III.

CHANGES, CHANGED CONDITIONS AND SCOPE CHANGES AFFECTING PAYMENT..................................................... 1 A. Claims Under the Changes Clause ............................................. 1 1. 2. 3. 4. B. C. The Standard Changes Clause ........................................ 1 Formal Change Orders....................................................... 2 Giving Notice ..................................................................... 4 Different Types of Constructive Changes.......................... 6

Cardinal Changes ........................................................................... 9 Authority to Order Changed Work............................................... 11 1. 2. 3. Municipalities................................................................... 11 Course of Conduct/Oral Modification.............................. 11 Ratification....................................................................... 11 What the Clause Says ....................................................... 11 Federal and Private Clauses ............................................. 13

D.

Changed Conditions ..................................................................... 11 1. 2.

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III.

CHANGES, CHANGED CONDITIONS AND SCOPE CHANGES AFFECTING PAYMENT A. CLAIMS UNDER THE CHANGES CLAUSE 1. 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 in plans and specifications; (3) changes required by governmental entities; (4) design changes; (5) overruns or underruns in quantities; and (6) conditions impacting on schedule, the time of completion or the method or manner of performance of the work. In most construction contracts, provision is made for such modifications by some form of Changes clause. A Changes clause is beneficial in that it allows for greater flexibility by permitting changes without necessitating a new contract for each addition, deletion, or revision on a project; sets forth the procedure for assessing the effect of changes; and permits for adjustment of plans and specifications to clarify the work the design professional and owner intended to be performed by the contractor without breaking contractual requirements. The change order mechanism also encourages the contractor to suggest beneficial changes 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 them will typically be governed by the wording of the particular clause. An example of a standard Changes clause often found in private building construction contracts is Article 7 of the American Institute Architects Document (AIA) A20l (1997 Edition), which reads, in part: 7.2.1. A Change Order is a written instrument prepared by the Architect and signed by the Owner, Contractor and Architect, stating their agreement upon all of the following: 1. 2. 3. a change in the work; the amount of the adjustment in the contract sum, if any; and the extent of the adjustment in the contract time, if any. * * *
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7.3.1. A Construction Change Directive is a written order prepared by the Architect and signed by 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 in the Work within the general scope of the contract consisting of additions, deletions or other revisions, the Contract Sum and Contract Time being adjusted accordingly. The foregoing standard Changes clause permits the owner or its representative to initiate the change, without the consent of the contractor, which the contractor is required to perform. However, the work must be within the general scope of the contract. Also, the directive must be in writing and the contractor 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 Orders

The standard Changes clauses specify that a change can only be made to the contract by a written order. Contract provisions requiring changes to be approved in writing are common and enforceable. See Central Penn Indus., Inc. v. Department of Transp., 25 Pa. Commw. 25, 358 A.2d 445 (1976); Linneman Constr., Inc. v. Montana-Dakota Utils. Co., 504 F.2d 1365 (8th Cir. 1974). See also 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 the terms of a contract with a governmental body, written orders for additional work are required, the contractor cannot recover for extra work without compliance with the contractual provisions. Dick Corp. v. State Public School Bldg. Authority, 27 Pa. Commw. 498, 500, 365 A.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 from when it received oral authorization to proceed to when it received written authority. The court refused to exclude this period from the damage claim, stating that the contractor was within its rights to wait for written authorization. In so ruling, 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 the contract procedures change order clause. The court ruled that the failure to comply fully with the procedure barred the claim, even though the president of the authority sent a letter to the contractor advising continuation of the work and later resolution of the dispute. It is also essential to understand any pricing procedures agreed to in the contract, 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 not be 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 the theory that extra work has been done under an oral agreement which is separate from a written contract and which does not retain the requirement of written authorization, or on the theory that the requirement of written authorization may also 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 public construction contracts than in private contracts. Finally, it should be noted that exculpatory provisions in contracts, such as the 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 the contractor 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 same legal effect as a formal change order if the contractors position is sustained. See generally 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, or credit, 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 the deviations. See Appeal of Blount Bros. Corp., A.S.B.C.A. No. 29862 (Feb. 25, 1988).
3. Giving Notice

