Federal Court Holds Design-Build Contractor To A Higher Standard On Differing Site Conditions Claim

Differing site conditions are common place in heavy highway construction.  Read more. To prevail on a differing site conditions claim, the contractor must prove that conditions encountered at the site were either materially different than shown in the contract drawings or are of an unusual nature differing materially from those ordinarily encountered and generally recognized as inherent in the work. 

In the 1920s, the U.S. government, in an attempt to reduce contingencies that contractors faced in performing work, began using a “changed conditions” clause in its fixed price construction contracts.  The purpose of this differing site conditions (“DSC”) clause was to place the risk of certain reasonably unexpected site conditions on the public works owner by granting a price increase in a time extension to the contractor who encounters such a DSC.  The long term effect of the DSC clause is to reduce bids and proposal prices.  Read more. 

The legal challenges that a design-build contractor faces when seeking an equitable adjustment under the DSC clause is illustrated in Metcalf Construction Co., Inc. v. United States.  2011 Ct. Fed. Cl. No. 07-777C (Dec. 9, 2011).  Metcalf entered into a design-build contract with the U.S. Navy to construction 212 family duplex housing units in Hawaii.  The Navy’s proposal included a soil investigation report indicating that the soil had a “slight expansion potential.”  This report also indicated that it was “for preliminary information only” and informed bidders of their duty to retain a geo-technical firm after the design-build contract was awarded to conduct a full soil investigation.  Metcalf was awarded the design-build contract for a fixed sum. 

The contract contained a standard DSC clause, which required that the contractor provide the government with written notice of a differing site condition if encountered.  After the contract was awarded, Metcalf engaged a geo-technical engineering firm who investigated the ground conditions and determined that the soils had a “moderate to high swelling potential,” which differed significantly from the soils that were described in the government’s RFP report on which Metcalf based its design-build proposal.  Metcalf’s geo-technical engineer recommended that the site be over excavated by two feet and that the slab subcrates be capped with two feet non-expansive granular fill.  The geo-technical engineer for the design-builder also reported that there would be a significant risk of slab failure if Metcalf used the design contained in the government’s RFP. 

Metcalf notified the Navy of the soil problems, but the Navy denied any compensation.  Nevertheless, Metcalf proceeded with the extra excavation and expended $4.8 million in removal of the expansive soil and the back fill of the granular fill. It then submitted a formal DSC claim.  The Navy denied Metcalf’s claim on three grounds; (1) Metcalf had assumed the risk of subsurface conditions, since it was a design-builder, it was obligated to prepare a design that would accommodate those conditions; (2) the Navy pointed out that the contract documents (i.e. the RFP) advised potential bidders of their responsibility to perform the engineering and design work after the award; and (3) the Navy asserted that the disclaimers on the RFP soils report, which stated it was “for preliminary information only,” barred Metcalf’s recovery. 

The case was then filed in the U.S. Court of Federal Claims and the court ruled that the contractor has the burden of proof in a DSC claim.  Therefore, the contractor must demonstrate that (1) the contract documents contained an affirmative representation regarding site conditions; (2) the actual site conditions were not reasonably foreseeable to the contractor based on information from other sources; (3) the contractor reasonably relied on this representation; and (4) the actual site conditions materially differed from those represented in the contract documents.  With that standard in mind, the court then found that Metcalf could not meet the first requirement of a DSC claim, since the Navy’s RFP soils report did not constitute an affirmative representation because it expressly indicated it was for “preliminary information only.”  The court also indicated that Metcalf was an established Hawaiian contractor and should have been aware of the presence of expansive soils or should have conducted soil studies of its own and, therefore, denied Metcalf compensation.

Comment: Generally, design-build projects should not be treated differently than design-bid-build projects when it comes to a DSC claim.  In this instance, if a contractor could establish that it relied on the information provided to it at bid time (the disclaimer notwithstanding) and based its price on that information, the fact that the contractor was a design-builder, rather than a design-bid-build contractor, should have made no difference.

In light of the purpose of the DSC clause, that is to take the gamble on sub-surface conditions out of bidding, the disclaimer clause should have made no difference in this case.  If DSC clauses are inserted, bidders need not weigh the cost and ease of making their own borings against the risk of encountering an adverse sub-surface conditions, contingencies are eliminated and the government benefits from more accurate bidding, without inflation for risks which may not eventuate.  Thus, disclaimer clauses, such as “for preliminary information only,” are rarely used to override the clear purpose of the DSC clause, which directs contractors not to submit bid prices which include contingencies for DSC they cannot reasonably foresee.  See Travelers Cas. & Sur. Co. of Am. v. United States, 75 Fed. Cl. 696, 715-716 (2007); Fehlhaber Corp v. United States, 151 F. Supp. 817, 825 (St. Cl. 1957) cert. denied, 355 U.S. 877 (1957).

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