In general terms, if a contractor agrees to construct an improvement for a stipulated sum, the contractor bears the risk and costs of concealed conditions. The contractor will not be excused or be entitled to additional compensation when unforeseen difficulties are encountered.[i] If a contractor agrees to erect a structure on a particular site, the contractor ordinarily assumes the risk of subsidence of the soil.[ii]
The risk of concealed conditions would normally cause a contractor to add large contingency amounts in a fixed price contract. As a result, owners would pay increased prices for projects, even if differing or concealed conditions are not encountered. To reduce the risk, the contingency and the price to the owner, many contracts include a differing or concealed site condition clause.
AIA Document A201-2017 (General Conditions of the Contract for Construction) removes the risk of differing or concealed site conditions from the contractor. It states:
3.7.4 Concealed or Unknown Conditions: If the Contractor encounters conditions at the site that are (1) subsurface or otherwise concealed physical conditions that differ materially from those indicated in the Contract Documents, or (2) unknown physical conditions or an unusual nature that differ materials from those ordinarily found to exist and generally recognized as inherent in construction activities of the character provided for in the Contract Documents, the Contractor shall promptly provide notice to the Owner and the Architect before conditions are disturbed and in no event later than 21 days after first observance of the conditions. The Architect will promptly investigate such conditions and, if the Architect determines that they differ materially, and cause an increase or decrease in the Contractor’s cost of, or time required for, performance of any part of the Work, will recommend an equitable adjustment on the Contract Sum or Contract Time, or both. If the Architect determines that the conditions at the site are not materially different from those indicated in the Contract Documents and that no change in the terms of the Contract is justified, the Architect shall promptly notify the Owner and Contractor in writing, stating the reasons. If either party disputes the Architect’s determination or recommendation, that party may proceed as provided in Article 15.
This contract provision splits concealed or unknown conditions into two “Types.” A “Type I” condition concerns “subsurface or otherwise concealed physical conditions, which differ materially from those indicated in the contract documents.” This type of claim depends on an inaccurate representation in the plans, specifications, test borings, soil reports or other contract documents.
A “Type II” condition is “unknown physical conditions of an unusual nature, which differ materially from those ordinarily found to exist and generally recognized as inherent in construction activities of the character provided for in the contract documents.” This type of claim does not depend on an inaccuracy in contract documents, but does require a physical condition that was unknown and of an unusual nature. A Type II differing site condition is more rare than its Type I counterpart and is much more difficult to prove.[iii]
U.S. government contract documents and Federal Acquisition Regulations generally describe differing site conditions in the same manner.[iv] Accordingly, differing or concealed conditions are generally split up into and described as Type I and Type II conditions in the construction industry.
Even in the absence of a differing site conditions clause in the contract, a Type I condition claim based on defects in the contract documents can be brought under a theory of “misrepresentation” by the owner[v] or based on the owner’s “implied warranty of the accuracy of the plan and specifications.”[vi]
To avoid being bound to soils reports and other contract documents, owners sometimes include explicit disclaimers. The effectiveness of these disclaimers seems to vary.[vii] The federal District Court in Virginia has upheld a disclaimer from an owner that provided a soils report “solely as a matter of convenience and general information,” and expressly disclaimed “any responsibility for the data as being representative of the conditions and materials which may be encountered.”[viii]
By definition, a Type II condition is not described in the contract documents. It must be an unknown physical condition of an unusual nature. If the condition is shown on any contract documents or discussed in any pre-bid conference, it cannot be unknown and a Type II condition claim will be denied.[ix]
Type II condition claims must also be for physical conditions. Claims will not be allowed under these differing site condition clauses for non-physical conditions such as labor disputes, governmental, political, economic or weather conditions.
Differing or concealed conditions provisions in a contract normally have notice requirements similar to those for changes or delays. This allows the owner or architect to inspect and verify the condition, formulate the best method of proceeding and perhaps alter the work to avoid excessive cost increases.[x] If the contractor fails to strictly follow the notice requirements, however, courts may allow the claim anyway if the owner had actual notice of the condition and can prove no prejudice or damage due to the late notice.[xi]
The ability to obtain a time extension or make a delay claim for a differing or concealed site condition will depend on all of the same requirements for making a claim for additional compensation.
[i] U.S. v. Spearin, 248 U.S. 132; 39 S. Ct. 59; 63 L. Ed. 166 (1918).
[ii] U.S. v. Spearin, 248 U.S. 132; 39 S. Ct. 59; 63 L. Ed. 166 (1918), citing Simpson v. U.S., 172 U.S. 372; 19 S. Ct. 222; 43 L. Ed. 482(1899).
[iii] Commonwealth v. AMEC Civil, LLC, 54 Va. App. 240, 266 (Va. Ct. App. 2009).
[iv] Federal Acquisition Regulations 52.236-2.
[v] City of Richmond v. I.J. Smith & Co. Inc. 119 Va. 198; 89 S.E. 123 (1916).
[vi] U.S. v. Spearin, 248 U.S. 132; 39 S. Ct. 59; 63 L. Ed. 166 (1918); Chantilly Constr. Corp. v. Dept of Transp., 369 S.E.2d (Va. App. 1988); 1616 Reminic Ltd. Partnership v. Atkinson & Keller Co., 14 B.R. 484 (E.D.Va. 1981); Raymond International, Inc. v. Baltimore County, 45 Md. App 247, 412 A.2d 1296 (Md. Ct. Spec. App 1980).
[vii] City of Richmond v. I.J. Smith & Co. Inc. 119 Va. 198; 89 S.E. 123 (1916); P.T. & L. Constr. Co. v. Dept of Transportation, 531 A.2d 1330 (N.J. 1987) [withholding information negates waiver]; Joseph F. Trionfo & Sons, Inc. v. Board of Education, 41 Md. App. 103, 395 A.2d 1207 (Md. Ct. Spec. App. 1979); Weichmana Engineering v. State, 109 Cal. Rptr. 529 (Ct. App. 1973) [disclaimer effective for honest mistake without fraud, bad faith or fiduciary relationship].
[viii] McDevitt & Street Co. v. Marriott Corp., 713 F. Supp 906, 914 (E.D. Va. 1989), aff’d in part and rev’d in part 911 F.2d 723 (4th Cir. 1990), on remand 754 F. Supp 513 (E.D. Va. 1991).
[ix] Highland Motor Transfer Co. v. Heyburn Building Co., 35 S.W.2d 521 (Ky. App. 1931); Condon-Cunningham, Inc. v. Day, 258 N.E.2d 264 (Ohio C.P.1969).
[x] Schnip Building Co. v. U.S., 645 F.2d 950 (Ct. Cl. 1981).
[xi] Peter Kiewit Sons’ Co., 60-1 BCA #2580; B.J. Lucarelli & Co., 1962 BCA #3269; Eisen-Magers Contr. Co., 59-1 BCA #23234; Bignold v. King County, 399 P.2d 611 (Wash. 1965); Kenny Constr. Co. v. Metropolitan Sanitary District, 288 N.E.2d 1 (Ill. 1972); Frederick Snare Corp. v. Maine-New Hampshire Interstate Bridge Authority, 41 F.Supp 638 (D.N.H. 1941).