2deb7dc9 39a7 4bc4 Ac389afd92a82b4b Publication

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Michael R. LiborMorgan, Lewis & Bockius LLP

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III. CHANGES, CHANGED CONDITIONS AND SCOPE

CHANGES AFFECTING PAYMENT..................................................... 1

A. Claims Under the Changes Clause ............................................. 1

1. The Standard Changes Clause........................................ 1

2. Formal Change Orders....................................................... 2

3. Giving Notice..................................................................... 4

4. Different Types of Constructive Changes.......................... 6

B. Cardinal Changes ........................................................................... 9

C. Authority to Order Changed Work............................................... 11

1. Municipalities................................................................... 11

2. Course of Conduct/Oral Modification.............................. 11

3. Ratification....................................................................... 11

D. Changed Conditions ..................................................................... 11

1. What the Clause Says ....................................................... 11

2. Federal and Private Clauses ............................................. 13


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III. CHANGES, CHANGED CONDITIONS AND SCOPE CHANGESA F F E C T I N G P A Y M E N T

A. C L A I M S U N D E R T H E C H A N G E S C L A U S E1. The Standard Changes Clause

Various changes in circumstances or conditions can occur in every

construction project that were not covered in the original contract documents,including: (1) additional or modified scope of work; (2) errors and omissions inplans and specifications; (3) changes required by governmental entities; (4) design

changes; (5) overruns or underruns in quantities; and (6) conditions impacting onschedule, the time of completion or the method or manner of performance of the

work.

In most construction contracts, provision is made for such modificationsby some form of Changes clause. A Changes clause is beneficial in that it

allows for greater flexibility by permitting changes without necessitating a newcontract for each addition, deletion, or revision on a project; sets forth the

procedure for assessing the effect of changes; and permits for adjustment of plansand specifications to clarify the work the design professional and owner intendedto be performed by the contractor without breaking contractual requirements. The

change order mechanism also encourages the contractor to suggest beneficialchanges knowing that it may receive a price adjustment for the additional work

performed.

There are, however, limitations on the owners ability to make changes.For example, the modification may not fundamentally change the contract.

The owners right to make changes and the contractors remedies for themwill typically be governed by the wording of the particular clause. An example of

a standard Changes clause often found in private building construction contractsis Article 7 of the American Institute Architects Document (AIA) A20l (1997Edition), which reads, in part:

7.2.1. A Change Order is a written instrumentprepared by the Architect and signed by the Owner,

Contractor and Architect, stating their agreementupon all of the following:

1. a change in the work;

2. the amount of the adjustment in the contractsum, if any; and

3. the extent of the adjustment in the contracttime, if any.

* * *


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7.3.1. A Construction Change Directive is a

written order prepared by the Architect and signedby the Owner and Architect, directing a change in

the Work prior to agreement on adjustment, if any,in the Contract Sum or Contract Time, or both. The

owner may, by Construction Change Directive,without invalidating the contract, order changes inthe Work within the general scope of the contract

consisting of additions, deletions or other revisions,the Contract Sum and Contract Time being adjustedaccordingly.

The foregoing standard Changes clause permits the owner or itsrepresentative to initiate the change, without the consent of the contractor, which

the contractor is required to perform. However, the work must be within thegeneral scope of the contract. Also, the directive must be in writing and thecontractor will be compensated if it incurs additional costs and/or be given a time

extension if there is an impact on schedule.

2. Formal Change OrdersThe standard Changes clauses specify that a change can only be made to

the contract by a written order. Contract provisions requiring changes to beapproved in writing are common and enforceable. See Central Penn Indus., Inc.

v. Department of Transp., 25 Pa. Commw. 25, 358 A.2d 445 (1976); LinnemanConstr., Inc. v. Montana-Dakota Utils. Co., 504 F.2d 1365 (8th Cir. 1974). Seealso American Institute of Architects Form A201, General Conditions for the

Contract for Construction (1997 ed.). This contract requirement will generally be

upheld by the Pennsylvania courts. One Pennsylvania decision has noted:

It is a well established rule of law that where, by theterms of a contract with a governmental body,written orders for additional work are required, the

contractor cannot recover for extra work withoutcompliance with the contractual provisions.

Dick Corp. v. State Public School Bldg. Authority, 27 Pa. Commw. 498, 500, 365A.2d 663, 664 (1976).

In Dick, a project was delayed in order to solve an engineering problem.

The contractor claimed damages for the delay, including a period of time fromwhen it received oral authorization to proceed to when it received written

authority. The court refused to exclude this period from the damage claim, statingthat the contractor was within its rights to wait for written authorization. In soruling, the Court cited Burke v. Allegheny County, 336 Pa. 411, 9 A.2d 396

(1939).


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The parties must read and understand the contract provisions setting forth

the notice requirements, forms for submittal of pricing claims and negotiation,and the procedures to be applied in change order pricing. The failure to do so can

lead to significant unforeseen consequences.

For instance, in Nether Providence Twp. Sch. Auth. v. Thomas M. Durkin& Sons, Inc., 476 A.2d 904 (Pa. 1984), the contractor claimed an extra for an

additional acre that was required to be cleared., but failed to follow fully thecontract procedures change order clause. The court ruled that the failure to

comply fully with the procedure barred the claim, even though the president of theauthority sent a letter to the contractor advising continuation of the work and laterresolution of the dispute.

It is also essential to understand any pricing procedures agreed to in thecontract, such as standard unit prices for labor, equipment and materials, and

established markups (profit, overhead, labor burden, etc.).

There is some conflicting case law on this point. In Universal Builders.Inc. v. Moon Motor Lodge, Inc., 430 Pa. 550, 244 A.2d 10 (1968), the court

reasoned that although a construction contract may provide that a builder will notbe paid for extra work unless it is done pursuant to a written change order, the

owner may be required to pay for the extra work done at his oral direction on thetheory that extra work has been done under an oral agreement which is separatefrom a written contract and which does not retain the requirement of written

authorization, or on the theory that the requirement of written authorization mayalso be considered a condition which has been waived.

