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ConstructionRisk.com
Report
Vol.
2, No.9 - Sep. 2000
In
This Issue:
*
Differing Site Conditions:
Can You Recover Increased Costs?
* Role of
Architect in Controlling Construction Costs
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About
this Issue:
This
newsletter is edited by J. Kent Holland, Jr., Esq., and published by
e-mail once per month. Archived issues (plus this current issue) are
maintained on our website at http://www.constructionrisk.com.
The website is organized as a construction risk management portal
to make it easy for you to find all kinds of valuable information on the
web. And it's completely
free! We are pleased to
present articles in this
issue that are written by two nationally recognized construction
lawyers.
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DIFFERING
SITE CONDITIONS: CAN YOU RECOVER INCREASED COSTS?
By
John T. Kirsch, Esq.
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.
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.
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
___________________________
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.
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ROLE
OF ARCHITECT IN CONTROLLING CONSTRUCTION COSTS
By
Michael K. DeChiara, Esq.
The 1997 edition of the American Institute of Architects Standard
Form of Agreement between Owner and Architect, AIA, B141-1997
fundamentally changes the role of the Architect regarding responsibility
for controlling construction costs. New section 2.1.7.1, is for the most part, a restatement of
old Subparagraphs 2.2.5, 2.3.2, and 2.4.3, with one critical difference.
The prior Subparagraph 2.2.5, obligated the Architect to provide
the Owner with a preliminary estimate of construction costs at the end
of the Schematic Design Phase. Prior Subparagraphs 2.3.2 and 2.4.3 obligated the
Architect to provide the Owner with adjustments to its preliminary
estimate of construction costs at the end of the Design Development and
Construction Document Phases, respectively.
The last sentence of the new Section 2.1.7.1, however, states:
"if at any time the Architect's estimate of the Costs of Work
exceeds the Owner's budget, the Architect shall make appropriate
recommendations to the Owner to adjust the Project's size, quality or
budget, and the Owner shall cooperate with the Architect in making such
adjustments." This
sentence causes a fundamental change in the architect's role and
responsibility.
Previously, the Architect merely advised the Owner of adjustments
or changes in its preliminary estimate as the Project progressed.
If the costs of the Project grew, the Owner had several options.
However, the Architect was not responsible for making
recommendations to bridge the gap between estimated costs and the
Owner's budget. More
importantly, the Architect would be compensated for preparing changes to
meet the Owner's budget not caused by his own failure to follow the
Project program.
Under the new B141-1997 form of agreement, as part of its Basic
Services, now takes on a much more proactive role in assuring that the
Architect's preliminary cost estimate matches the owner's budget through
the completion of the Construction Document Phase.
The most problematic phrase in this new and troubling sentence is
set forth in the last twelve words which state, "and the Owner
shall cooperate with the Architect in making such adjustments."
The problems presented by this phrase include the following:
(1)
There are no boundaries for the "adjustments" necessary to
bring the Architect's estimate of cost into line with the Owner's
budget. That is to say,
this is a totally open-ended obligation;
(2)
As a result of number one, the amount of redesign work necessary
to adjust the Architect's estimate is similarly open-ended
notwithstanding the potential mismatch of the Owner's evolving program
with the Owner's budgetary constraints; and
(3)
The Architect is bound to provide redesign services for free
notwithstanding the fact that the estimate of the costs of work may have
increased due to factors that are totally unrelated to the Architect's
services.
Thus,
this one new sentence appears to be a representation that the Architect
will now make all modifications necessary to its documents as may be
necessary to bring them into conformance with the Owner's budget through
the completion of Construction Documents.
The results of this sentence could be catastrophic for any
Architect retained on a large complex project, as well as for smaller
architects working on more modest projects.
Providing
redesign work, essentially for free, is a quick path to financial ruin.
Why this sentence now appears in a standard AIA document is at
best perplexing. This major
problem is amplified significantly when the Architect also retains the
consultants on a project and all their services are also provided for
free or, in the worst case, the unwitting Architect has to pass this
unreasonable burden on to his or her consultants and ends up in the
preposterous situation of not only performing substantial work for free,
but being obligated to pay the consultants for the same work it is
already losing money on.
What
is also very troubling about the new sentence at the end of new Section
2.1.7.1 is that it assumes that the primary reason that the Owner's
budget has been exceeded is due to the work of the Architect.
