FEATURE ARTICLE

 

Managing Construction Site Condition Risks  

Benjamin Franklin said simply “time is money.” When a contractor encounters a differing site condition, costs can skyrocket while production slows or even comes to a standstill. Proper site planning and carefully drafted contract clauses may determine which party bears the risk.

For an owner or developer, the foundation for successful development and construction begins with an adequate and accurate “site investigation.” It then ends with solid documentation in the contract of the “baseline” expected to be encountered by the contractor.

Which Party Bears The Risk To Assure The Accuracy Of The Site Investigation?
The owner and contractor both have duties with regard to accuracy of the site investigation. Most contract documents will incorporate the owner’s site investigation. They usually place a burden on contractors to inspect the land to ensure they are familiar with the scope of work.

Results Of Investigations Should Be Incorporated from “Differing” Site Condition Claims.
The owner’s obligation is to be accurate in the information it provides to the contractor. In a recent case against Miami University, an asbestos removal contractor alleged to have encountered a differing site condition when it discovered ceiling tiles mounted directly to clay tile requiring more work than it had bid. After a trial on the merits, the focus of the court was on the pre-bid site inspection and the documents that the owner made available for the bidders’s inspection. The court held that the contractor had adequate opportunity to inspect the site and should have discovered the condition encountered. The court held:

Moreover, the court is persuaded by the testimony of [Miami] that the historical drawings were mentioned and made available pre-bid and that the “as-built” drawings not only showed the presence of a tile substrate but also noted with the designation “su.” where the suspended ceiling systems were located. The court also finds credible and gives weight to the testimony of [Miami], who stated that it was not unusual for a building from this era to have clay tile in place.

The court could have held that merely “mentioning” the historical drawings was not sufficient to place the contractor on notice of their existence. Therefore, as a practical matter, the lesson learned from the Miami University case is to document all items provided to the contractors for the purpose of site investigation. The simplest means of doing so is to list within the contract documents the data, such as the historical drawings, and the location where it can be inspected.

Subsurface Differing Site Conditions Cannot Be “Inspected.”
Even though a contractor has a duty to conduct a reasonable site inspection, it does not place a duty to conduct a subsurface investigation independent of that conducted by the owner. In a case against the Ohio Department of Admin. Services., the contractor did not perform any site investigation before submitting a bid to construct a new prison. While excavating footers 35 feet below grade, the contractor encountered large rocks, coal and shale that made trench footings impossible. Rather than using open trenches for pouring footings, the contractor was forced to build forms. Although the State had provided soil borings and drawings to the bidders, it relied upon a disclaimer that declared the soil borings to be for “information purposes” only. The court noted that the disclaimer in a government contract is not enforceable in Ohio and that the contractor can rely upon the Owner’s underground investigation as being accurate when preparing its bid.

The Owner Should Not Withhold Vital Subsurface Condition Data.
Another lesson to be learned from the Miami University case is that Ohio will apparently recognize a cause of action known as “superior knowledge” if the facts are supportive. In order to establish a breach by nondisclosure of superior knowledge, a contractor must establish (1) the owner possesses knowledge of vital facts regarding a solicitation or contract, (2) the contractor neither knows nor should have known of the facts, by contract specification or otherwise, (3) the owner knew or should have known of the contractor’s ignorance of the facts, and (4) the owner failed to disclose the facts to the contractor. Once a party demonstrates the nondisclosure of superior knowledge, the party must still show reliance and injury by the failure to disclose.

A mere estimate of costs prepared by the Owner’s consultant, without details of the actual job site conditions, is not likely to be considered “vital” information. The Ohio Tenth District Court of Appeals in a case against the City of Columbus held that an engineer’s estimate for the dewatering costs to be approximately one percent of the costs was not an “affirmative representation about the conditions that will be encountered on site.”

In a very close case in the Second District Court of Appeals case against the City of Troy, the court held that the contractor was responsible for ground water conditions encountered on site when the owner conducted no soils testing. It was discovered that the owner had been advised by a local engineering firm that shallow ground water was to be expected. The court said that without expert testimony, it could not hold that the advice was vital to a contractor.

The holding in the City of Troy case is unusual and should not be relied upon by owners to forego its own subsurface investigation. Typically, without an owner’s baseline, each bidding contractor will be expected to include a significant contingency in their bid to address unknown subsurface conditions. This tends to needlessly drive costs upward. If a bidder conducts its own soils test, it will certainly expect to pass its costs with mark-up through to the owner. It will further insist upon incorporating the results of its investigation into the contract. Finally, the successful bidder can always argue that the conditions are materially different from those ordinarily encountered. Therefore, rather than take risky positions, such as that taken by the City of Troy, it’s best to develop a baseline to serve as a fair starting point for all concerned.

Ohio recognizes the two types of differing site conditions noted in that clause as Type I and Type II differing site conditions. Type I differing site conditions involve conditions that are materially different from the conditions noted in the contract documents. Some examples of Type I differing site conditions include the presence of subsurface perched water, boulders, water table levels, soils type (whether too hard or too soft) and even old building foundations.

Type II differing site conditions differ materially from what is expected in that geographic region. For example, a contractor in Alaska encountered a Volkswagen Bus that had broken down on the tundra in the winter and sank when it thawed in the spring. The contract documents did not warn against such a find. The contractor submitted a claim for the cost of its removal and the court held that it was not unusual to find cars and equipment sunken in the tundra and it was a condition that the contractor should have included as acontingency in its bid.

Notice Is Serious Business In Ohio
If a contractor disturbs the site and fails to comply with the notice requirements of the differing site condition clause, the Ohio courts will typically throw out the differing site
condition claim, regardless of the cost to the contractor or the lack of prejudice to the owner. In the case involving the construction of the Columbus Convention Center, a contractor encountered nearly $1 million dollars in additional hauling costs compared to its original scope of work of $200 thousand. The Ohio Supreme Court held that even though the Owner had knowledge of the additional work and “even acquiesced” in it, the Owner could duck liability if the contractor did not have a signed change order from the Owner before proceeding with the work.

Conclusion
With careful planning, a solid site investigation team, and reasonable contract clauses owners can hedge their bets against subsurface conditions.

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Mike Copley is a Shareholder and a member of the Real Estate & Construction and Litigation Practice Groups.  He can be reached at mcopley@bdblaw.com or 614.227.4264. He concentrates his practice in the areas of land development, construction and business litigation.