Alaska Supreme Court Issues its Decision on Contractor's Differing Site Condition Claim – The Contractor's Failure to Keep Contemporaneous Records Barred the Contractor's Recovery

This recent case emphasizes the importance of a contractor keeping proper records when performing extra or changed work.[i]  Here, the contractor’s failure to keep such records barred its clam recovery altogether.

1.  Background.  The Alaska Department of Administration (“Department”) solicited bids in 2006 for asbestos abatement and renovations of one floor in the State Office Building in Juneau, Alaska.  The Department’s invitation for bid indicated that potential bidders were responsible for conducting a site investigation of the project. A pre-bid meeting was conducted at which the Department provided bidders an opportunity to visit the project site, but only one bidder actually conducted a site visit. It is undisputed that contractors visiting the site would not have been able to review the surface of the pan deck (the metal pan on which the concrete is placed to create the floors of each successive story of the building) because fireproofing was still covering the pan deck at the time of the pre-bid conference and thus, the asbestos was not viable.

North Pacific was the successful bidder for the project. The Department’s contract documents included provisions which stated that the contractor had “visited and carefully examine the site and is satisfied as to the conditions to be encountered in performing the Work.” After work began, North Pacific’s abatement subcontractor discovered that the pan deck surface, instead of being smooth, was “dimpled.”  The dimpled pan deck surface made the cleaning process much more time consuming and inefficient.  The contractor’s difficulty with cleaning the dimpled deck was described in only one daily report.  

2.  Pertinent Contract Provisions.  The contract contained a differing site conditions clause, which permitted the contract price to be equitably adjusted if the contractor encountered latent physical conditions at the site varying materially from what was indicated in the contract documents. The contract also contained a clause that 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. Failure to keep such records shall bar any recovery by reason of the alleged differing site condition.”  Finally, the contract provided that if the contractor believed additional compensation or time was needed that “… he must immediately begin keeping complete, accurate, and specific daily records concerning every detail of the potential claim including actual costs incurred.”

3.  Administrative Process. The contract required that any claim be submitted initially to an appointed hearing officer for a decision.

The evidence indicated that North Pacific and its subcontractor neither participated in the pre-bid conference nor conducted a site investigation. Thus, North Pacific was held to the standard of what would have been revealed by a reasonable investigation of a similarly situated contractor.

The hearing officer determined that the contractor had encountered a differing site condition because had North Pacific participated in the pre-bid meeting, its reasonable investigation would not have revealed the dimpled pan since the pan was covered with fireproofing. The hearing officer also concluded that the Department was obligated to disclose the condition of the pan deck surface because the Department had information that an ordinary bidder would not reasonably acquire without resort to the Department – i.e., the Department had “superior knowledge.”

The hearing officer then concluded that although the contractor failed to keep the required complete and accurate specific daily reports regarding every detail of the potential claim including the actual costs incurred, the Department’s failure to disclose knowledge concerning the pan’s condition, excused the contractor from the contract’s record-keeping requirement.  The Department rejected the hearing officer’s findings and the contractor appealed to the Alaska Supreme Court.

4.  The Supreme Court’s Ruling. The Supreme Court started its analysis with the observation that a reasonable investigation would not have revealed the exposed pan deck’s embossing and that the contractor had offered evidence supporting the basic proposition that embossed decks are generally uncommon outside of Juneau, Alaska.  However, as to the superior knowledge of the Department, the Supreme Court held that the Department has no duty to disclose reports or knowledge within its possession unless the Department occupies a “uniquely favored position with regard to the information at issue that no ordinary bidder in the [contractor’s] position could reasonably acquire that information without resort to the state,” a very high burden for the contractor to bear.  The court concluded that North Pacific could have conducted research on its own and was not dependent on the Department as the only reasonable avenue for acquiring the information as to what the pan deck surface looked like.  Thus, the state had no duty to disclose the information regarding the pan deck surface.

The Court then went on to analyze the contract’s record-keeping provisions. The Court acknowledged that the contractor could likely demonstrate that a differing site condition occurred; however, because the contractor failed to keep accurate and detailed records (which indicated the actual cost of the work being done due to the alleged differing site condition), the contractor was barred from any recovery. North Pacific’s subcontractor had kept only one daily report documenting problems encountered with the embossed deck and failed to segregate its labor costs in performing the pan deck cleaning from its other non-claim labor costs. North Pacific failed to offer an explanation as to why it was unable to provide contemporaneous records of the additional costs. Thus, the Court held that the contractor’s claim was completely barred and upheld an award of attorney’s fees against the contractor.

Comment.  The Court’s decision spends some time discussing that, although the contract provisions mandating record-keeping that may be beyond the practical abilities of any contractor caught in a significant change (not of its making), the court was not prepared to grant the contractor equity because parties are free to enter into contracts that contain such stringent clauses. That argument, of course, ignores the fact that this is a public contract and that the contractor had no input or opportunity to negotiate the terms and conditions of the very onerous contract clauses.

The lesson learned from this case is that daily reports are critical to the substantiation and backup of any extra work or changed condition that occurs on a construction project. It is hard to understand why the subcontractor only had one daily report substantiating the extra work effort and inefficiency that was caused by the dimpled surface pans, when a smooth surface was anticipated. The court came down hard on this contractor and enforced the contract as written.

This court’s logic is very similar to the reasoning in the Washington case of Mike M. Johnson that upheld the strict notice requirements. It appears that the courts in both Alaska and Washington are prepared to literally enforce public works contract provisions irrespective of the fact that to do so may cause a forfeiture of the contractor’s meritorious claim. In this instance even though the contractor had a valid differing site condition claim, the fact that the record-keeping was not up to par meant that the contractor lost its claim altogether.

[i] North Pacific Erectors, Inc. v. Department of Administration, 2013 W.L. 4768380 (Alaska)

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