The Dotted Line: Mitigating the risk of unforeseen site conditions
This feature is a part of "The Dotted Line" series, which takes an in-depth look at the complex legal landscape of the construction industry. To view the entire series, click here.
When construction companies across all trades enter into a contract, they bank on knowing that their agreed-upon scopes of work will be the extent of their obligations. To that end, the bidding process is an exercise in due diligence with estimators and others on the project team running through the specifications over and over and gleaning any other necessary information from meetings with the owners' representatives and visits to the site.
But no matter how conscientious contractors may be, there is still a chance that something below the radar, also known as unforeseen site conditions, will reveal itself after the work starts. And if contractors aren't careful in how they handle these surprises, they could find themselves footing the bill for some very expensive extras.
“Scope of work issues,” said John-Patrick Curran, a partner at Sive Paget & Riesel in New York, “are invariably the single largest sources of conflict between owners and contractors.”
The word "site" makes many think that this situation typically occurs during excavation or is somehow otherwise exclusive to the ground underneath or around a structure, but that is not always true. Contractors can also encounter unforeseen conditions once construction is underway. For example, during a renovation, there could be rotted structural members previously hidden from view or asbestos- or lead-containing materials that must be remediated.
And, of course in the field, Curran said, construction crews could unexpectedly encounter underground storage tanks, bedrock at a much shallower depth than geotechnical reports indicated or contamination that has the potential to expose workers to dangerous chemicals, as is sometimes the case when crews are excavating sites that were used as storage for petroleum tanks or were home to paint-related or industrial manufacturing operations.
“About 75% of the time,” said Steve Summers, executive vice president of Gray Construction in Lexington, Kentucky, “there is some level of unanticipated or unforeseen conditions encountered on a construction jobsite.” More often than not, he said, these scenarios involve soils or organics that require removal, replacement or some type of treatment.
Many contractors might believe they are not responsible for work they did not include in their proposal, but this is not always true if the contractor did not take care to perform some pre-bid investigation of the project.
For example, American Institute of Architects Form A201- General Conditions of the Contract of Construction states in Section 3.2: Review of Contract Documents and Field Conditions by Contractor, that “Execution of the contract by the contractor is a representation that the contractor has visited the site, become generally familiar with local conditions under which the work is to be performed, and correlated personal observations with requirements of the contract documents.”
So what does this mean? In a nutshell, the contractor is responsible for confirming that they’ve done their homework on the site and have identified any anomalies.
But, as a contractor, how deep does one have to dig? Contractors are not expected to do exhaustive studies prior to an agreement with the owner, Curran said, but they should pick up those items that would be apparent during the course of an ordinary inspection.
In addition, it’s important to keep in mind, he said, that contractors are entitled to rely on physical conditions depicted in construction documents.
The way this plays out when it comes to site work for a Gray Construction project, Summers said, is that the geotech or testing company will identify unforeseen site conditions and issue a report. “From there," he said, “the subcontractor will raise a flag to make a change. At this point, it is up to Gray Construction to determine if it is an area of risk that is included in our contract or not.”
Once work begins, if a contractor does come across conditions that differ from those presented in the contract documents, according to the aforementioned AIA contract, then it is their obligation to promptly notify the architect of any “errors, inconsistencies or omissions” via a request for information. If the contractor fails to perform its obligations under the contract, then it can be held responsible for the unforeseen conditions it has encountered.
According to Summers, standard contracts like those published by the AIA are about as fair as contracts get. “At Gray, we prefer the standard unforeseen clauses such as AIA, as we feel they are pretty fair to all parties and are clearly understood throughout the industry,” he said. “Unfortunately, the trend with owner contracts tends to try to push all site and unforeseen conditions risk to the contractors, regardless of their involvement in the site selection or due diligence process.”
If an owner does try to allocate the responsibility for all unforeseen conditions to the contractor and gets a reputation for being unreasonable and refusing to negotiate these points, however, this can backfire. In fact, unforeseen site conditions, according to a recent article in the City Journal, a publication of the Manhattan Institute, are one of the many reasons New York City infrastructure costs are so high. Reportedly, Metropolitan Transportation Authority contracts allocate all of the financial risks for unforeseen geological conditions to the contractor, and construction companies respond by padding the figures in their bids to cover any contingencies.
Conversely, said attorney Quinn Murphy of Sandberg Phoenix in St. Louis, Missouri, some contractors have been accused of taking advantage of the fact that there are unknowns on a project by bidding low and then counting on being able to submit money-making change orders to up the contract amount after the fact.
Murphy said there are three steps contractors should take to avoid being drawn into a dispute around unforeseen site conditions or having to pay for something they genuinely didn’t see coming.
First, he said, contractors should understand the allocation of risk in their contracts — knowing who is responsible for unforeseen conditions — and understand their responsibilities when it comes to making pre-bid inspections.
Next, no matter the contract language, contractors should meticulously inspect the property and make sure the contract documents reflect actual conditions. Murphy said to use photos, reports, etc., as this sort of record-keeping makes it easier to support unforeseen condition claims.
Contractors should be thoroughly familiar with the contractor notice requirements in their contract as well. “If you encounter unforeseen conditions that will affect the work, you have to [make notification] within [a certain number of] days," Murphy said. “You have to go through the submittal process.” However, he said, it sometimes takes weeks to perform certain analyses.
In these cases, contractors should consider a “bookmark” notification to the architect or other designated project team member that will preserve their rights while they gather the necessary supplemental information about the potential change.
In general, though, contractors shouldn’t agree to a short-term analysis window, Murphy said, and managers should make sure staff know to notify them immediately if they come across something in the field that might be an unforeseen condition.
Gray personnel, Summer said, note potential unforeseen conditions on daily or weekly reports or use the notification provisions of the contract to assure that proper communication and documentation occurs throughout the project.
Third, Murphy said, contractors have to understand the change order process and the owner’s ability to direct work. If a company encounters unforeseen conditions, it has to provide notice and submit a change order, but the owner will most likely require that it continue working.
Murphy said he never recommends that his clients agree to that provision, but if it is part of the contract, those signing on should at least be aware of the possibility of incurring extra costs during negotiations as to whether the work in question is an unforeseen condition.
Also, if a contractor digs in and refuses to perform the work, then it can be held responsible for the resulting delays. “Most of these claims are for early-phase work,” Murphy said, “so [there can be] a domino effect of liquidated damages. If everyone looks back and blames you, the claims are massive.”
If it’s not possible to have that clause completely removed, then the next best move is to have it revised to provide some protection. For example, Murphy said, the owner could retain the right to require the contractor to keep working after a claim of unforeseen conditions, but only up to a certain percentage of the value of the base contract amount.
What this tells the owner, he said, is that there is no blank check — no circumstance where the contractor can be directed to do unlimited extra work with no meaningful obligation to be paid for it.
But, ultimately, much of the responsibility lies with the contractor in protecting itself against having to pay for and perform work related to unforeseen conditions. If a contractor signs a contract stating it's responsible for all conditions and hasn’t done its due diligence in determining the validity of site conditions, Curran said, that’s just schedule-killing litigation waiting to happen. “Delays of any fashion are detrimental to everyone involved," he said. “If you have to go to court, you’ve already lost.”
The Dotted Line series is brought to you by AIA Contract Documents®, a recognized leader in design and construction contracts. To learn more about their 200+ contracts, and to access free resources, visit their website here. AIA Contract Documents has no influence over Construction Dive's coverage within the articles, and content does not reflect the views or opinions of The American Institute of Architects, AIA Contract Documents or its employees.
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