The conflicting case law in this area may be reconciled on the basis that

courts will be more strict in enforcing the requirement of a writing in publicconstruction contracts than in private contracts.

Finally, it should be noted that exculpatory provisions in contracts, such asthe requirement of a written change order, may not be enforced if there is

evidence of active interference by the owner with the contractors performance.See Coatesville Constr. v. Ridley Park, 509 Pa. 553, 506 A.2d 862 (1986).

A change that arises from owner conduct which does not follow a

contracts formal change order requirements but which, nevertheless, causes thecontractor to perform what is claimed to be work different from or in addition to

the contract work may be deemed a constructive change, and can have the samelegal effect as a formal change order if the contractors position is sustained. Seegenerally Miller Elevator Co. v. United States, 30 Fed. Cl. 662, 678 (1994); Al

Johnson Constr. Co. v. United States, 20 Cl. Ct. 184, 204 (1990), and Part III.A.4,below.

In some instances, an owner will assert the right to a price reduction, orcredit, despite the absence of any formal, directed, deductive change. The most


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common situation arises when the owner accepts nonconforming work and seeks

a credit based on the cost savings realized by the contractor as a result of thedeviations. See Appeal of Blount Bros. Corp., A.S.B.C.A. No. 29862 (Feb. 25,

1988).

3. Giving NoticeOften an owner will issue work orders, either written or oral, without

realizing that they could potentially be regarded by the contractor as changeorders. In addition, conditions may arise during the course of a project that thecontractor believes should result in a change order. To protect the owner from

having the contractor submit long lists of changes upon the completion of theproject, the standard changes clause requires the contractor to give notice to the

owner of circumstances that the contractor believes warrants a change order. Forexample, AIA Document A201 (1997 edition) makes provision for notice to theowner of potential claims in Article 4.3.2:

4.3.2 Time Limits on Claims. Claims by eitherparty must be initiated within 21 days after

occurrence of the event giving rise to such Claim orwithin 21 days after the claimant first recognizes thecondition giving rise to the Claim, whichever is

later. Claims must be initiated by written notice tothe Architect and other party.

The AIA contract further refines the notice requirements for various typesof claims, as follows:

4.3.4 Claims for Concealed or UnknownConditions. If conditions are encountered at the sitewhich are (1) subsurface or otherwise concealed

physical conditions which differ materially fromthose indicated in the Contract Documents or (2)unknown physical conditions of an unusual nature,

which differ materially from those ordinarily foundto exist and generally recognized as inherent in

construction activities of the character provided forin the Contract Documents, then notice by theobserving party shall be given to the other party

promptly before conditions are disturbed and in noevent later than 21 days after first observance of the

conditions. The Architect will promptly investigatesuch conditions and, if they differ materially andcause an increase or decrease in the Contractors

cost of, or time required for, performance of anypart of the Work, will recommend an equitable

adjustment in the Contract Sum or Contract Time,


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or both. If the Architect determines that the

conditions at the site are not materially differentfrom those indicated in the Contract Documents and

that no change in the terms of the Contract isjustified, the Architect shall so notify the Owner

and Contractor in writing, stating the reasons.Claims by either party in opposition to suchdetermination must be made within 21 days after

the Architect has given notice of the decision. If theconditions encountered are materially different, theContract Sum and Contract Time shall be equitably

adjusted, but if the Owner and Contractor cannotagree on an adjustment in the Contract Sum or

Contract Time, the adjustment shall be referred tothe Architect for initial determination, subject tofurther proceedings pursuant to Paragraph 4.4.

4.3.5 Claims for Additional Cost. If theContractor wishes to make Claim for an increase in

the Contract Sum, written notice as provided hereinshall be given before proceeding to execute theWork. Prior notice is not required for Claims

relating to an emergency endangering life orproperty arising under Paragraph 10.6.

4.3.6 If the Contractor believes additional cost isinvolved for reasons including but not limited to (1)a written interpretation from the Architect, (2) an

order by the Owner to stop the Work where theContractor was not at fault, (3) a written order for a

minor change in the Work issued by the Architect,(4) failure of payment by the Owner, (5)termination of the Contract by the Owner, (6)

Owners suspension or (7) other reasonablegrounds, Claim shall be filed in accordance with

this paragraph 4.3.


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4.3.7 Claims for Additional Time.

4.3.7.1 If the Contractor wishes to make Claim foran increase in the Contract Time, written notice as

provided herein shall be given. The ContractorsClaim shall include an estimate of cost and ofprobable effect of delay on progress of the Work.

In the case of a continuing delay only one Claim isnecessary.

4.3.7.2 If adverse weather conditions are the basisfor a Claim for additional time, such Claim shall bedocumented by data substantiating that weather

conditions were abnormal for the period of time,could not have been reasonably anticipated, and had

an adverse effect on the scheduled construction.

These notice requirements, much like the requirement of a written changeorder, are often strictly followed by Pennsylvania courts. In Central Penn Indus.,

Inc. v. Commonwealth of Pennsylvania, 25 Pa. Commw. 25, 358 A.2d 445(1976), a highway contractor sued the Commonwealth for extra compensation

after performing more excavation than anticipated. The court denied recovery ofthe claim in part because the contractor wholly failed to give notice that it wouldmake a claim for this additional work. As the Court said: . . . Section 1.9.9

[requiring written notice of claims] is there, and it is not our function to rewritethe contract. Id.

4. Different Types of Constructive Changesa. Defective Plans and Specifications

A classic type of constructive change may arise from contract plans andspecifications which are considered defective or ambiguous. Any changes to the

contract work caused by such plans and specifications constitute a constructivechange and, generally, the law is that an owner impliedly warrants the suitability

of the plans and specifications. See United States v. Spearin, 248 U.S. 132(1918). If they are not clearly ambiguous - that is if a contractor is reasonablyinterpreting them - the contractor may recover the extra costs resulting from the

unclear plans and specifications. On the other hand, if the plans andspecifications are patently unclear, the contractor is expected to detect this

problem and seek clarification before the contract is executed.

