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Construction Site Conditions - Who Is At Risk?

A frequent issue between the contractor and owner, or the contractor and its subcontractors, involves unforeseeable or undetected site conditions encountered during construction.  The allocation of risk between the parties regarding unknown site conditions, which can be a significant expense and commonly leads to litigation, should be clearly defined in the pertinent contracts. 

The general rule is that when a contractor agrees to construct a project, for a fixed sum, and the project is otherwise possible to construct, the contractor will not be excused from performance or become entitled to additional compensation because of unforeseen or unknown site or soil conditions encountered during construction.  Accordingly, a prudent contractor would either: (i) obtain its own site information; (ii) include a risk factor in its bids for unknown site conditions; or, (iii) not bid the project at all.  In order for an owner to get bids from reliable contractors, and bids which do not include a risk factor or an investigation cost, an owner typically assumes some or all of the risk of unknown or undetected site conditions.  In order to avoid the rule that the contract bears the risk of site conditions, the assumption of site risks by the owner must be specifically included in the contract between the parties.  However, this contractual provision can vary between contracts.  In some instances, the owner assumes very little risk, with the contractor still basically responsible for the soil conditions, even though that contract may appear otherwise.

For example, a contract may provide that that the "contractor shall visually inspect the site to determine and ascertain site conditions, and the existence of those site conditions will not relieve the contractor from completing the work."  Another contract may, by contrast, provide that "the contractor assumes all risks associated with or relating to the project, work or job site and subsurface and climatic or weather conditions regardless of the cause, event, condition or effect, and the contractor shall remain responsible and obligated to complete the work provided in the contract without extension or increase in the Contract Amount."  Clearly, there is a significant allocation of risk between the two clauses regarding site conditions.  The parties to a construction contract should be careful in determining what site risks are assumed under the contract.

In some projects, the owner may provide its own soils and site reports, and assume responsibility for the accuracy of those reports in a "differing site conditions" clause.  This clause under those circumstances permits a contractor to base its bid on site information provided by the owner, with the understanding that if site conditions are materially different than those reasonably indicated by the site reports, the contractor can seek an increase in the contract price.  However, in some instances, an owner will provide the site reports, but specifically exclude in the contract any responsibility for the accuracy of the reports.  The contract may specifically state that the owner is not responsible for the reports and that they are for informational purposes only.  Without carefully reviewing the contract, the fact that the owner has not assumed any risk could be unknown to the contractor.  The contractor may use the reports, but, unknowingly, at its own risk.  In this scenario, if the actual site conditions vary from the site reports, the contractor may have no contractual recourse against the owner.

Commonly, a construction contract simply provides that the contractor has an obligation to visit and inspect the site and is only responsible for information obtained based upon a competent site visit.  The owner, as opposed to the contractor, would then be responsible and bear the risk for unknown or undetectable subsurface conditions.  In this situation, the contract should contain a "differing site condition" clause that provides the contractor is entitled to an increase in the contract price and/or an extension of time to complete the project, if the actual conditions encountered were not discoverable upon a reasonable site inspection by the contractor.  In this regard, when a contract contains a site investigation clause, then generally the contractor bears the risk that the actual site conditions would have been discovered through a professional investigation and reasonable inquiries resulting from the investigation.

Notwithstanding a contractual provision that addresses site conditions, there are various non-contractual principles that can have a legal effect on the risk-shifting for unknown or unforeseeable actual site conditions.  For example, to avoid imposing on the contractor the risk associated with unforeseen or unknown site conditions with a fixed-sum contract, courts have held that there is an implied warranty by the owner that site conditions are as described in and inferred from the plans and specifications.  If the site conditions vary from the plans and specifications, the owner may be responsible for the unknown conditions and the contractor may be entitled to additional compensation based upon the implied warranty.  This implied warranty can exist even if there is a contractual clause that disclaims the owner's responsibility for the accuracy of site reports or a clause requiring the contractor to inspect the site and verify the site conditions.

Another legal principle that can avoid imposition on the contractor the risks associated with unknown site conditions is a possible misrepresentation by the owner.  For example, if the owner provides faulty site information to the contractor with the expectation that the contractor will reasonably rely on the information, a contractor may be able to still be awarded additional compensation even if the contract provides that the contractor is responsible for site conditions.  The application of this principle in any given case will depend significantly on the relevant facts and contractual provisions, but it is an available remedy to a contractor that should be explored.

Contracts vary significantly regarding the shifting of risks associated with site and soil conditions.  The parties to a construction contract are well advised to carefully review the contract in whole, including specifically the provisions regarding the shifting of risk for site conditions.  The failure to know and understand which party bears the risk of unforeseen or unknown site conditions can lead to significant unsuspected costs and expense, and litigation, which should be addressed in the contract before construction starts.