Often an owner will issue work orders, either written or oral, without realizing that they could potentially be regarded by the contractor as change orders. In addition, conditions may arise during the course of a project that the contractor believes should result in a change order. To protect the owner from having the contractor submit long lists of changes upon the completion of the project, the standard changes clause requires the contractor to give notice to the owner of circumstances that the contractor believes warrants a change order. For example, AIA Document A201 (1997 edition) makes provision for notice to the owner of potential claims in Article 4.3.2: 4.3.2 Time Limits on Claims. Claims by either party must be initiated within 21 days after occurrence of the event giving rise to such Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later. Claims must be initiated by written notice to the Architect and other party. The AIA contract further refines the notice requirements for various types of claims, as follows: 4.3.4 Claims for Concealed or Unknown Conditions. If conditions are encountered at the site which are (1) subsurface or otherwise concealed physical conditions which differ materially from those indicated in the Contract Documents or (2) 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, then notice by the observing party shall be given to the other party promptly 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 they differ materially and cause an increase or decrease in the Contractors cost of, or time required for, performance of any part 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 different from those indicated in the Contract Documents and that no change in the terms of the Contract is justified, the Architect shall so notify the Owner and Contractor in writing, stating the reasons. Claims by either party in opposition to such determination must be made within 21 days after the Architect has given notice of the decision. If the conditions encountered are materially different, the Contract Sum and Contract Time shall be equitably adjusted, but if the Owner and Contractor cannot agree on an adjustment in the Contract Sum or Contract Time, the adjustment shall be referred to the Architect for initial determination, subject to further proceedings pursuant to Paragraph 4.4. 4.3.5 Claims for Additional Cost. If the Contractor wishes to make Claim for an increase in the Contract Sum, written notice as provided herein shall be given before proceeding to execute the Work. Prior notice is not required for Claims relating to an emergency endangering life or property arising under Paragraph 10.6. 4.3.6 If the Contractor believes additional cost is involved 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 the Contractor 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 reasonable grounds, 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 for an increase in the Contract Time, written notice as provided herein shall be given. The Contractors Claim shall include an estimate of cost and of probable effect of delay on progress of the Work. In the case of a continuing delay only one Claim is necessary. 4.3.7.2 If adverse weather conditions are the basis for a Claim for additional time, such Claim shall be documented 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 change order, 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 of the claim in part because the contractor wholly failed to give notice that it would make 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 rewrite the contract. Id.
4. Different Types of Constructive Changes a. Defective Plans and Specifications

A classic type of constructive change may arise from contract plans and specifications which are considered defective or ambiguous. Any changes to the contract work caused by such plans and specifications constitute a constructive change 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 reasonably interpreting them - the contractor may recover the extra costs resulting from the unclear plans and specifications. On the other hand, if the plans and specifications 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 be construed against the party who drafted them (the owner). As one Pennsylvania court expressed the rule, where [t]he contract was the [owners] own form, its language 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 which determines whether a contractor should inquire about an omission in the plans. As one court expressed it: Although the potential contractor may have some duty 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 any and all ambiguities, doubts or possible differences in interpretation. The Government, as the author, has to shoulder the major task of seeing that within the zone of reasonableness the words of agreement communicate the proper notions -- as well as the main 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 that 50% of certain conduit was reusable was inaccurate resulting in substantially more excavation. Over two strong dissents, the court allowed extra compensation. It held that specifications that are materially inaccurate because of mistakes by the owners design engineer permits recovery of extra costs where the contractor cannot reasonably be expected to have uncovered the mistake. The Court 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 was denied recovery based on ambiguous plans and specifications where, although they were found to be latently ambiguous as written in the contract, they were later 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 Spearin doctrine, parties had explicitly allocated risk to the subcontractor.

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b.

