Successful construction projects are almost like miracles — with so many moving parts and variables (including variables that are known and others that are unknown), it really is a wonder that any large project comes in on time and on budget.
One category of those “unknown variables” on construction projects that can be challenging to manage is called differing site conditions.
However, many construction contracts include differing site conditions clauses that attempt to lay the groundwork for how these issues will be managed if and when they’re encountered on the jobsite. Read on for an overview of how different site conditions clauses work in a construction contract.
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What Do Differing Site Conditions Contract Clauses Do?
The purpose of a differing site clause is to allocate risk, not to point fingers. When preparing a bid for a project, there’s only a limited amount of time to investigate the site conditions. Further, if the bid package includes a geotechnical report or any other disclosures about the conditions of the job site, the contractor will rely on this information to prepare an accurate bid. When site conditions don’t match expectations, a tricky predicament is created. If a contract doesn’t account for the possibility for differing conditions, it could spark a dispute.
Read the companion piece to this article: What Are Differing Site Conditions? Best Practices for Contractors and Subs
Differing Site Conditions Clauses Can Lead to More Accurate Bids
When bidding on a project, contractors and subs factor in a certain amount of risk. One such risk that gets baked into the price is the risk that there’s an issue or a flaw with the job site. When that risk is taken off the table, a bid can come in a little more accurately. This is especially important for fixed-price or lump-sum contracts. The rationale being that the contractor should have anticipated certain site conditions, and failed to account for those conditions in their bid, so they shouldn’t be able to force the owner to pay additional money after the fact.
Beware of Risk-Shifting Language in Your Contract
Construction contracts are essentially a game tug-of-war, trying to shift and reallocate any potential risks. Everyone should be aware of these risk-shifting provisions. Owners may take this a step further by including some sort of exculpatory (free from blame) clause concerning differing site conditions. Keep an eye out for language that attempts to relieve the owner from liability or disclaim the accuracy of the site condition information. These clauses often include phrases like “information provided was obtained solely for use in establishing design controls for the project.”
Enforceability of these clauses depends on where the project is located. Some states will, while others are less willing to, enforce these clauses – particularly if the clause includes recovery for unanticipated costs. If you encounter one of these exculpatory clauses, there are still ways to protect yourself. Include contingencies in your bid requesting all site information available to the owner, or even conduct your own extensive site investigation.
What Happens If There Is No Differing Site Conditions Clause?
Absent a differing site conditions clause, if damages are incurred due to differing site conditions, contractors or subs will only be able to recover under common law principles relating to their contract. Specifically, the following may apply:
- breach of contract through misrepresentation or fraud;
- mutual mistake;
- superior knowledge;
- unjust enrichment.
Breach of Contract Through Misrepresentation or Fraud
For misrepresentation, the contractor must prove:
- (1) they justifiably relied on information represented in the contract,
- (2) actual conditions differed materially from the conditions indicated in the contract,
- (3) the owner erroneously concealed info that was material to contract performance,
- (4) the contractor incurred increased costs of performance due to the encountered conditions.
Keep in mind – it will only amount to fraud if the errors or inaccuracies were intentional.
Want to learn more about how Breach of Contract works in construction?
Under this theory, a contractor must prove that:
- (1) at the time of the contract formation,
- (2) there was a material mistake,
- (3) as to the very basis upon which the contract was made.
If successful, mutual mistake could provide for the rescission of the contract and award any actual costs incurred.
If the owner possesses special knowledge that’s vital to the performance of the contract, but the contractor is ignorant of that information or the information isn’t reasonably available, then the owner has a duty to disclose their superior knowledge.
To collect under this claim, a claimant must establish that:
- (1) the owner failed to disclose facts that it had a duty to disclose,
- (2) the owner knew the contractor would act on the false/incomplete info provided,
- (3) the contractor relied on the owner to disclose all pertinent info, and
- (4) contractor’s cost of performance increased as a result of not having this superior knowledge.
A claim for unjust enrichment needs to be proved by showing
- (1) work completed was not originally required by the contract, and
- (2) the owner directed or agreed to have the work completed.
The rationale here is that if the contractor provides services that are beyond the scope of work detailed in the contract, the owner is being unjustly enriched if the contractor doesn’t receive fair value compensation for the extra work that they performed.