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A contractor prevailed under the differing site conditions (DSC) clause of a highway bridge construction contract by meeting the requirements of the so-called Stuyvesant test, which requires a contractor to prove that “(1) the conditions indicated in the contract differ materially from those it encounters during performance”; (2) “the conditions were reasonably unforeseeable based on all the information available to the contractor at the time of bidding”; (3) “it reasonably relied upon its interpretation of the contract and contract-related documents”; and (4) “it was damaged as a result of the material variation between the expected and countered conditions.”

The ultimate decision in favor of the contractor was based largely on drill hole data provided with the contract, as well as a depiction in contract documents of the existing bridge that was to be demolished sitting on a footing directly on a rock ledge at the depth the contractor stated the contract represented for the new footers. The Court found the contractor reasonably relied on the ledge elevations shown in the bidding documents in pricing and designing is cofferdam. W. M. Schultz Construction, Inc. v. Vermont Agency of Transportation, 203 A. 3d 1205 (Vermont 2018).

The project was funded in party with federal aid, and this meant that the standard federal contract DSC clause was required to be included in the contract. As explained by the court (quoting from case precedent), “The purpose of the Differing Site Conditions clause is to allow contractors to submit more accurate bids by eliminating the need for contractors to inflate their bids to account for contingencies that may not occur.”

The court explained that to be entitled to a differing site condition under the important case precedent of Stuyvesant Dredging Co. v. United States, 834 F.2d 1576, 1581 (Fed. Cir. 1987), a contractor must prove:

(1) “the conditions indicated in the contract differ materially from those it encounters during performance”;

(2) “[t]he conditions actually encountered” were “reasonably unforeseeable based on all the information available to the contractor at the time of bidding”;

(3) “it reasonably relied upon its interpretation of the contract and contract-related documents”; and

(4) “it was damaged as a result of the material variation between the expected and encountered conditions.”

The first Stuyvesant element was the “threshold” question that was of most significance in the court’s analysis. The court stated: “While there need not be ‘express representations as to the nature of conditions, … at least insofar as subsurface or latent conditions are concerned, there must be reasonably plain or positive indications in the bid information or contract documents that such subsurface conditions would be otherwise than actually found in contract performance.”

The agency appeals Board that reviewed the initial dispute granted the contractor summary judgment because it found that the bid documents repeatedly stated that the approximately elevation of the existing ledge was 802 feet and they did not state that subsurface conditions were unknown, could vary, or were sloped. Numerous Plan Sheets showed elevations drawn to scale using the defined symbol for exposed ledge, “and each represented, sometimes in multiple places, existing ledge elevation at approximately 802.5 feet at Abutment #2.” The Court states that the Board found it important that the bid documents described the prior bridge and stated that the footing for the then-existing Abutment #2 was poured directly on the ledge.

The various documentation presented by the state agency attempting to refute the differing site condition claim included soil borings from around the entire project and one plan sheet in particular (number 212) that the state agency asserted was controlling because it included “calculated dimensions rather than scaled dimensions” like those shown on other plan sheets. On the bottom of that plan sheet there was a notation for the Abutments #2 footing, indicating “el. Varies.” From that notation, the state agency argued that the contractor should have known that the elevation varied and that it could not depend upon the elevation being what was shown as being the 802 foot ledge elevation on all the other plan sheets.

In reviewing the opposing arguments, the court quoted a principle of law that

“A contractor does not need to show that its ‘interpretation of the contract is the only reasonable one, but it does bear the burden of showing that its construction is at least a reasonable reading.”

In this case the court concluded it was reasonable for the contractor to construe the contract as indicating that the elevation of the bedrock at Abutment #2 was approximately 802.5 feet.

The state agency argued that the “Existing Bridge Data” notation, which stated that the prior abutment was “spread footing on ledge,” didn’t necessarily mean that it rested entirely and directly on bedrock without any subfooter.”   In finding that argument to be unpersuasive, the court explained:

“But this is not the question. The question here is how a reasonable contractor would construe the information provided. It was reasonable to read the notation to mean what it said. This is particularly true given the drawings that portrayed the existing bridge abutment footing as a level plateau with slopes on either side. Additionally, as the Board observed, nothing in the contract materials indicated that the ledge on which the existing abutment footer had been poured was at an elevation that differed from the bid documents’ several other ledge descriptions and data. No subfooting was depicted in the drawings for Bridge # 19, moreover, and there was no pay item for concrete for a subfooting.”

For these and other reasons explained more fully in the decision, the court affirmed the Board’s summary judgment in favor of the contractor – finding that the contractor was entitled to equitable adjustment on its differing site condition claim.

Comment: As explained by the court, quoting from the important precedent of Foster Construction v. U.S, the reason for including a DSC clause in a contract is that the clause:

“makes it clear that bidders are to compute their bids, not upon the basis of their own preaward surveys or investigations, but upon the basis of what is indicated and shown in the specifications and on the drawings. The clause should induce the bidder not to consider such contingencies as the latent or subsurface conditions, for which the Government has assumed responsibility.”

Project owners need to understand that they are doing themselves no favor by attempting to eliminate the ability of a contractor to make a bona fide differing site condition claims (DSC). This is particularly so for a public owner like a department of transportation that is going to have multiple construction projects.

As a hypothetical to demonstrate how attempts to insert language into a contract to eliminate or avoid DSC claims, an project owner actually harms itself and wastes money, consider the following:

(1) A department is going to have 10 projects during a year;

(2) The average project cost will be $20 million;

(3) The total for the 10 projects for the entire year would be $200 million

(3) One project has a DSC and it is for $2 million

(5) $202 million is the total expended by the department on the 10 projects if it pays the one DSC claim.

In contrast, consider what happens if the department prevents all DSC claims from the being filed:

(1) A department is going to have 10 projects during a year;

(2) The average project cost will be $20 million;

(3) The total for the 10 projects for the entire year would be $200 million;

(4) The bidders on all 10 projects inflate their bids by $2 million to account for contingency needed to cover the potential differing site conditions they might encounter on each project.

(5) $20 million is the amount of the total contingency amounts added to the ten projects.

(6) $220 million is the total amount incurred by the department for the ten projects

In the above hypothetical, the department wasted $18 million as a result of its ill-advised decision to eliminate differing site condition claims. It is unfortunate that we are seeing so many misguided project owners ignoring the wisdom of allowing differing site condition claims.

Risk Management Tip: On the design-build contracts, when advising a design professional or its insurance carrier with regard to the design subcontracts and the risks associated with those contracts, if I see that the prime design-build contract includes language making it difficult or impossible to the design-builder to make a bona fide DSC claim, I advise the designer and carrier to beware of the increased likelihood of litigation by the design-builder against the design professional to recover the DSC costs that cannot be recovered from the Owner. Eliminating DSC claims creates more claims and litigation between the design-builder and the design professional subcontractor.

 

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 ConstructionRisk 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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk Report, Vol. 22, No. 3 (March 2020).

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