Method of Performance

Construction contracts generally provide detailed specifications as to the quality of performance to be maintained for the project but not the manner in which 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 its agent may decide that a particular method of construction would be better than another for doing the work. If the owner insists that its method be used instead of another 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 sequence without 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 of construction 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 Performance

When contract specifications cannot be met, or when they prove to be commercially impracticable, a contractor is faced with another type of constructive change -- impossibility of performance. Pennsylvania law accepts the principle of frustration of purpose as defined in the Restatement (Second) of Contracts 261 (1979). Where, after a contract is made, a partys performance is made impracticable without his fault by the occurrence of an event, the non-occurrence of which was a basic assumption upon which the contract was made, his duty to render performance is discharged, unless the language or the circumstances indicate the contrary. Madreperla v. Williard Co., 606 F. Supp. 874, 878 (E.D. Pa. 1985). It is often difficult to determine the point at which obligations become so impractical as to excuse performance. For example, a contractor was engaged to construct a fountain at a state park. While construction was underway, the work was interrupted by a hurricane. The contractor sought damages for the costs incurred 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 language imposing the risk on [the contractor], our law is that a contractor is presumed to have assumed the risk of unforeseen contingencies arising during the course of the work, unless performance is rendered impossible 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 a hurricane is an act of God, but the flooding did not make performance of the contract impossible as that term has been construed under the law. Legal impossibility means not only strict impossibility, but impracticability because of extreme and unreasonable difficulty, expense, injury or loss involved. Albert M. Greenfield & Co. v. Kolea, 475 Pa. 351, 380 A.2d 758 (1977). Here, flood damage 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 was not entitled to recover even though the architect approved a change order for the extra work as the architects decision was not an admission of liability by the owner. Id.
B. C A R D I N A L C H A N G E S

A 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 them would not constitute a breach of contract. The basic tests for determining if a change 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.), 220 A.D.2d 339, 632 N.Y.S.2d 788 (1995) (change orders to add work excluded under the original contract materially nearly doubled the original contract price); Airprep Tech., Inc. v. United States, 30 Fed. Cl. 488 (1994) (contractors default excused 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 the benefits 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 project completely. See Roy E. Weston Servs., Inc. v. Haliburton Nus Envtl. Corp., 1993 WL 57182, at *3 (E.D. Pa. 1993). The law recognizes such action as a breach and awards the aggrieved contractor damages in a fashion similar to quantum meruit recovery. However, the cardinal change doctrine may apply regardless of the nature 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 undertaking than that contemplated by the parties? This determination does not necessarily depend 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, rehg denied, 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 unreasonably transform the character of the work or unduly increase its costs. For example, a change 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 Elia Building 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 adjacent to 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 was found to be outside the scope of the original convention center contract. In short, change orders are properly issued under a Changes clause if the work 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 owner is in breach of the contract and the contractor may refuse to perform the work (or may perform it and seek damages upon completion). It should be noted, however, that what constitutes a cardinal change will depend upon the disposition of the court and the language of any applicable contract clauses. Therefore, the contractor risks being held in breach of contract if its interpretation of a change as a cardinal change is not later upheld.

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C.

AUTHORITY TO ORDER CHANGED WORK 1. Municipalities

The power to modify a contract is generally vested in the officer or body authorized to make the contract. See McQuillin, Municipal Corporations, Vol. 10, 29.121 (1966). A Director of Public Works may not have the authority to order changes to a contract required to be authorized by the county commissioners. Burke v. Allegheny County, 336 Pa. 411, 9 A.2d 396 (1939).
2. Course of Conduct/Oral Modification

A 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. Universal Builders, Inc. v. Moon Motor Lodge, 430 Pa. 550, 244 A.2d 10 (1968).
3. Ratification

Although a change may have been issued by someone without authority, if the unauthorized act was subsequently ratified by a person with authority, it serves as a formal change order. Knowledge of the change is usually the essential ingredient in the theory of ratification. Once knowledge is established, silence can 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. CHANGED CONDITIONS

Contractors 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 totally unexpected given the type and locale of the work. Contractors ordinarily include additional costs in their bids to allow for these contingencies. Owners have attempted 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 Says