A subsidiary rule is that ambiguous plans and specifications may beconstrued against the party who drafted them (the owner). As one Pennsylvania

court expressed the rule, where [t]he contract was the [owners] own form, itslanguage is to be construed most strongly against [the owner]. Housing

Authority of City of Pittsburgh v. Sanctis Construction Co., Inc., 158 Pa. Super.71, 74-75, 43 A.2d 581, 583 (1945).


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Minor inconsistencies, however, need not be brought to the attention of

the owner prior to a bid. It is a matter of magnitude and reasonableness whichdetermines whether a contractor should inquire about an omission in the plans.

As one court expressed it:

Although the potential contractor may have someduty to inquire about a major patent discrepancy, or

obvious omission, or a drastic conflict in provisions,. . . he is not normally required (absent a clear

warning in the contract) to seek clarification of anyand all ambiguities, doubts or possible differencesin interpretation. The Government, as the author,

has to shoulder the major task of seeing that withinthe zone of reasonableness the words of agreement

communicate the proper notions -- as well as themain risk of a failure to carry that responsibility.

WPC Enterprises Inc. v. United States, 323 F.2d 874 (Ct. Cl. 1963).

The following Pennsylvania cases are instructive in this area and

illustrative of the rules noted above.

In Acchione and Canuso, Inc. v. Commonwealth Dept. of Transp., 501 Pa.337, 461 A.2d 765 (1983), a highway contractor sought to increase costs for

additional excavation when the representation in the original specifications that50% of certain conduit was reusable was inaccurate resulting in substantially

more excavation. Over two strong dissents, the court allowed extracompensation. It held that specifications that are materially inaccurate because of

mistakes by the owners design engineer permits recovery of extra costs where thecontractor cannot reasonably be expected to have uncovered the mistake. TheCourt made clear that the specifications need not be actually known by the owner

to be wrong; rather, specifications which are mistakenly inaccurate will suffice.

In another case, the court reached the opposite result. A contractor wasdenied recovery based on ambiguous plans and specifications where, although

they were found to be latently ambiguous as written in the contract, they werelater clarified by subsequent letters which favored the owners interpretation. See

Z & L Lumber Co. v. Nordquist, 348 Pa. Super. 580, 502 A.2d 697 (Pa. Super.1985).

See also Rhone Poulenc Rorer Pharms. v. Newman Glass Works, 112 F.3d

695 (3d Cir. 1997) where the court ruled that under Pennsylvania law,subcontractors express warranties that the work would be free from faults and

defects overrode the owners implied warranty of design under the Spearindoctrine, parties had explicitly allocated risk to the subcontractor.


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b. Method of PerformanceConstruction contracts generally provide detailed specifications as to the

quality of performance to be maintained for the project but not the manner inwhich the work is to be performed. Usually a contractor may use its own method

of performance. However, during the course of construction, the owner or itsagent may decide that a particular method of construction would be better thananother for doing the work. If the owner insists that its method be used instead ofanother satisfactory and more economical method the contractor desires to use,the owner may be responsible for resulting additional costs. See Henly

Construction Co., IBCA 185, 61-2 BCA 3239 (1961).

Likewise, the selection of the sequence of completing work is the right of

the contractor, as long as the contractor conforms to the contract requirements.An owner or contracting officer cannot or may not be able to alter this sequencewithout being responsible for extra costs related to the change. For example, the

Court of Claims upheld an award to a contractor of $48,512.84 when the

contracting officer issued an oral directive to alter the contractors sequence ofconstruction and the contractor complied at great expense. See Turnbull, Inc. v.United States, 389 F.2d 1007 (Ct. Cl. 1967).

c. Impossibility or Impracticability of PerformanceWhen contract specifications cannot be met, or when they prove to be

commercially impracticable, a contractor is faced with another type ofconstructive change -- impossibility of performance.

Pennsylvania law accepts the principle of frustration of purpose as definedin the Restatement (Second) of Contracts 261 (1979). Where, after a contract is

made, a partys performance is made impracticable without his fault by theoccurrence of an event, the non-occurrence of which was a basic assumption uponwhich the contract was made, his duty to render performance is discharged, unless

the language or the circumstances indicate the contrary. Madreperla v. WilliardCo., 606 F. Supp. 874, 878 (E.D. Pa. 1985).

It is often difficult to determine the point at which obligations become soimpractical as to excuse performance. For example, a contractor was engaged toconstruct a fountain at a state park. While construction was underway, the work

was interrupted by a hurricane. The contractor sought damages for the costsincurred in moving the silt and mud deposited at the construction site during a

flood caused by the hurricane. The court observed:

Even in the absence of contractual languageimposing the risk on [the contractor], our law is that

a contractor is presumed to have assumed the risk ofunforeseen contingencies arising during the course

of the work, unless performance is renderedimpossible by an act of God. General State


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Authority v. Osage Co., 24 Pa. Commw. 276, 355

A.2d 845 (1976). There is no dispute that ahurricane is an act of God, but the flooding did not

make performance of the contract impossible as thatterm has been construed under the law. Legal

impossibility means not only strict impossibility,but impracticability because of extreme andunreasonable difficulty, expense, injury or loss

involved. Albert M. Greenfield & Co. v. Kolea,475 Pa. 351, 380 A.2d 758 (1977). Here, flooddamage did not make performance impracticable,

even though it did make it more expensive.

F. J. Busse, Inc. v. Dept. of General Services, 47 Pa. Commw. 539, 544, 408 A.2d

578, 581 (1979). The Court in the above case also held that the contractor wasnot entitled to recover even though the architect approved a change order for theextra work as the architects decision was not an admission of liability by the

owner. Id.