This is often not the case, particularly on large, sophisticated
projects. Project cost escalations can be driven by any number of
external factors (e.g., poor estimating by the general contractor or
construction manager, and escalation in the cost of labor or materials,
to name but two of many). In
addition, the Owner's budget and its underlying assumptions may be
incorrect or unreasonable. However,
in the past, if that was the case, the Architect's additional work in
revising its plans and specifications, and those of the consultants,
would be borne by the Owner unless it was solely the Architect's or the
consultant's professional negligence which caused the Owner's budget to
be exceeded. In addition,
the Architect now may be responsible for the risk of the escalation in
the cost of labor and materials from the inception of its services
through the completion of the Construction Documents Phase.
In
the interest of thoroughness, it should be noted that Section 1.3.3.
"Changes in Services," gives the Architect an argument that it
should be compensated by the Owner for the redesign to bring its cost
estimates in line with the Owner's budget through the Construction
Documents Phase. This
argument is not strong, however, for a number of reasons.
If the Architect "recommends changes" to be initiated
to meet the Owner's budgetary requirements, this does not neatly fit
into a "Change in Service" as defined in B141-1997.
Next, Section 2.1.7.1 contains no cross-reference to Section
1.3.3, and the legal construction of the new contract to read section
2.1.7.1 to include Section 1.3.3. is, in my opinion, a weak argument.
At best, the Architect is left with a difficult legal and factual
debate which by its nature generally favors the Owner.
Thus,
the simple inclusion of the new sentence at the end of Section 2.1.7.1
has indeterminate ramifications which may well impose catastrophic
obligations on Architects working on large projects.
Was this the intended effect of this language? Of course not. Will
it be the actual effect? Perhaps. And
that is a frightening thought.
Article
copyright: 2000, Zetlin & DeChiara, LLP
_________________________________
About
the Author: Michael
DeChiara is a partner in the law firm of Zetlin & DeChiara, LLP,
whose practice emphasizes the representation of design professionals.
For more information: 801 Second Avenue, New York, NY 10017;
(212) 682-6800.
Editor's
Note on this Article: by J. Kent Holland, Jr.
While pondering the impact of these clauses of the new AIA form,
I came across Mr. DeChiara's article in his law firm newsletter and
decided it would be good to share with the readers of
ConstructrionRisk.com Report. The
concerns he raises strike me as reasonable, but I don't imagine it was
the intent of the AIA for the language to be interpreted the way it has
been presented in this article. It
would be interesting to get the AIA's view about this.
The problem is, however, that with reasonable people disagreeing
over the intent of the language, it is entirely possible that a court
would apply the principle that the party that drafts the contract is
responsible for any ambiguity. This
would mean that an owner's more strict interpretation could be applied
against the architect even if this was not the intent of the architect
or AIA.
What
makes the clause more ambiguous is the fact that an increasing number of
contracts that are being drafted by project owners are specifically
requiring the architect to take responsibility for performing additional
design services without compensation when there are construction cost
overruns. An example of
such a clause is one that I was just asked to comment on for a client.
It reads as follows: "If
the construction Budget is exceeded by the total of the lowest
responsive and responsible bids and any legally negotiated prices for
the Project, the Department shall, at their option ... [have several
choices of action]. If
the Department adopts options (2)(3) or (4), the Consultant shall modify
the Approved Program Requirements, the Project schedule and the Contract
Documents and cooperate in any necessary bidding or negotiation WITHOUT
ADDITIONAL COMPENSATION." This states in unambiguous language what some owners will
assert has been stated by the new AIA form, whether inadvertently or
not.
With
the current hot construction market, it is unreasonable for an owner to
expect an A/E to assume responsibility for cost escalations in
contractor's bids that are beyond the A/E's control.
It is unwise for an A/E to agree to such liable, and to the
extent that they suffer costs as
a result, their professional liability coverage will not cover those
costs as damages unless caused by negligence.
Unfortunately, the contract language is creating contractual
liability and potential guarantees that are excluded under the typical
professional liability policy.
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DISCLAIMER
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newsletter is distributed with the understanding that
ConstructionRisk.com, LLC and J. Kent Holland, Jr. are not engaged in
the rendering of legal services. Further, the comments in this
newsletter are for general distribution and cannot apply to any single
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Copyright
2000, ConstructionRisk.com, LLC
Editor:
J. Kent Holland, Jr., JD
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