A clause is often included in federal, state and many private contracts that provides the contractor with a remedy for unanticipated costs it incurs as a consequence of encountering a changed site condition in the form of physical conditions misrepresented (intentionally or unintentionally) by the plans and specifications, or unexpected from that ordinarily encountered. Such a clause is usually 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. Nether Prov. Tp. Sch. Auth. v. Durkin & Sons, Inc., 505 Pa. 42, 476 A.2d 904, 906 (1984). The Differing Site Conditions clause in federal contracts was promulgated many years ago to increase the economy and efficiency of the construction contract competitive bidding process. The need for the clause is apparent. If contractors were required to assume the full risk of increased costs of unfavorable and unforeseeable site conditions, they would have to choose undertaking a costly pre-bid analysis of subsurface site conditions or including sizable 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 can eliminate large bid contingencies and prevent the need for its contractor to commission duplicate site analyses by allowing the contractor to rely upon the information collected by the owner. Should the contractor subsequently encounter subsurface or physical conditions which differ from those indicated in the contract, the contractor is relieved of the risk of bearing increased costs by the promise of an adjustment in the contract price to equitably compensate it for extra costs. Under this clause, the owner assumes responsibility for such latent or subsurface conditions. The extent of further obligation of inquiry of bidders may be to require them to ascertain, for example, under federal contracts, such conditions as may be readily determined by inspection and inquiry, such as the location, accessibility and general character of the site. Foster Construction Company, 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-siteconditions clause applies only to physical conditions that existed at the time of contracting and not to those that developed during performance. See Olympus Corp. v. United States, 98 F.3d 1314 (Fed. Cir. 1996). Furthermore, this clause applies only to physical conditions and not to actions of third parties such as labor strikes. Id. Constructive changes describe situations where a contractor is instructed or required by the owner to perform a change in the work without the issuance of a formal change order which entitles a contractor to recover additional costs. However, the wording of a particular differing site conditions clause may be so broad as to apply to more traditional constructive changes. The purpose of this section is twofold. First, it will identify the types of differing site clauses currently in use in the industry (public and private) and discuss, 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 Clauses a. Federal Contracts

The federal and private contracts forms typically read as follows:

(a)

The Contractor shall promptly, and before the conditions are disturbed, give a written notice to the Contracting Officer [or Owner] of (1) subsurface or latent physical conditions at the site which differ materially from those indicated in this contract, or (2) unknown physical conditions at the site, of an unusual nature, which differ materially from those ordinarily encountered and generally recognized as inhering in work of the character provided for in the contract. The Contracting Officer [Owner] shall investigate the site conditions promptly after receiving the notice. If the conditions do materially so differ and cause an increase or decrease in the Contractors cost of, or the time required for, performing any part of the work under this contract, whether or not changed as a result of the conditions, an equitable adjustment shall be made under this clause and the contract modified in writing accordingly. No request by the Contractor for an equitable adjustment to the contract under this clause shall be allowed, unless the Contractor has given the written notice required; provided, that the time prescribed in [or the Contract] above for giving written notice may be extended by the Contracting Officer. No request by the Contractor for an equitable adjustment to the contract for differing site conditions shall be allowed if made after final payment under this contract.

(b)

(c)

(d)

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

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(ii)

Type I Conditions

Misrepresented 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 may recover any increased (and reasonable) costs that resulted from the different conditions. Thus, the general rule to apply as a test for a Type I condition is whether there exists a discrepancy between conditions actually encountered and conditions as indicated in the contract documents. The clause covering Category I conditions contains key words which determine 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 to conditions 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 subsurface boulders. F. Arthur Higgins, ASBCA 76-128, 79-2 BCA 14,050. Inaccurate government-furnished test borings which did not indicate the existence of solid rock. Baltimore Contractors, Inc., GSBCA 4808R, 80-2 BCA 14,767. A borrow pit designated in the contract was shown to be unsuitable for the work. Mann Construction Co., AGBCA 76-109, 80-2 BCA 14,674. Inaccurate borings provided by the government which indicated significantly more weathering than actually encountered, while another boring showed the top of bedrock at a lower boring elevation than encountered. Slattery Associates, Inc., ENG BCA 3922, 80-2 BCA 14,489.

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

Plans which indicated that removal of a moisture barrier from an existing building only covered onethird of the roof when, in fact, the entire roof had to 14

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be stripped. Kromer, Inc., ASBCA 23820, 80-2 BCA 14,465.

The failure to indicate the presence of water pockets beneath a built-up roof being repaired. Fermin O. Gonzalez, ASBCA 21421, 80-1 BCA 14,254. The failure of the plans to illustrate the existence of operational air ducts above a ceiling that was to be replaced and above which new air ducts had to be installed. Joseph Morton Co., Inc., BSBCA 4611, 80-2 BCA 14,771. Inaccurate representations in a contract regarding moisture retention qualities of upper soil levels and drainage characteristics. Southern Paving Corp., AGBCA 74-103, 77-2 BCA 12,813.