B. CARDINAL CHANGESA cardinal change is a change or series of changes that are beyond the

scope of the contract. Luria Brothers & Co. v. United States, 369 F.2d 701 (Ct.Cl. 1966). Cf. Hildebrand v. Burger, 102 Pa. Super. 163, 156 A. 593 (1931).

Such changes need not be followed by a contractor, and a refusal to perform themwould not constitute a breach of contract. The basic tests for determining if achange is cardinal are (a) whether the additional work was within the

contemplation of the parties when they executed the contract; and (b) whether the

project, as modified, is still the same basic project. Id. See also Success Constr.Corp. v. Superintendent of Ins. (In re Liquidation of Union Indem. Ins. Co.), 220A.D.2d 339, 632 N.Y.S.2d 788 (1995) (change orders to add work excluded underthe original contract materially nearly doubled the original contract price);

Airprep Tech., Inc. v. United States, 30 Fed. Cl. 488 (1994) (contractors defaultexcused when nonperformance arose from owners insistence on extra work

amounting to a cardinal change).

The rationale behind the cardinal change doctrine is a recognition that thebenefits of the bidding system could be abused by an owner who proposed one

construction project, attracted a contractor, and then used its increased

postcontract bargaining power to change the entire nature of the projectcompletely. See Roy E. Weston Servs., Inc. v. Haliburton Nus Envtl. Corp., 1993WL 57182, at *3 (E.D. Pa. 1993). The law recognizes such action as a breach andawards the aggrieved contractor damages in a fashion similar to quantum meruit

recovery. However, the cardinal change doctrine may apply regardless of thenature of the damages sought. See L.K. Comstock & Co. v. Becon Constr. Co.,

932 F. Supp. 906, 937-38 (E.D. Ky. 1993), affd without opinion, 73 F.2d 362


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(6th Cir. 1995); Allied Materials & Equip. Co. v. United States, 569 F.2d 562,

563 (Ct. Cl. 1978).

Whether or not changes are beyond the scope of the contract is largely a

factual question; i.e., is the changed work a substantially different undertakingthan that contemplated by the parties? This determination does not necessarilydepend on the number of changes made but rather focuses on their magnitude and

quality. Nat Harrison Associates v. Gulf States Utilities Co., 491 F.2d 578, rehgdenied, 493 F.2d 1405 (5th Cir. 1974). The owners customary contractual right

to alter or change a project is limited to changes that do not unreasonablytransform the character of the work or unduly increase its costs. For example, achange in the proposed method of backfill which increased the estimated cost

from $600,000 to $2,000,000 was held to be beyond the scope of a subcontract.Peter Kiewit Sons Co. v. Summit Construction Co., 422 F.2d 242 (8th Cir.

1969). See also Employers Ins. of Wausau v. Construction Management Engrs.,Inc., 297 S.C. 354, 377 S.E.2d 119 (S.C. Ct. App. 1989); Bignold v. King County,65 Wash. 2d 817, 399 P.2d 611 (1965) (substantial changes in quantities may

constitute a radical change).

In other cases, an addition to a contract may be deemed to be a new

undertaking because it substantially changed the original contract. In Albert EliaBuilding Co. Inc. v. New York State Urban Development Corp., 54 A.D.2d 337,388 N.Y.S.2d 462 (1977), for example, the city awarded a contract for the

construction of a convention center, but later decided to develop the area adjacentto the site. The city attempted to add the construction of an expensive tunnel

between the convention center and the adjacent area to the original contract(which only provided for the construction of the civic center). This change wasfound to be outside the scope of the original convention center contract.

In short, change orders are properly issued under a Changes clause if thework changed is within the general scope of the contract. If change orders are

deemed to exceed the scope of the contract, either in kind or quantity, the owneris in breach of the contract and the contractor may refuse to perform the work (ormay perform it and seek damages upon completion). It should be noted, however,

that what constitutes a cardinal change will depend upon the disposition of thecourt and the language of any applicable contract clauses. Therefore, the

contractor risks being held in breach of contract if its interpretation of a change asa cardinal change is not later upheld.


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C. A U T H O R I T Y T O O R D E R C H A N G E D W O R K 1. Municipalities

The power to modify a contract is generally vested in the officer or bodyauthorized to make the contract. See McQuillin, Municipal Corporations, Vol.

10, 29.121 (1966). A Director of Public Works may not have the authority toorder changes to a contract required to be authorized by the countycommissioners. Burke v. Allegheny County, 336 Pa. 411, 9 A.2d 396 (1939).

2. Course of Conduct/Oral ModificationA court may find that a contract was modified by the conduct of the owner

as opposed to an express authorization, Arndt, Preston, Chapin, Lamb & Keen,

Inc. v. L-M Mfg. Co., 163 F. Supp. 406 (E.D. Pa. 1958), affirmed, 262 F.2d 343(3d Cir. 1959); or that it was orally modified by a separate oral agreement -- even

where contract provides that it may be modified only in writing. UniversalBuilders, Inc. v. Moon Motor Lodge, 430 Pa. 550, 244 A.2d 10 (1968).

3. RatificationAlthough a change may have been issued by someone without authority, if

the unauthorized act was subsequently ratified by a person with authority, itserves as a formal change order. Knowledge of the change is usually the essential

ingredient in the theory of ratification. Once knowledge is established, silencecan be interpreted as ratification of a change. Williams v. United States, 127 F.

Supp. 617 (Ct. Cl.), cert. denied, 349 U.S. 938 (1955).

D. C H A N G E D C O N D I T I O N SContractors bidding on construction projects face a number of risks and

uncertainties, one of the most significant being site conditions which may either(1) differ from conditions represented in the bid documents or (2) be totallyunexpected given the type and locale of the work. Contractors ordinarily include

additional costs in their bids to allow for these contingencies. Owners haveattempted to lessen the impact of contingency costs by providing in the contract

the means for the contractor to obtain a fair adjustment for differing conditions.

