PROTECT YOUR RIGHTS TO PAYMENT FOR CHANGED CONDITIONS
Submitted by: Robert Marconi of Stanislaw Ashbaugh, LLP

A very recent appellate case threatens the right of contractors to recover their extra costs for changed conditions, when the owner has included disclamatory language in the contract documents.  In Basin Paving Co. v. Mike M. Johnson, Inc., 107 Wn. App. 61, 27 P.3d 609 (2001), petition for review pending, the court declared that exculpatory clauses in the contract documents could negate a changed conditions claim as a matter of law, despite the subsurface conditions expressly indicated in the contract documents.

          Basin Paving involved a waste water and water treatment system project that entailed substantial excavation work.  The contract designated all of the excavation work as “unclassified excavation.”  The contract documents included all borings and geotechnical data available to the owner.  But the contract documents also included recitals disclaiming responsibility for the reliability of the soils information indicated in the contract documents; requiring bidders to satisfy themselves as to the risk of adverse subsurface conditions; and defining the scope of the excavation as requiring removal of whatever material might be encountered during the progress of the work.

          Based upon the indications in the contract documents, the contractor anticipated some rock, but ended up excavating far more of it than expected.  Both the costs and time of the work increased substantially beyond what had been anticipated.  The contractor made claim for a changed condition.  But the owner opposed the claim, on the theory that although the amount of rock actually encountered may have exceeded what the contract indicated, the disclaimers prevented the contractor from relying on the indications in the contract documents.

          The trial court ruled as a matter of law in favor of the owner, and Division 3 of the Court of Appeals affirmed.  In its published opinion the appellate court declared that regardless of whether actual conditions differed from those the contractor reasonably anticipated based on indications in the contract documents, the mere fact that the presence of rock was foreseeable prevented rock -– in whatever quantity might be encountered – from constituting a changed condition.

          The Basin Paving case may prove to be a substantial departure from pre-existing law on changed conditions in a least three respects.  First, it changes the inquiry from whether actual conditions differed from what the contractor reasonably anticipated to whether the actual conditions were beyond what was reasonably foreseeable at all.  Second, it allows exculpatory clauses to “trump” the contract’s changed conditions clause, so that bidders may not be entitled to recover even when they reasonably rely on indications set forth in the contract documents.  And third, Basin Paving permits determination of the absence of a changed condition to be made as a matter of law, thereby eliminating that notion of measuring the reasonableness of the contractor’s expectations based upon the totality of indications and clauses in the contract.

          An effective response to the financial catastrophe that the Basin Paving ruling could mean to other contractors involves an understanding of why changed conditions clauses exist.  Contrary to general belief, changed conditions clauses are for the benefit of owners, not contractors.

          Changed conditions arise from the unpredictability of pre-existing site conditions, particularly subsurface conditions.   The costs of constructing a project can vary wildly, depending on the physical conditions encountered during the course of the work.  Pile driving through sandy soils is cheap and easy; driving through nested cobbles and boulders can be nearly impossible.  Clay and silty soil may be ideal for foundation work when it is dry, but can be a nightmare to work in if saturated by unanticipated groundwater.

          The importance of changed conditions, though, does not depend primarily on whether they exist.  More fundamental is the issue of which party accepted the risk that differing site conditions might be encountered.

          Normally the owner is the party who drafts the construction contract.  Although on some private projects the contractor has a say in the contract language, ordinarily the owner dictates the project design and the contract terms, other than price.  On public contracts, the contract documents are almost universally prepared solely by the owner and its agents.

          As the party with the “power of the pen,” the owner can put the entire risk of unanticipated site conditions on the contractor.  Nothing in the law prevents it.  In the case of Dravo Corp. v. Metro, 79 Wn.2d 214, 219-20, 484 P.2d 399 (1971), the contractor encountered severe subsurface conditions that neither the owner nor the contractor anticipated, and that differed from what had been found during the owner’s geotechnical investigation.  But the contractor was denied extra compensation because the owner had disclaimed any responsibility that the geotechnical data was representative of what the contractor should expect, and because the prime contract had no “changed conditions” clause providing for compensation in the event of differing site conditions.

Owners nevertheless have found a powerful incentive not to place all risks of adverse site conditions on the contractor.  That incentive is money.  Contractors faced with unknown and uncontrollable risks increase their prices to compensate for contingencies.  The less that is known about the likelihood or potential severity of a risk, the higher the contingency price will tend to be.  “Whenever dependable information on the subsurface is unavailable, bidders will make their own borings or, more likely, include in their bids a contingency element to cover the risk.  Either alternative inflates the costs to the Government.”  Foster Construction v. , 435 F.2d 873, 886 (Ct. Cl. 1970).  See Ruff v. United States, 96 Ct. Cl. 148, 164 (1942) (“[B]idders must, in order to be safe, wet their estimates on the basis of the worst possible conditions that might be encountered.  Such a practice would be very costly to the [owner].”).