Physical Condition

The condition in question must be physical in nature and not the result of economic, political or governmental actions. Thus, events such as labor shortages, increased material costs, and state or local ordinances which restrict the contractors performance are non-physical situations which would not warrant recovery under the clause. However, a Type I claim may be based on misrepresentations of manmade physical conditions such as utility lines, sidewalks and highways, or the elevation of fill placed by a previous contractor. * Material Difference

Whether an encountered condition is materially different from that indicated by the contract will depend on the facts in each particular case. The condition complained of must be examined from the viewpoint of whether it has a material impact on the contractors cost and/or time of performance. Under this view, since the purpose of the clause is to fairly compensate contractors for unforeseen risks which arise during performance, materiality should be tied to the economic and time impacts associated with the changed condition. * Conditions Indicated in the Contract

Relief under the clause is not dependent upon a finding that the conditions encountered are contrary to express representations in the documents provided to the contractor. Such representations need not be explicit or specific, but may be inferred from reading the contract as a whole. See I.A. Constr. Corp. v. Dept of Transp., 139 Pa. Commw. 509, 591 A.2d 1146 (1991) (contractor may draw reasonable inferences from the lack of an indication in the contract documents). A contractor may rely upon indications in the contract documents as to the subsurface conditions, for example, and a variance from these indications is a
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compensable DSC. See J.E. Robertson Co. v. United States, 437 F.2d 1360 (Ct. Cl. 1971).
(iii) Type II Conditions

A condition under this category can be classified as one which is so unusual or unpredictable that the contractor could not reasonably have foreseen its existence. Type II conditions, unlike Type I, are not based upon the existence of a difference between the conditions encountered and those indicated by the contract documents. Rather, this category includes conditions that must be compared to those which would normally be expected at the site. Proper evaluation should take into consideration all of the factors which a prudent and reasonable bidder would 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 intelligent analysis of job requirements based on sound construction experience is essential. This is a question of foresight, not hindsight. If a reasonable bidder should have anticipated 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 a reasonable 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 not be unusual in an urban location, such as an abandoned water main, might be unusual in a rural location. A Type II DSC does not have to be considered a geological peculiarity in order to be unusual. The following conditions have been found to qualify under Category II:

The existence of an underlying and undisclosed second layer of sidewalk beneath an existing concrete sidewalk that was to be removed. Dawson Construction 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 mentioned in the contract documents and not discoverable by a 16

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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 heavy cover of dirt with no contract information regarding its existence. Conrad Weihnacht Construction Inc., ASBCA 19666, 75-1 BCA, 11,069.
Non-Coverage Under the Clause

b.

In the absence of the owners reservation of subsurface risks through a differing site conditions clause, the contractor who undertakes a contract may be assuming all risks involved in subsurface work. See Eastern Tunneling Corp. v. Southgate Sanitation District, 487 F. Supp. 109 (D.Colo. 1979). A successful claim is one that satisfies the conditions outlined by the clause which serves as the basis for recovery. Although many cases are based on changed conditions actually being encountered, this does not guarantee recovery. As an example, a contractor performing tunneling work encountered rock which had a shear strength three times that stated in a soils report provided by the government. However, the additional expense incurred was not recoverable because another clause in the contract identified the soils report (upon which the contractor had relied) as not part 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 not fall within the meaning of the phrase indicated in this contract as used in the clause. Dravo Corp., ENG BCA 3901, 80-2 BCA 14,757. In another case, adverse conditions encountered during excavation of a river 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 dam which caused silt to flow onto portions of the project which were both fully and partially completed). Since this condition was not a subsurface or latent condition, it was not a Type I condition. Neither was this a Type II condition because 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 those actually encountered. Sierra Pacific Builders, AGBCA 18-161, 80-2 BCA 14609. Since Category II claims must involve an unknown and unusual condition, an event which is very difficult to prove, the contractors only option is to seek relief under another contract provision. If the contract merely failed to indicate the presence of a condition encountered in the field, that condition is not a differing site condition. Appeal of Quality Servs. of N.C., Inc., ASBCA No. 34851 (1989).
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c.

