters:

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.

This language creates two distinctly different types of Differing Site Conditions claims.  They are conveniently known as Type I Differing Site Conditions and Type II Differing Site Conditions.  A successful claim generally requires proof of six Type I elements or three Type II elements.  In addition, there may be numerous other conditions that precede the filing of a successful claim, including timely and written notice of the condition encountered.

Type I Differing Site Conditions

A type I claim requires proof that:

1. representations of subsurface conditions are indicated in the contract;
2. the contractor has reasonably interpreted the representations in the contract;
3. the contractor reasonably relied on the representations in the contract;
4. the subsurface or latent physical condition encountered is materially different from the representations in the contract;
5. the subsurface or latent physical condition encountered was unforeseeable; and
6. the additional costs to the contractor are solely from the materially different subsurface or latent physical condition.  Youngdale & Sons Construction Co., Inc. v. United States, 27 Fed. Cl. 516 520 (1993).

Generally, the subsurface condition in dispute must be expressly indicated in the contract documents.  In some cases, however, courts hold that an implied contractual representation is adequate.  See e.g., P.J. Maffei Building Wrecking Corp. v. United States, 732 F.2d 913, 916 (Fed.Cir. 1984).  In addition, courts are fairly liberal in construing whether a document is part of the contract representations. Surveys, maps, drawings, core samples and boring logs provided by the owner, therefore, may be considered part of the contract documents.  Moreover, a reasonable interpretation of the contract documents is determined from the perspective of a reasonable and prudent contractor acting under similar conditions.  Weeks Dredging & Contracting, Inc. v. United States, 13 Cl.Ct. 193, 224 (1987), affd, 861 F.2d 728 (Fed.Cir. 1988).

A successful claim may be complicated by issues regarding the contractor’s actual reliance on inaccurate contract representations.  The damages or delays sustained by the contractor must be the result of the misrepresentation or inaccuracy in the contract documents.  The contractor must, therefore, prove that it reviewed the contract documents and subsequently based his bid on the inaccurate representations.  In addition, the unexpected actual conditions encountered must be the cause of the contractor’s additional costs or delays. Finally, the contractor must be unaware that the contract representations are inaccurate.  Obvious conditions that were observed or would have been observed in a pre-bid site inspection will serve to bar a Differing Site Conditions claim.

Type II Differing Site Conditions

A Type II claim requires the contractor to prove that:

1. the subsurface or latent physical condition was unknown;
2. the subsurface or latent physical condition was unusual and could not be reasonably anticipated based on a review of the contract documents and site inspection; and
3. the encountered condition was materially different from those ordinarily encountered and generally expected in the type of work to be performed.  Youngdale & Sons Construction, 27 Fed.Cl. at 537.

Clearly, a Type II condition is harder to prove than a Type I condition because the owner has not represented the subsurface conditions.  Fru-Con Construction Corp. v. United States, 44 Fed.Cl. 298, 311 (1999).  There is a greater expectation that the contractor has investigated the project and is aware of potential problems.  Likewise, a successful claim is always based on delays or damages caused by a condition that was unreasonably encountered based on all facts and circumstances.

The answers to a few preliminary questions may determine the potential for a successful Differing Site Conditions claim:

• Did the government/owner make a representation as to the subsurface conditions?
• If not, how reasonable was it to encounter the actual condition based on the circumstances, and would a site inspection indicate a potential problem?
• Finally, was the unforeseen subsurface condition the actual cause of the additional expenses or delay?

Article Copyright: 2000, Jenkins & Gilchrist

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About the Author:  John Kirsch is an attorney with the law firm of Jenkens & Gilchrist with offices in Austin, Houston and San Antonio, TX; Chicago, IL, and Washington, D.C.  He may be contacted at 1919 Pennsylvania Ave., N.W., Suite 600, Washington, D.C. 20006; 202-326-1500, FAX 202-326-1555, e-mail: jkirsch@jenkens.com.

This article is published in ConstructionRisk.com Report, Vol. 2, No. 10 (Oct 2000).