An owner who allocates the entire risk of changed conditions to the contractor may end up paying far more for the work than the actual costs of construction, since the contract price will include substantial payment for contingencies that may never come to pass.

[With a “changed conditions” clause] the owner expressly agrees to adjust the contractor’s compensation if unexpected conditions are encountered.  The purpose of such clauses is to make it unnecessary for the bidder to take into account, in computing his bid, contingencies of this kind.  This results in lower bids and in lower costs to the owner if the subsurface reveals no unexpected conditions.

Dravo Corp. v. Metro, 79 Wn.2d 214, 219-20, 484 P.2d 399 (1971).  But see, V.C. Edwards Contracting Co. v. Port of Tacoma, 83 Wn.2d 7, 514 P.2d 1381 (1973)(Contractor recovered for unanticipated changed condition, despite the absence of a changed conditions clause.).

          Owners have another built-in incentive not to foist onto the contractor all risks of adverse site conditions:  The owner is uniquely well situated to assess likely site conditions before the work begins.  The physical conditions of a site are normally evaluated through a geotechnical investigation.  It may involve borings, test pits, laboratory analyses, research of earlier construction on the same site or nearby areas, and interpretation by professionals of the known geological site conditions.  The investigation may take weeks to perform, and more weeks to digest.  Its results may indicate that design revisions for the project are in order, either to make it buildable in light of adverse aspects of the site, or to make construction more cost effective.  Indeed, a reasonably thorough investigation of site conditions may be needed before a project design can even proceed.

          The owner and its professionals are the only parties to a construction project in the position to decide how much time and resources should be dedicated to a geotechnical investigation before the project is designed and let for bidding.  The more time and money the owner devotes to the investigation, the more suitable will be the project’s design to actual site conditions, and the more certain will be the project’s cost because the risk of unknown conditions is reduced.  By taking responsibility for a site investigation, and for some degree of risk that actual conditions will not be worse than the pre-bid investigation suggests, the owner can make a cost/benefit decision on how much time and money to dedicate to the investigation and design phase of a project.

          An owner who merely places all risk of adverse site conditions on the contractor forfeits that opportunity.  In evaluating a project for bidding, contractors have very limited incentive to put substantial effort into investigating an owner’s site. Potential bidders normally get nothing for the time and money they dedicate to bidding, other than the possibility of eventual contract award.  Construction contractors also do not normally have geotechnical investigation equipment, or professionals on staff to operate it and interpret the results.  Moreover, leaving responsibility for site investigation to potential bidders is wasteful, since the results of any one contractor’s investigation will not be shared with contractors preparing competing bids.  Consequently, owners have found it is in their own interest to decide how much pre-bid investigation may be appropriate, to perform it prior to preparing contract documents, and to accept some level of risk against other, unanticipated site conditions.

The “changed conditions” clause is the contract mechanism to allocate the risk of adverse site conditions between the owner and the contractor.  The changed conditions clause works in conjunction with the indications of conditions shown or reasonably inferred from the contract documents.

The two elements work together; the presence of the changed conditions clause works to reassure bidders that they may confidently rely on the logs and need not include a contingency element in their bids.  Reliance is affirmatively desired by the Government, for if bidders feel they cannot rely, they will revert to the practice of increasing their bids.

The purpose of the changed conditions clause is thus to take at least some of the gamble on subsurface conditions out of bidding.  Bidders need not weigh the cost and ease of making their own borings against the risk of encountering an adverse subsurface, and they need not consider how large a contingency should be added to the bid to cover the risk.  They will have no windfalls and no disasters. The Government benefits from more accurate bidding, without inflation for risks which may not eventuate.  It pays for difficult subsurface work only when it is encountered and was not indicated in the logs.

Foster Construction v. United States, 435 F.2d 873, 886 (Ct. Cl. 1970).

          While borings, gradation results, laboratory tests, site descriptions, and other geotechnical information can all furnish indications of conditions for the contractor to expect, they are routinely accompanied by clauses conditioning bidders’ ability to rely on those indications.  Those clauses approach the subject in different ways.  Some disclaim outright the accuracy or reliability of the information presented.  Others affirm its accuracy, but disclaim any responsibility for relying on it.  Still others call for bidders to perform their own site investigations.