Non-Physical Conditions

If 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 delays and disruptions to the work caused by, for example, a government order to another contractor is not compensable under the DSC clause. Robert E. McKee General 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 upstream reservoirs by the government created an unusual amount of fog in the contract area. The contractor alleged a changed condition because the fog hampered its performance. However, the governments operation of the up stream reservoirs was 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 Conditions

Although acts of God (generally related to severe weather) are physical in character and may be unusual and unknown at the time of bidding, they are generally 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 drifting snow, which the contractor alleged was a separate obstructive condition not concerning weather. The contractors claim that it was a DSC was denied because the obvious could not be ignored that this was a weather-related condition. Schouten Construction Co., DOT CAB 78-14, 79-1 BCA 13,553. A nearby river from which the contractor anticipated obtaining all of its water needs dried up; however, a DSC claim was denied because the lack of 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 to be outside the scope of the DSC clause since, like weather, the water level in the lake depended on 18

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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 nonrecovery for weather conditions in cases in which unusually severe weather (or other acts of God) have combined with another condition. For example, severe rainfall combined with an inadequately designed drainage system and an early thaw in conjunction with the unusual nature of the soil which ruined haul roads together created weather conditions which were a compensable DSC. D.H. Dave & Gerben Contracting Co., ASBCA 6257, 1962 BCA 3493; John A. Johnson Contracting Corp. v. United States, 132 F. Supp. 698 (Ct. Cl. 1955).
e. Site Inspections

Contractors are generally obligated by contract to make a reasonable prebid site investigation. What is meant by reasonable may vary with the circumstances, but can be generally defined as an examination of the site and all other data available to bidders in accordance with what a reasonably experienced and 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. See Crookham 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 is not included in the contract but is readily available from other sources, such as relevant 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 soils testing report). The following cases demonstrate how the courts will apply this requirement in situations where the contractor could have previously discovered the condition about which it subsequently complained:

A claim submitted on work involving street lighting was based on the failure to show streets and sidewalks on the plans. Since the omissions would have been revealed by even a cursory site inspection, the claim was denied. Tri-County Excavating, Inc. v. Borough of Kingston, 46 Pa. Commw. 315, 407 A.2d 462 (1979). A contractors mistaken belief that pipes and wires in manholes were connected to existing sump pumps (which they were not) led to a claim that the volume of water encountered could not have been 19

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anticipated. However, the contract did not mention sump pumps and did not represent the level of the water table. It was unreasonable, under the circumstances, for the contractor to rely on the probable condition of the existing pumps in formulating his bid. Mayfair Const. Co., NASA BCA 678-15, 80-2 BCA 14,596.

A claim alleging additional costs of performance, apparently caused by an unexpected subsurface shell strata, was denied because the condition was predictable from the seaside location of the work (i.e., an obvious condition). Fortec Construction, ENG BCA 4352, 80-2 BCA 14,623.
Disclaimers

f.

Since 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 compensation from the government if the contractors crystal ball wasnt accurate on a particular occasion. Government information was not mandatory, which left the contractor 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 of provisions found in all federal contracts. Courts interpreting private contracts have demonstrated little uniformity in their decisions as to the effectiveness of exculpatory 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 very explicit to nonexistent, and exculpatory provisions may be generously added. Differing site claims interpreted under state laws clearly illustrate the principle that each case stands on its own facts, based on various states interpretations. Case law precedent becomes less compelling given the different circumstances that may arise from one contract to the next. Not only will the facts 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 phrase and 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 cases demonstrate why this is true:

A contractor was required to dredge to a minimum depth of 38 feet in a designated area. Boring logs included 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 on the basis that, among other things, the boring information only represented a general indication of the materials likely to be found adjacent to the boring holes. The court found that the boring information which was furnished was misleading since it did not, in fact, give a general indication of the 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 materially different from those indicated in the plans and brought suit for its additional costs under the DSC clause in the contract (identical to the federal DSC clause). The owner (State of Montana) contended that exculpatory language in the contract required that the contractor make an affirmative effort to inquire about discrepancies in the plans. The Court held that the exculpatory clauses relied on by the State did not waive, eliminate or modify the contractors right to rely on the representations made 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 costs paid to its excavation subcontractor for the removal of a substantial quantity of unanticipated rock, because, among other things, (1) the test boring data made available to bidders by the owner was specifically excluded from the contract, and (2) the data was obtained only upon the contractor s unqualified release of the owner from any liability. Thus, the contractor was not justified in relying on the boring data. (The contract did not contain a Changed Conditions clause.) Sornsin 21

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Construction Co. v. Montana, 180 Mont. 248, 590 P.2d 125 (1978).