1. What the Clause SaysA clause is often included in federal, state and many private contracts that

provides the contractor with a remedy for unanticipated costs it incurs as aconsequence of encountering a changed site condition in the form of physical

conditions misrepresented (intentionally or unintentionally) by the plans andspecifications, or unexpected from that ordinarily encountered. Such a clause isusually referred to as a Changed Conditions or Differing Site Conditions

(DSC) clause.


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If these clauses mandate a specific procedure that a contractor must follow

in order to recoup extra costs, that procedure must be strictly followed. NetherProv. Tp. Sch. Auth. v. Durkin & Sons, Inc., 505 Pa. 42, 476 A.2d 904, 906

(1984).

The Differing Site Conditions clause in federal contracts waspromulgated many years ago to increase the economy and efficiency of the

construction contract competitive bidding process. The need for the clause isapparent. If contractors were required to assume the full risk of increased costs of

unfavorable and unforeseeable site conditions, they would have to chooseundertaking a costly pre-bid analysis of subsurface site conditions or includingsizable contingencies in their bids. Either alternative would prove unnecessarily

costly to the owner and the contractor in the long run.

Because the owner has usually performed or obtained an analysis of the

conditions of the construction site prior to soliciting bids for its project, it caneliminate large bid contingencies and prevent the need for its contractor to

commission duplicate site analyses by allowing the contractor to rely upon theinformation collected by the owner. Should the contractor subsequentlyencounter subsurface or physical conditions which differ from those indicated in

the contract, the contractor is relieved of the risk of bearing increased costs by thepromise of an adjustment in the contract price to equitably compensate it for extracosts. Under this clause, the owner assumes responsibility for such latent or

subsurface conditions. The extent of further obligation of inquiry of bidders maybe to require them to ascertain, for example, under federal contracts, such

conditions as may be readily determined by inspection and inquiry, such as thelocation, accessibility and general character of the site. Foster ConstructionCompany, et al. v. United States, 435 F.2d 873 (Ct. Cl. 1970).

Changed conditions are not to be confused with constructive changes;changed conditions generally describe physical conditions which existed prior to

contract execution, but were unknown or misrepresented. The differing-site-conditions clause applies only to physical conditions that existed at the time ofcontracting and not to those that developed during performance. See Olympus

Corp. v. United States, 98 F.3d 1314 (Fed. Cir. 1996). Furthermore, this clauseapplies only to physical conditions and not to actions of third parties such as labor

strikes. Id. Constructive changes describe situations where a contractor isinstructed or required by the owner to perform a change in the work without theissuance of a formal change order which entitles a contractor to recover additional

costs. However, the wording of a particular differing site conditions clause maybe so broad as to apply to more traditional constructive changes.

The purpose of this section is twofold. First, it will identify the types ofdiffering site clauses currently in use in the industry (public and private) anddiscuss, in general terms, the available coverage Secondly, it will explore those

instances in which recovery under the clause is prevented, either by 1) events


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outside the scope of intended coverage or 2) by exculpatory language in the

contract.

2. Federal and Private Clausesa. Federal Contracts

The federal and private contracts forms typically read as follows:

(a) The Contractor shall promptly, and before theconditions are disturbed, give a written notice to the

Contracting Officer [or Owner] of (1) subsurface orlatent physical conditions at the site which differ

materially from those indicated in this contract, or(2) unknown physical conditions at the site, of anunusual nature, which differ materially from those

ordinarily encountered and generally recognized as

inhering in work of the character provided for in thecontract.

(b) The Contracting Officer [Owner] shall investigatethe site conditions promptly after receiving the

notice. If the conditions do materially so differ andcause an increase or decrease in the Contractors

cost of, or the time required for, performing anypart of the work under this contract, whether or notchanged as a result of the conditions, an equitable

adjustment shall be made under this clause and thecontract modified in writing accordingly.

(c) No request by the Contractor for an equitableadjustment to the contract under this clause shall beallowed, unless the Contractor has given the written

notice required; provided, that the time prescribedin [or the Contract] above for giving written notice

may be extended by the Contracting Officer.

(d) No request by the Contractor for an equitableadjustment to the contract for differing site

conditions shall be allowed if made after final

payment under this contract.

FAR 52.236-2 (1984; rev. 2001). This clause establishes recovery under twoconditions: (a) misrepresented conditions (Type I); and (b) unknown and unusualconditions (Type II).


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(ii) Type I ConditionsMisrepresented conditions include those situations where the government

provides information (e.g., a soils report) that the contractor reasonably relies on.If a contractor encounters subsurface or latent physical conditions at the site

differing materially from those indicated by the soils report, that contractor mayrecover any increased (and reasonable) costs that resulted from the differentconditions. Thus, the general rule to apply as a test for a Type I condition iswhether there exists a discrepancy between conditions actually encountered andconditions as indicated in the contract documents.

The clause covering Category I conditions contains key words whichdetermine whether or not it is applicable to a particular situation. Selected key

words are examined separately below.

Subsurface or Latent

Subsurface pertains to underground conditions while latent refers toconditions hidden or concealed from a reasonable site inspection.

The following examples have been categorized as subsurface conditions

encompassed by the definition of a Category I DSC:

The presence of excessive large subsurfaceboulders. F. Arthur Higgins, ASBCA 76-128, 79-2

BCA 14,050.

Inaccurate government-furnished test borings whichdid not indicate the existence of solid rock.Baltimore Contractors, Inc., GSBCA 4808R, 80-2BCA 14,767.

A borrow pit designated in the contract was shownto be unsuitable for the work. Mann Construction

Co., AGBCA 76-109, 80-2 BCA 14,674.

Inaccurate borings provided by the governmentwhich indicated significantly more weathering than

actually encountered, while another boring showedthe top of bedrock at a lower boring elevation than

encountered. Slattery Associates, Inc., ENG BCA3922, 80-2 BCA 14,489.

