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On a contract for a renovation and asbestos removal in a state office building, the contractor claimed there was a differing site condition making asbestos removal more difficult than anticipated.  The Supreme Court of Alaska held that the contractor could have performed its own site investigation to determine the conditions and could not argue that the state had failed to disclose superior knowledge, but that even if a differing site condition could have been proved, the contractor was barred from recovery because it failed to comply with express provisions of the contract requiring it to keep records of all damages.  North Pacific Erectors, Inc. v. State of Alaska, 2013 WL 4768380 (Alaska 2013).

Details of the Case

The state’s bid solicitation notified potential bidders that they were responsible for investigating the project site.  By submitting a bid, the contractor represented that it had “visited and carefully examined the site and is satisfied as to the conditions to be encountered in performing the Work.”   The contractor and its subcontractor didn’t visit the job site or participate in the prebid meeting before bidding on the contract.

After the subcontractor began work it made a note in its daily report about “dimple deck surface and describe the cleaning process for ‘indentations’ and ‘protrusions’ in the pan deck that ‘cost us considerable time.’”  Although the workers had to use toothbrushes to clean asbestos from the bumpy surfaces, the daily report did not contain any time estimate for the additional cleaning efforts.  The subcontractor notified the prime about the pan deck problem, and the prime transmitted the information to the state, requesting additional compensation.  The request was denied and the prime filed a claim under the contract’s differing site conditions clause.

Differing Site Conditions

The initial dispute was heard and decided by an administrative hearing officer.  He found that the daily report note about the additional work was the only entry made in the daily reports relating to the embossed deck pan and extra work required.  But he concluded there was a differing site condition that entitled the contractor to additional compensation even though the sub “did not segregate its labor costs,” and its “exert utilized a method of requesting damages [total cost method] which is prohibited by contract.”  The hearing officer declined to enforce the contract limitations because he found the Department should have disclosed the condition of the deck pan surface to all bidders.  The Department’s Deputy Commissioner reviewed and rejected the hearing officer decision as being at variance with the law and concluded that the contractor was entitled to no relief.  The key reason given by the Deputy Commissioner was that to prevail on a differing site condition claim, the contractor had “the heavy burden” of showing that “it could not have anticipated the condition from site inspection, reasonable investigation, or general experience.”

The Deputy Commissioner concluded that “[here], in spite of the State’s admonitions, [Contractor] did not conduct a site investigation” and is therefore “charged with the knowledge a reasonable investigation would have revealed.”  According to the Deputy Commissioner, “a reasonable investigation should have at least entailed a request for photos or other information on the pan deck.  The deputy commissioner also point out that [Contractor] could have obtained information from the five previous subcontractors that had performed asbestos removal for the department.  The agency concluded that ‘reasonable investigation would have revealed the exposed pan deck and its embossing.’  Thus, [Contractor’s] own failure to reasonably anticipate the condition caused the ‘unplanned expense and delay.’”

The Deputy Commissioner also concluded that the contractor failed to demonstrate that the pan deck surface was outside the norm of what could be expected by a contractor.  Finally, the Deputy Commissioner concluded the Department’s staff experience with pan decks was limited and they had no reason to believe the pan deck surface was unique.  Therefore, they lacked superior knowledge that had to be revealed to the contractor.   The deputy commissioner found that because the contractor could have acquired the relevant information on the pan deck through an independent investigation, it failed to show that the Department had breached a duty to disclose.  This was affirmed on appeal by the state supreme court for the reasons explained below.

The court concluded that the Department did not occupy such “uniquely favored a position with regard to the information at issue that no ordinary bidder in the plaintiff’s position could reasonably acquire that information without resort to the State.”  The test used by the court for imposing on the State a duty to disclose information in its possession was first explained in the decision of Morrison-Knudsen v. State as follows:

“Did the state occupy so uniquely-favored a position with regard to the information at issue that no ordinary bidder in the plaintiff’s position could reasonably acquire that information without resort to the State?  Where resort to the state is the only reasonable avenue for acquiring the information, the state must disclose it, and may not claim as a defense either the contractor’s failure to make an independent request or exculpatory language in the contract documents.”

In this case, the court concluded that although the Department had some control over the information concerning the building, it did not have absolute control over the relevant information.  The court found that the contractor could have reasonably acquired the information without resorting to the Department, just as other bidders had done.  “Accordingly, we hold that the State had no duty to disclose information regarding the pan deck surface.”

In addition, the court agreed with the state that the contractor’s failure to comply with the contractual records requirement and damages provision bars recovery for the differing site condition claim.  The contract expressly required the contractor “to keep an accurate and detailed record which will indicate the actual ‘cost of the work’ done under the alleged differing site condition” and provided that “failure to keep such a record shall be a bar to any recovery….”   The contract also required that for additional compensation claims, the contractor “must immediately begin keeping complete, accurate, and detailed specific daily records concerning every detail of the potential claim including actual costs incurred.”  The court stated that under the contract “total cost, modified total cost or jury verdict forms of presentation of damage claims are not permissible to show damages.”   The contract event stated that “labor inefficiencies must be shown to actually have occurred and can be prevent solely based on job records.”

Based on all the above, the court concluded, “the parties contracted to require detailed records for differing site condition claims and to establish the actual cost method as the only permissible method to calculate damages” and that “failure to comply with these provisions in the contract bars recovery for the differing site condition claim.”   In strictly applying the contract requirements against the contractor, the court also explained that the state law was consistent with the contract requirements in that “the preferred method is the actual cost method, ‘in which each element of extra expense incurred because of the [alleged breach] is added up for a total claimed amount.’”

In emphasizing the need for actual cost documentation of damages, the court stated, “Courts prefer the actual cost method because it provides the court with a record of discrete additional costs, guaranteeing that the final amount of the adjustment will be equitable and reliable.”   The court further stated that its conclusion is supported by federal decisions and cited Joseph Pickard’s Sons Co. v. United States that, to rely on the jury verdict method, a contractor must show “a justifiable inability to substantiate the amount of his resultant injury by direct and specific proof.”  Failure to produce records of actual costs was found to be inexcusable and fatally defective in the case of Joseph Pickard’s Sons and is likewise found to be fatally defective by the Supreme Court of Alaska in this case.

Comment

This case shows the importance of complying with the requirements of the contract (particularly those concerning filing claims and documenting damages.  It is also instructive as to the general requirements for proving entitlement to relief for differing site conditions and the significance of contract language that may impose duties upon a bidder to conduct its own independent site investigations before bidding.  Finally, the disdain for total cost or jury verdict damage claims is clearly emphasized in this decision.  Thus, even in the absence of contract language specifying that detailed documentation be maintained to prove actual damages, it is likely that the court here would have rejected the contractor’s claim, because relying on total cost or jury verdict damages instead of producing “records of actual costs was inexcusable and fatally defective.”

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 16, No. 1 (Jan 2014).

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