The Ins and Outs Of Differing Site Condition Claims
William C. Last, Jr.
Attorney at Law
A recent United States Court of Claims case, entitled Orlosky Inc. v. U.S. (2005) 64 Fed Cl. 63, points out the in and outs of differing site condition claims. The project involved the Point Mugu Naval Air Weapons Station, in Point Mugu, California. The contractor sought, in part, an equitable adjustment of the contract amount for a differing site condition. Generally, under Federal Acquisition Regulations the contract can be equitably adjusted for differing site conditions.
The contractor, Orlosky Inc., failed to conduct a pre-bid site inspection. The U.S. asserted that the failure to make such a pre-bid site investigation negates the contractor's right to recover for the differing site conditions, if they were discernable by such an inspection. The contractor, on the other hand, argued the U.S. should not avoid liability for misrepresenting the site conditions simply because the contractor failed to make a pre-bid site inspection.
Differing site conditions are generally defined as unforeseen site conditions that are discovered after the contract has been executed and are different from those set forth in the plans and specifications or are different from those that should be encountered at the site. The differing site conditions can be underground conditions or differing conditions that may be found in remodeling an existing structure.
An example of an unforeseen condition in an existing structure would be the discovery of asbestos that must be abated before the work proceeds. Differing underground conditions are classified as either Type I or Type II. Type I conditions are subsurface or latent conditions which differ from those on the plans or in the contract documents. Type II conditions are unusual physical conditions which differ materially from those ordinarily encountered.
In the Orlosky case, the question that was before the court is who bears the cost of overcoming the differing site condition. In many contracts the owner attempts to shift the risk of the unforeseen and differing condition to the contractor. Owners will include contract clauses that state that they do not warrant the actual site conditions and obligate the contractor to investigate the site and warrant that they have done so before they submitted their bid. Generally, to shift the risk to the contractor, the clause must specifically disclaim the site condition that is at issue, state that information in the plans and specifications do not accurately reflect the actual conditions; state that the contractor should not rely on any information as to that condition that maybe included in the plans and specifications; and that the contractor is solely responsible for determining the actual site condition.
As to private works differing site condition disputes, if the contractor did not contractually assume the risk of such unknown condition, it should, generally, be able to recover the cost of such additional work. It may also be possible for the contractor to rescind the contract if materially differing site conditions are discovered after the contract is signed and before the work has commenced.
As to California public works contracts, if the contract does not shift the risk of differing site conditions to the contractor, the contractor should be able recover the additional costs associated with such differing conditions. The right to such a recovery is based on a misrepresentation and/or implied warranty as to completeness of the plans and specifications. The misrepresentation of the site conditions and includes statements in the plans and specifications that are likely to mislead the contractor. Under California law, however, if the public owner includes risk shifting clause relative to differing site conditions, yet misrepresents the site condition, such clauses are not enforced. (E. H. Morrill Co. v State (1967) 65 C2d 787)
There are occasions when the owner includes such a limitation clause, but fails to give the contractor complete access to the site. For example, the bid documents and the contract could include such a clause but the owner will not the contractor into certain site locations thereby preventing the contractor from discovering asbestos in hidden but accessible locations. If that occurs, generally, the clause will not be enforced.
In the Orlosky case, the work to be performed included "a coordination study of the electrical high voltage system and replacement of fuses and other electrical apparatuses, as well as resetting of reclosers, which are "switches placed on a pole to provide emergency shut off in case of a short circuit."" After the award of the contract, but before the pre-construction meeting, the contractor conducted a site inspection and discovered "some alarming conditions regarding the reclosers that increased the cost of performing the contracted for work.
The bid solicitation package for the Point Mugu project included the following statement: "Bidders are expected to inspect the site where services are to be performed and to satisfy themselves to all general and local conditions that may affect the cost of performance of the contract to the extent such information is reasonably obtainable. In no event will a failure to inspect the site constitute grounds for withdrawal of a bid after opening or for a claim after award of the contract." It was clear from the facts that had the contractor made a pre-bid inspection, it would have discovered the condition for which it sought additional compensation.
In analyzing the question the Court of Claims reviewed the basic components of a differing site condition claim. In essence the contractor must show "that the conditions actually encountered were 'reasonably unforeseeable based on all the information available to the contractor at the time of bidding.'" Stuyvesant Dredging Co. v. United States, 834 F.2d 1576, 1581 (Fed. Cir. 1987)) Since some of the differing site conditions the contractor sought additional compensation for were reasonably foreseeable in a site inspection, his claim was denied.
The Orlosky case basically stands for the proposition that if a contractor is given an opportunity to view the project site, it should do so. If the contractor fails to visit the site before submitting its bid, it runs the risk of bearing the cost of performing additional work that was not in the plans and specifications but reasonly ascertainable on a site visit. If you undertake a site inspection and the owner refuses to provide access to critical portions of the prospective project site, the contractor should confirm such limitations by so informing the owner.
This article, 8 2005, was written by William C. Last, Jr. of Last & Faoro. Mr. Last is an attorney who has been specializing in Construction Law for over eighteen years. Mr. Last also holds a California A&B contractors license. If you have any questions Mr. Last can be contacted at 415-764-1990 or 650-425-7679. He has other articles on his web site: lhfconstructlaw.com. This bulletin is published periodically to provide general information about current legal issues. If you have a specific legal question or need legal advice, you should contact an attorney.