Latent conditions which have been held to exist within type I include:

Plans which indicated that removal of a moisturebarrier from an existing building only covered one-

third of the roof when, in fact, the entire roof had to


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compensable DSC. See J.E. Robertson Co. v. United States, 437 F.2d 1360 (Ct.

Cl. 1971).

(iii) Type II ConditionsA condition under this category can be classified as one which is so

unusual or unpredictable that the contractor could not reasonably have foreseen itsexistence. Type II conditions, unlike Type I, are not based upon the existence of a

difference between the conditions encountered and those indicated by the contractdocuments. Rather, this category includes conditions that must be compared tothose which would normally be expected at the site. Proper evaluation should

take into consideration all of the factors which a prudent and reasonable bidderwould customarily consider in estimating the quantity, quality, and methods of

performing work at the particular time and jobsite.

Careful study of contract documents, a site inspection and an intelligentanalysis of job requirements based on sound construction experience is essential.

This is a question of foresight, not hindsight. If a reasonable bidder should haveanticipated the condition at the time of bidding, the claim under Category II is not

justified.

The key words to consider in Category II are unknown and unusual.The interpretation of the term unknown is dependent upon whether the

contractor, at the time of bidding, knew or had reason to know (through areasonable assessment of the work site conditions and contract information)

whether the subsequently encountered condition was originally foreseeable.

The term unusual relates to whether the encountered condition is to be

expected at the place of performance. For example, a condition which might notbe unusual in an urban location, such as an abandoned water main, might beunusual in a rural location.

A Type II DSC does not have to be considered a geological peculiarity inorder to be unusual. The following conditions have been found to qualify underCategory II:

The existence of an underlying and undisclosedsecond layer of sidewalk beneath an existing

concrete sidewalk that was to be removed. DawsonConstruction Co., GSBCA 5170, 80-2 BCA 14,696.

Timber piles discovered beneath a concrete plaza.P.J. Maffei Building & Wrecking Corp., GSBCA

5031, 80-2 BCA 14,647.

The presence of a waste oil deposit not mentionedin the contract documents and not discoverable by a


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reasonable site inspection. Mutual Construction

Inc., DOT BCA 1075, 80-2 BCA 14,630.

The inclusion of considerable debris (i.e., roots,stumps, and logs) hidden from sight under a heavycover of dirt with no contract information regardingits existence. Conrad Weihnacht Construction Inc.,

ASBCA 19666, 75-1 BCA, 11,069.

b. Non-Coverage Under the ClauseIn the absence of the owners reservation of subsurface risks through a

differing site conditions clause, the contractor who undertakes a contract may beassuming all risks involved in subsurface work. See Eastern Tunneling Corp. v.

Southgate Sanitation District, 487 F. Supp. 109 (D.Colo. 1979). A successfulclaim is one that satisfies the conditions outlined by the clause which serves as thebasis for recovery.

Although many cases are based on changed conditions actually beingencountered, this does not guarantee recovery. As an example, a contractor

performing tunneling work encountered rock which had a shear strength threetimes that stated in a soils report provided by the government. However, theadditional expense incurred was not recoverable because another clause in the

contract identified the soils report (upon which the contractor had relied) as notpart of the contract and the report had not been endorsed by the government as to

its accuracy. This was not considered to be a Type I condition because it did notfall within the meaning of the phrase indicated in this contract as used in theclause. Dravo Corp., ENG BCA 3901, 80-2 BCA 14,757.

In another case, adverse conditions encountered during excavation of ariver channel were not compensable as a DSC because they resulted from actions

by a third party which the government could not prevent (the city removed a damwhich caused silt to flow onto portions of the project which were both fully andpartially completed). Since this condition was not a subsurface or latent

condition, it was not a Type I condition. Neither was this a Type II conditionbecause siltation was ordinarily encountered in this type of work and both parties

knew that it was common in the work required under the contract. Dyer & Dyer,Inc., ENG BCA 3999, 80-2 BCA 14,563.

Many Type I claims fail because the claimant cannot establish that any

representations were made in the contract documents which differ from thoseactually encountered. Sierra Pacific Builders, AGBCA 18-161, 80-2 BCA 14609.

Since Category II claims must involve an unknown and unusual condition, anevent which is very difficult to prove, the contractors only option is to seek reliefunder another contract provision. If the contract merely failed to indicate the

presence of a condition encountered in the field, that condition is not a differingsite condition. Appeal of Quality Servs. of N.C., Inc., ASBCA No. 34851 (1989).


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c. Non-Physical ConditionsIf a differing site conditions clause expressly requires that the conditions

complained of be physical in nature, then conditions caused by governmental,political or economic conditions are excluded from coverage. Hallman v. United

States, 320 F.2d 669, cert. denied, 375 U.S. 882 (1963). This means that delaysand disruptions to the work caused by, for example, a government order toanother contractor is not compensable under the DSC clause. Robert E. McKeeGeneral Contractor, Inc., ASBCA 5521, 60-1 BCA 2526.

Another example of a non-physical condition occurred in a case

involving the dredging of a river channel. The release of water from upstreamreservoirs by the government created an unusual amount of fog in the contract

area. The contractor alleged a changed condition because the fog hampered itsperformance. However, the governments operation of the up stream reservoirswas considered a sovereign act for which it could not be held liable. Dunbar &

Sullivan Dredging Co., ENG BCA 3165-3167, 73-2 BCA 10,285.

d. Weather-Caused ConditionsAlthough acts of God (generally related to severe weather) are physical

in character and may be unusual and unknown at the time of bidding, they aregenerally not an acceptable basis by themselves for recovery as a differing site

condition. See Hardeman - Monier Hutcherson, ASBCA 12392, 68-2 BCA 7220.

The following cases illustrate weather conditions found not to be included

in differing site clauses similar to the clause used in federal contracts.

