Construction projects rarely proceed as planned. In fact, anticipating potential problems might be the main function of a construction contract.
In some cases, the conditions of the construction site themselves are different than originally anticipated — a situation called “differing site conditions.” In these cases, who bears the cost of the additional work needed? It all comes down to the language of the contract, so contractors and subcontractors need to be prepared before these situations arise.
This is where differing site conditions come into play. In this post, we’ll talk about what differing site conditions are and how to handle them with contract clauses.
What are differing site conditions?
Differing site conditions occur when a construction contractor encounters a concealed site condition (like, potentially, a subsurface condition) that differs from what was in the contract or from what would normally be expected. The difference in the site conditions is presumed to affect the work on the project, most often leading to a cost increase to the contractor that must now overcome the unexpected site conditions.
These conditions can describe just about anything. A few specific, hypothetical scenarios include:
- rocks where soft soil was presumed
- buried debris
- unexpected utility lines
- a higher than anticipated water table under the job site
Beyond the specifics of what is uncovered at the site, there are two main categories of differing site conditions: those that differ from the contract and those that differ from normal expectations.
1. Conditions different from contract
These are site conditions that differ materially from the conditions planned for the construction contract. This provides relief to the contractor who encounters a site condition not anticipated by the contract.
In order to prove a successful claim, the claimant must prove that:
- The contract documents describe certain site conditions;
- The description was reasonably relied on to price and schedule work;
- Actual site conditions were different from those described in the contract documents; and
- The difference in conditions increased the cost and/or the time required to perform the contract work.
2. Conditions different from normal expectations
These are site conditions that differ materially from those conditions that are “normally encountered.” This provides relief to a contractor who encounters unusual conditions on the jobsite itself.
To show a Type 2 condition, the following must be established:
- What conditions are recognized as “known” or “usual physical conditions” at the site;
- What physical conditions were actually encountered;
- The actual conditions differed materially from the known or usual conditions; and
- The actual conditions impacted the cost and/or time to perform the contract.
Regardless of the “type” there’s a very important question to answer: Were the conditions reasonable or foreseeable? In other words, would a rational, experienced, prudent, and intelligent contractor in the same field have discovered or should have reasonably assumed about the site condition when submitting their bid? If the condition could have or should have been easily discovered, a differing site conditions clause might not be of much use.
Courts will resolve these conflicts by focusing on what information was available to the contractor, whether the contractor took reasonable steps to investigate the site conditions, and whether the contractor made reasonable assumptions in their bid. Reasonable, reasonable, reasonable! That’s the word of the day (every day!) when it comes to differing site conditions.
What do differing site conditions clauses in contracts 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.
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.
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 are unwilling to enforce these clauses, but others will do so — 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 clause for differing site conditions?
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.
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.
Tips for contractors and subcontractors
First and foremost: Read the contract carefully. Make sure you know and understand every aspect of it, especially ones that involve risk allocation and notice requirements. Search the contract for any exculpatory clauses or language disclaiming the accuracy of the site information provided to you. If you are still unsure, you can probably perform your own site investigation prior to submitting your bid.
If you do encounter differing site conditions, stop what you’re doing and contact the owner, project manager, or whoever else is responsible for the job site. Be sure to follow any notice requirements. Missing a deadline or disturbing the condition could be problematic. After all, the owner should have an opportunity to investigate the condition for themselves. Once you have incurred extra costs due to a differing site condition, keep a good record of these costs in case a dispute arises later on.
No one wants to deal with unforeseen conditions on a project, but sometimes, the issue is inevitable. Differing site conditions increase costs for everyone. Since these conditions are usually unearthed early on in the project, they can cause a ripple effect on the overall project schedule and touch each party providing work – all the way down to the wage laborers. Including a differing site conditions clause could really help to avoid headaches. Meanwhile, a failure to do so could result in serious expense and few paths to recover damages.