4 steps for handling unexpected conditions claims on construction projects

Every construction contractor has heard a handful of stories about projects that have gone sideways because of unexpected site conditions. These unforeseen conditions range from asbestos and mold being discovered on the job site to unanticipated ground water to excessive rock formations disrupting the construction project. Unexpected conditions can become a major problem for contractors. Regardless of whether the project is a design-bid-build process or billed on time and materials, contractors never look forward to telling an owner that the project is going to be more expensive than initially thought.

Overview of Differing Site Condition Claims

Nearly all standard construction industry contracts have a provision for unexpected site conditions. Generally, the provision will include a description of what is meant by an unexpected or concealed condition, what the contractor should do when such a condition is discovered, and the process to be followed once the condition is confirmed by the owner.

Unexpected conditions on construction sites are commonly referred to as “differing site conditions.” There are two types of differing site conditions:

• Type I – Type I differing site condition is a physical condition at the site that differs materially from what was indicated in the contract documents. In order to prevail on a Type I differing site condition claim, a contractor must show that the contractor reasonably relied upon the contract documents that represented the condition of the construction site, the conditions on the construction site were materially different from the contract documents, and those conditions were unforeseeable.
• Type II  - Type II differing site condition claim is an unusual or unknown condition at the site that differs materially from those ordinarily encountered and reasonably anticipated given the nature of the work and the location of the project. To succeed on a Type II claim, a contractor must show that it did not know about the physical condition; it could not have anticipated the condition from inspection or general experience; and the condition varied from the norm in similar contracting work.

Pre-Bid Site Investigation

When a differing site condition is claimed, the extent of the contractor’s pre-bid site investigation will be scrutinized. Almost every construction contract contains provisions that require the contractor to be fully aware of all conditions that might affect successful completion of the work. Those same provisions also require contractors to conduct a reasonable site investigation and compare the site to the project plans and specifications. The site investigation is typically limited to a visual inspection of the project site, but can extend to making a subsurface investigation if the contract documents so require or if a subsurface investigation is typically necessary for the type of work to be performed. The adequacy of the site investigation is measured by what a reasonable, intelligent contractor, experienced in the particular field or work involved, could be expected to discover.

Providing Notice to the Owner

Notice issues present major concerns in differing site condition claims. Most differing site condition provisions require contractors to notify the owner when the contractor encounters a differing condition. The provision will require that notice be given to the owner within a certain number of days and will typically require that the contractor not do anything to further disturb the differing site condition so that the owner can inspect and evaluate the potential impact on the project. Even though there are some instances where courts do not require strict compliance with the notice requirements for differing site conditions, construction contractors are taking a major risk if they continue to work before the owner has had an opportunity to inspect the condition.

Practical Advice for Handling a Differing Site Condition Claim

Below are some steps that construction contractors can take to prevent problems from a differing site condition:

1. Read your contract. This advice goes without saying, but contractors should always know the contract for the job they are working on. This advice goes far beyond contractors seeking to preserve differing site condition claims because knowing the project’s contract is an integral part of a contractor’s ability to deliver the project in a manner that avoids claims against the contractor and preserves claims against other parties. It is specifically important for contractors encountering differing site conditions to check the project’s contract to determine whether there is a provision that covers unexpected conditions.
2. Document, document, document! It is extremely important that contractors keep accurate and thorough records documenting the contractor’s site investigation, as well as the circumstances surrounding the unexpected condition once encountered. Contractors should document all of the steps taken once the differing site condition was discovered, including when notice was given to the owner, the substance of the notification and the date of the notification. It is important to note here that contractors can provide a general notice to the owner even if the contractor is unsure of the extent and magnitude of the potential impact of the unforeseen condition. Contractors should give the owner notice early and often to be best situated to recover their additional costs.
3. Request and negotiate a change order. Once the extent of the impact of the differing condition is known, request and negotiate a written change order for the increased costs and/or modified schedule. If the owner refuses to issue a change order, start preparing for a claim by documenting all communication regarding the negotiation and attempts to resolve the issue prior to resorting to the contract’s claim procedure. Contractors should refer to the contract documents for guidance on the claim procedure for the project so that the proper steps are taken to preserve the claim.
4. Preparing for litigation. In addition to documenting all communication with the owner regarding the differing condition, be sure to closely track the increased costs and required schedule modifications associated with the additional work and/or materials required as a result of the differing condition. Pay close attention to any schedule compression, work acceleration, disruptions in job flow, and the related increase in costs. Engage legal counsel early so that the job documentation meets all of the requirements of a Type I or Type II differing site condition claim. This way, you have support for your claim when it comes time for litigation or arbitration. Even if the claim never reaches litigation or arbitration, proper documentation and engaging counsel early can be extremely helpful in resolving claims through alternative dispute resolution methods and negotiations with the other side.

Differing site condition claims on a construction site can be very expensive and result in protracted litigation. By following some of the general advice above and by engaging legal counsel early, contractors can preserve their claims and put themselves in a better position to protect their bottom line.