Access to the worksite was blocked by driftingsnow, which the contractor alleged was a separateobstructive condition not concerning weather. Thecontractors claim that it was a DSC was denied

because the obvious could not be ignored that thiswas a weather-related condition. Schouten

Construction Co., DOT CAB 78-14, 79-1 BCA 13,553.

A nearby river from which the contractoranticipated obtaining all of its water needs dried up;

however, a DSC claim was denied because the lackof water in the river was caused solely by weather(a lack of rainfall). Turnkey Enterprises, Inc. v.United States, 597 F.2d 750 (Ct. Cl. 1979).

An unusually high water level in a lake was held tobe outside the scope of the DSC clause since, like

weather, the water level in the lake depended on


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uncontrollable natural forces. Roen Salvage Co.,

ENG BCA 3670, 79-2 BCA 13,882.

Courts and Boards have recognized exceptions to the general rule of non-

recovery for weather conditions in cases in which unusually severe weather (orother acts of God) have combined with another condition. For example, severerainfall combined with an inadequately designed drainage system and an early

thaw in conjunction with the unusual nature of the soil which ruined haul roadstogether created weather conditions which were a compensable DSC. D.H. Dave

& Gerben Contracting Co., ASBCA 6257, 1962 BCA 3493; John A. JohnsonContracting Corp. v. United States, 132 F. Supp. 698 (Ct. Cl. 1955).

e. Site InspectionsContractors are generally obligated by contract to make a reasonable pre-

bid site investigation. What is meant by reasonable may vary with thecircumstances, but can be generally defined as an examination of the site and all

other data available to bidders in accordance with what a reasonably experiencedand prudent contractor would do in similar circumstances. Liles Construction

Co., Inc. v. United States, 455 F.2d 527 (Ct. Cl. 1972); Branna Construction Co.v. West Allegheny Joint School Authority, 430 Pa. 214, 242 A.2d 244 (1968).Contractors are expected to draw reasonable inferences from observable

conditions while applying the knowledge of an expected contractor. SeeCrookham Vessels, Inc. v. Larry Moyer Trucking, Inc., 16 Ark. App. 214, 699

S.W.2d 414 (1985). Contractors may also be responsible for information that isnot included in the contract but is readily available from other sources, such asrelevant documents on file in public offices. See Appeal of Ashbach Constr. Co.,

PSBCA No. 2718 (1991); Appeal of Thomas J. Young, Jr., P.S.B.C.A. No. 3885

(1998) (information could be found through project manuals reference to a soilstesting report).

The following cases demonstrate how the courts will apply thisrequirement in situations where the contractor could have previously discovered

the condition about which it subsequently complained:

A claim submitted on work involving street lightingwas based on the failure to show streets andsidewalks on the plans. Since the omissions wouldhave been revealed by even a cursory site

inspection, the claim was denied. Tri-CountyExcavating, Inc. v. Borough of Kingston, 46 Pa.

Commw. 315, 407 A.2d 462 (1979).

A contractors mistaken belief that pipes and wiresin manholes were connected to existing sump

pumps (which they were not) led to a claim that thevolume of water encountered could not have been


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anticipated. However, the contract did not mention

sump pumps and did not represent the level of thewater table. It was unreasonable, under the

circumstances, for the contractor to rely on theprobable condition of the existing pumps in

formulating his bid. Mayfair Const. Co., NASABCA 678-15, 80-2 BCA 14,596.

A claim alleging additional costs of performance,apparently caused by an unexpected subsurfaceshell strata, was denied because the condition waspredictable from the seaside location of the work

(i.e., an obvious condition). Fortec Construction,ENG BCA 4352, 80-2 BCA 14,623.

f. DisclaimersSince commercial contracts seek protection against the unknown, it is not

surprising that owners (both public and private) have long sought to insulate

themselves from the mysteries that lie beneath or within the subject work area.

Federal agencies first recognized the unfairness caused by this reasoning.Contractors were expected to be able to predict the conditions and applicable

costs of performing work, while being unable to seek additional compensationfrom the government if the contractors crystal ball wasnt accurate on a

particular occasion. Government information was not mandatory, which left thecontractor in a position to assume all risks involved.

Federal contract clauses attempt to balance the risk between the parties.Private contracts, however, do not necessarily possess the uniformity ofprovisions found in all federal contracts. Courts interpreting private contracts

have demonstrated little uniformity in their decisions as to the effectiveness ofexculpatory language vis-a-vis changed conditions.

One reason for this is the vast variety of types of general conditions to be

found in private contracts. Changed condition clauses range from the veryexplicit to nonexistent, and exculpatory provisions may be generously added.

Differing site claims interpreted under state laws clearly illustrate theprinciple that each case stands on its own facts, based on various statesinterpretations. Case law precedent becomes less compelling given the differentcircumstances that may arise from one contract to the next. Not only will thefacts giving rise to the claim always differ, but the provisions upon which the

claims (or defenses to the claims) are based may vary by only as much as a phraseand still affect the outcome.


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Given this background, no hard and fast rules can be given regarding

disclaimers and their effect on changed condition clauses. The following casesdemonstrate why this is true:

A contractor was required to dredge to a minimumdepth of 38 feet in a designated area. Boring logsincluded in the bidding documents specified sand,

silt and limestone fragments. However, solid,heavy rock was encountered when dredging began.

The owner denied the contractors DSC claim onthe basis that, among other things, the boringinformation only represented a general indication of

the materials likely to be found adjacent to theboring holes. The court found that the boring

information which was furnished was misleadingsince it did not, in fact, give a general indication ofthe materials likely to be found. Cruz Construction

Co., Inc. v. Lancaster Area Sewer Authority, 439 F.Supp. 1202 (E.D. Pa. 1987).