An unanticipated subsurface condition forced the contractor to alter its method of performance to meet the infiltration limits in the specifications on a sewer project. The contractor sued the owner and the engineer for its increased costs, who in turn defended by indicating that the exculpatory language in the contract held the contractor solely responsible for complying with the infiltration limits. The Court, however, disregarded this contention, and held that this was an impermissible attempt to shift liability. The contractor did not bring its claim under the differing site clause; rather, it alleged a breach of an implied warranty by the owner and negligence on the part of the engineer. Joseph F. Trionfo & Sons, Inc. v. Board of Education, 41 Md. App. 103, 395 A.2d 1207 (1979). A subcontractors contract to perform excavation of pipe trenches on a county park project incorporated exculpatory language from the prime contract which excluded from the contract documents boring logs provided by the owner. When the boring logs proved faulty, the subcontractor brought suit against the prime contractor. The court denied the claim by stating: The foregoing speaks for itself. In addition to putting the subcontractor on notice as to expectation of his determination of accuracy of subsurface conditions, the fact is clear that any information (in this case the boring logs) regarding subsurface conditions were not part of 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 concrete piers of a bridge, the contract documents contained site data representing the conditions expected to be 22

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encountered. However, a contract provision disclaimed responsibility for the data, stating it was for informational purposes only, did not purport to represent actual conditions, and did not relieve the bidder of responsibility for independently verifying the data. Actual conditions varied greatly from those indicated which resulted in a huge cost overrun to the contractor. In deciding this claim, the court disregarded the strong exculpatory language in the contract because the ownerprovided site data was positive representations of fact that could not reasonably be verified by the contractor. Raymond International, Inc. v. Baltimore County, 45 Md. App. 247, 412 A.2d 1296 (1980), cert. denied, 449 U.S. 1013 (1980).

The contract documents for construction of a sewerage system included test borings and estimated quantities of rock to be removed. When rock was encountered at higher levels than the borings indicated, necessitating additional rock removal, the contractor submitted a claim for its extra costs. The owner defended on the basis of the exculpatory language in its contract which clearly disclaimed (a) liability as to the accuracy of the test borings provided by the owner and (b) responsibility for the variation between the estimated and actual quantities of work. The court held that exculpatory provisions are controlling under Missouri law, and that given the circumstances of this case, the contractor is presumed 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). The holding in Air Cooling was, however, limited in a later case by the Missouri Court of Appeals. See Sanders Co. Plumbing v. City of Independence, 694 S.W.2d 841 (Mo. Ct. App. 1985). In cases where the evidence indicates that the custom and practice of the involved industry is for boring results to be relied upon by contractors despite disclaimers, that the reliance was invited by the other party to the contract and that the contractor had an inadequate amount of time to do its own test, an action will lie for misrepresentation. Therefore, a boiler plate disclaimer . . . does not negate the representations 23

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made by the test results where those results are positive representations of material fact. Id., 694 S.W.2d at 846. What conclusions can be drawn from these decisions? It can be inferred that an owner may be able to disclaim liability for subsurface data it furnishes to the contractor. Where courts have held owners responsible regardless of the number and type of disclaimers in the contract documents, the key was the contractors 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 in situations where the owner may have taken years to accumulate site data (which it disclaims responsibility for) while a contractor may only have weeks or days before bids are submitted. Morrison-Knudsen Co., Inc. v. United States, 397 F.2d 826 (Ct. Cl. 1968).
g. Silence of Contract Documents

Cases are split on whether silence of contract documents is an affirmative representation that can give rise to a claim of differing site condition. Compare Appeal of PK Constructors, Inc., ENG BCA No. 4901 (Nov. 27, 1991) (stating that 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 when a drawing was silent about the presence of any man-made subsurface obstructions, the contractor was entitled to assume that none were present). In general, a contracts silence will give rise to a differing site condition claim only if that silence is accompanied by affirmative representations which caused the contractor to draw a reasonable inference.

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