This article is the seventh in my series of discussions about contractual risk allocation. This installment focuses on differing site conditions clauses. Currently, a common approach to these clauses is to shift all-risk to the contractor. This shifting of risk is often reflected in both bid instruction and the general conditions to the contract. Because the courts will enforce these clauses and because the amount of risk placed on contractors with these clauses can be extreme and difficult to predict, contractors should be conscious of these clauses and negotiate or adjust their estimates accordingly.
I’ve previously addressed court enforcement of these clauses in an article about the El Paso Field Servs. v. MasTec case. In that case, MasTec accepted all-risks for overcoming underground conditions and foreign crossings on a pipeline project. The consequence of this acceptance resulted in millions of dollars in damages for the contractor. The goal of this article is to help contractors recognize and negotiate these clauses so these catastrophic consequences can be avoided.
As stated, the first location that underground conditions are typically addressed is in the Instructions to Bidders or front-end specifications published with the invitation to bid. These documents often become part of the Contract Documents and are therefore binding on Contractors. An example of this language is as follows:
Existing surface and subsurface structures are shown on the plans if their location has been determined. The Owner and Engineer assume no responsibility for failure to show any or all of the structures on the plans or to show them in their exact location. It is mutually agreed that such failure to show these structures will not be considered sufficient basis for claims for additional compensation for extra work or for increasing the pay quantities in any manner whatsoever.
Contract General Conditions often have similar language that may entitle the Contractor to a time extension but not always a contract price adjustment in the event conflicts with underground structures or facilities. The essential problem with these clauses is that by shifting all of the risk for locating and overcoming any obstacles created by underground facilities, the parties are placing the risk in the hands of the party least able to prepare for, balance, and handle that risk.
Typically, the Owner and its design engineer have superior access to information and knowledge about the types of underground crossings or structures that must be negotiated or navigated in the course of the Project. For example, when a municipality is hiring a contractor to replace, extend, or create new underground water and wastewater infrastructure, the Owner should have access to information from previous as-built drawings, utility easements, and the like so that it can account for the number and location of possible interferences. If the Owner wants to secure the best value and price for the project, it should share that information at bid time.
If the Owner fails to share that information and still places the risk for these conditions on the contractor, the Owner may be insulating itself from liability, but it is also setting up the project for potential failure. In this regard, the Owner’s desire to avoid paying for work to overcome underground or unknown conflicts may actually result in a higher level of exposure and risk of project failure.
Contractors who are asked to accept contract language need to be able to recognize the differing levels of severity in these clauses. The EJCDC C-700 2013 edition treats this clause in relatively equitable manner.
- Contractor shall be entitled to an equitable adjustment in the Contract Price or Contract Times, or both, to the extent that any existing Underground Facility at the Site that was not shown or indicated in the Contract Documents, or was not shown or indicated with reasonable accuracy, or any related delay, disruption, or interference, causes an increase or decrease in Contractor’s cost of, or time required for, performance of the Work; subject, however, to the following:
- Contractor did not know of and could not reasonably have been expected to be aware of or to have anticipated the existence or actual location of the Underground Facility in question…
This language attempts to equitably allocate risk for underground obstructions. The language used demonstrates that the drafters understood that the Owner had superior knowledge and ability to handle the effect of these conflicts. The drafters, however, recognized that the contractor should not be entitled to an adjustment if the contractor knew or anticipated the existence of the conflict.
Contractors who are asked to bid on or accept contracts that place the risk for these conditions on the contractor should be aware that on any procurement issued under the authority of Chapter 2269 of the Government Code (which allows for best-value competitive bidding, competitive sealed proposals, design/build, construction manager at-risk) allows negotiation of contract terms after contract award. Because chapter 2269 expressly allows for negotiation, the days of feeling like you cannot negotiate on a public contract are over.
Additionally, chapter 2269 allows for both modifications in contract terms and contract price after award. Therefore, a contractor who may successfully negotiate away certain risks can reward the owner with a discount on price. Of course, a skilled negotiation will allow for language like the EJCDC language to be inserted in place of an all-risk provision so that the contract price may be adjusted upwards if actual conflicts create delays and damages.
The use of this extreme risk-shifting clause relating to underground conditions can be a source of hardship and significant damages. Contractors should consider the wording and effect of these clauses in their bid submittals and contract negotiations.