While constructing an irrigation pumping system,the contractor encountered conditions materiallydifferent from those indicated in the plans and

brought suit for its additional costs under the DSCclause in the contract (identical to the federal DSC

clause). The owner (State of Montana) contendedthat exculpatory language in the contract requiredthat the contractor make an affirmative effort to

inquire about discrepancies in the plans. The Courtheld that the exculpatory clauses relied on by the

State did not waive, eliminate or modify thecontractors right to rely on the representationsmade in the plans; nor did they eliminate its right to

rely on the DSC clause. Stock & Grove, Inc. v.United States, 493 F.2d 629 (Ct. Cl. 1974).

A contractor was denied recovery of extra costspaid to its excavation subcontractor for the removalof a substantial quantity of unanticipated rock,

because, among other things, (1) the test boring datamade available to bidders by the owner was

specifically excluded from the contract, and (2) thedata was obtained only upon the contractor sunqualified release of the owner from any liability.

Thus, the contractor was not justified in relying onthe boring data. (The contract did not contain a

Changed Conditions clause.) Sornsin


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Construction Co. v. Montana, 180 Mont. 248, 590

P.2d 125 (1978).

An unanticipated subsurface condition forced thecontractor to alter its method of performance tomeet the infiltration limits in the specifications on asewer project. The contractor sued the owner and

the engineer for its increased costs, who in turndefended by indicating that the exculpatory

language in the contract held the contractor solelyresponsible for complying with the infiltrationlimits. The Court, however, disregarded this

contention, and held that this was an impermissibleattempt to shift liability. The contractor did not

bring its claim under the differing site clause;rather, it alleged a breach of an implied warranty bythe owner and negligence on the part of the

engineer. Joseph F. Trionfo & Sons, Inc. v. Boardof Education, 41 Md. App. 103, 395 A.2d 1207

(1979).

A subcontractors contract to perform excavation ofpipe trenches on a county park project incorporated

exculpatory language from the prime contract whichexcluded from the contract documents boring logs

provided by the owner. When the boring logsproved faulty, the subcontractor brought suit againstthe prime contractor. The court denied the claim by

stating:

The foregoing speaks for itself. In

addition to putting the subcontractoron notice as to expectation of hisdetermination of accuracy of

subsurface conditions, the fact isclear that any information (in this

case the boring logs) regardingsubsurface conditions were not partof the agreement or contract.

W.H. Lyman Construction Co. v.Village of Gurnee, 84 Ill. App. 3d

28, 403 N.E. 2d 1325 (Ill. 1980).

In a contract for underwater repairs of the concretepiers of a bridge, the contract documents contained

site data representing the conditions expected to be


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encountered. However, a contract provision

disclaimed responsibility for the data, stating it wasfor informational purposes only, did not purport to

represent actual conditions, and did not relieve thebidder of responsibility for independently verifying

the data. Actual conditions varied greatly fromthose indicated which resulted in a huge costoverrun to the contractor. In deciding this claim,

the court disregarded the strong exculpatorylanguage in the contract because the owner-provided site data was positive representations of

fact that could not reasonably be verified by thecontractor. Raymond International, Inc. v.

Baltimore County, 45 Md. App. 247, 412 A.2d1296 (1980), cert. denied, 449 U.S. 1013 (1980).

The contract documents for construction of asewerage system included test borings andestimated quantities of rock to be removed. When

rock was encountered at higher levels than theborings indicated, necessitating additional rockremoval, the contractor submitted a claim for its

extra costs. The owner defended on the basis of theexculpatory language in its contract which clearly

disclaimed (a) liability as to the accuracy of the testborings provided by the owner and (b)responsibility for the variation between the

estimated and actual quantities of work. The courtheld that exculpatory provisions are controlling

under Missouri law, and that given thecircumstances of this case, the contractor ispresumed to have assumed the risk of unforeseen

contingencies arising during the course of the work.Air Cooling & Energy v. Midwestern Construction

Co., 602 S.W.2d 926 (Mo. Ct. App. 1980). Theholding in Air Cooling was, however, limited in alater case by the Missouri Court of Appeals. See

Sanders Co. Plumbing v. City of Independence, 694S.W.2d 841 (Mo. Ct. App. 1985). In cases where

the evidence indicates that the custom and practiceof the involved industry is for boring results to berelied upon by contractors despite disclaimers, that

the reliance was invited by the other party to thecontract and that the contractor had an inadequate

amount of time to do its own test, an action will liefor misrepresentation. Therefore, a boiler platedisclaimer . . . does not negate the representations


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made by the test results where those results are

positive representations of material fact. Id., 694S.W.2d at 846.

What conclusions can be drawn from these decisions? It can be inferredthat an owner may be able to disclaim liability for subsurface data it furnishes tothe contractor. Where courts have held owners responsible regardless of the

number and type of disclaimers in the contract documents, the key was thecontractors reliance on a positive factual assertion made by the owner.

Jacksonville Port Authority v. Parkhill-Goodloe Co., Inc., 362 So. 2d 1009 (Fla.App. 1978). Courts have also given little substance to exculpatory clauses insituations where the owner may have taken years to accumulate site data (which it

disclaims responsibility for) while a contractor may only have weeks or daysbefore bids are submitted. Morrison-Knudsen Co., Inc. v. United States, 397 F.2d

826 (Ct. Cl. 1968).

g. Silence of Contract DocumentsCases are split on whether silence of contract documents is an affirmative

representation that can give rise to a claim of differing site condition. CompareAppeal of PK Constructors, Inc., ENG BCA No. 4901 (Nov. 27, 1991) (statingthat silence does not give rise to a differing site condition) with I.A. Constr. Corp.

v. Department of Transp., 591 A.2d 1146 (Pa. Commw. 1991) (finding that whena drawing was silent about the presence of any man-made subsurface

obstructions, the contractor was entitled to assume that none were present). Ingeneral, a contracts silence will give rise to a differing site condition claim onlyif that silence is accompanied by affirmative representations which caused the

contractor to draw a reasonable inference.

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