          In the event of a dispute, none of these clauses will be disregarded.  But at the same time, none of them is likely to be deemed legally dispositive.  Instead, each will be weighed according to its terms, but also in the context of the representations and indications that the contract documents do furnish to the contractor.  In other words, whether a differing site condition exists will remain an issue of fact, and disclamatory or cautionary language in the contract documents are additional facts to weigh on that issue.  See Bignold v. King County, 65 Wn.2d 817, 821-22, 399 P.2d 611 (1965) (Whether differing site condition exists is a question of fact, and will be found if a condition could not reasonably be anticipated, “despite admonitory or exculpatory phrases”.).

          One such clause, nearly universal to public contracting, requires bidders to perform their own site investigation.  WSDOT Standard Specification 1-02.4(1) (2000 ed.) is typical of these provisions:

          The bidder shall carefully examine the bid documents as defined in Section 1-01.2.  Submittal of a bid shall be conclusive evidence that the bidder has made these examinations and understands all requirements for the performance of the completed work.  The bidder further warrants, agrees, and acknowledges by submitting a bid that it . . . [h]as satisfied itself as to the character, quality, and quantity of surface and subsurface materials or obstacles to be encountered insofar as this information is reasonably ascertainable from an inspection of the work site (including material sites) as well as from the bid documents and other information made a part of this contract . . . .

          The bidder agrees that the Contracting Agency shall not be liable to it on any claim for additional payment or additional time or any claim whatsoever if the claim directly or indirectly results from the bidder’s failure to investigate and familiarize itself sufficiently with the conditions under which the contract is to be performed.

          Conducting firsthand a site investigation is good construction practice.  A contractual reminder that bidders should do so hurts no one, and is a simple precaution against slap-dash bid preparation.  Even without such an admonitory clause, a contractor would have difficulty prevailing on a claim over a site condition that a reasonable site inspection would have revealed.  Both Type I and Type II claims require the contractor to prove that the condition was not anticipated and that the contractor should not reasonably have anticipated the condition.

          At the other end of the exculpatory scale are clauses that purport to eviscerate whatever significance indications of site conditions in the contract documents might otherwise have.  The disclamatory clause at issue in Dravo Corp. v. Metro, 79 Wn.2d 214, 484 P.2d 399 (1971), presents a fine example:

          Subsoil investigations, including underwater borings, were carried out in the vicinity of the interceptor sewer alignment prior to advertisement of the contract.  Reports giving the results of these investigations may be examined at the Municipality’s offices.  These investigations were carried out for design purposes only, and are not considered adequate for construction.

          The Municipality does not warrant the correctness of the soil investigations, or of any interpretation, deduction or conclusion given in the report relative to subsurface conditions.  The bidder shall make his own deductions and conclusions as to the nature of the materials to be excavated, the difficulties of making and maintaining the required excavations, the difficulties which may arise from subsurface conditions, and of doing any other work affected by the subsurface conditions, and shall accept full responsibility therefore.

          No extra payment will be made over and above the contract price on account of any difference between the information relating to soil and foundation conditions provided by the Municipality and the conditions disclosed at the site of the work during the progress of the contract.

79 Wn.2d at 215-16 (emphasis added).  Such clauses undercut to the point of contradiction the notion of changed conditions, when the contract also contains a changed conditions clause (which the contract in Dravo did not).

          More typical of disclamatory clauses are provisions reciting that information furnished to bidders is “for information only,” or is accurate solely to the extent of the sample tested, and cannot be relied upon to indicate conditions anywhere else on the site.  The WSDOT specs contain such a clause:

          If the Contracting Agency has made subsurface investigation of the site of the proposed work, the boring log data and soil sample test data accumulated by the Contracting Agency will be made available for inspection by the bidders. . . .

          The Contracting Agency specifically makes no representations, guarantees, or warranties as to the condition, materials, or proportions of the materials between the specific borings regardless of any subsurface information the Contracting Agency may make available to the prospective bidders.

Standard Specifications § 1-02.4(2) (2000 ed.).

          Where the contract includes a changed conditions clause, courts do not routinely allow the owner to offer with one hand (by including indications of site conditions in the contract documents and a promise to pay for differing site conditions), while taking away with the other (by also inserting disclamatory or exculpatory language in the contract).

          It was not incumbent upon the plaintiff, prior to submitting its bid and entering into the contract, to conduct its own investigation in order to ascertain the truth or falsity of the defendant’s positive assertions regarding subsurface conditions . . ., even though the contract contained a general condition stating that “The Contractor further acknowledges that he has satisfied himself as to the character, quality and quantity of surface and sub-surface materials to be encountered insofar as this information is reasonably ascertainable from an inspection of the site, including all exploratory work done by the Government,” and also contained a technical provision stating that “the Government does not guarantee that materials other than those disclosed by the explorations [i.e. the test borings] will be encountered.”

Morrison-Knudsen Co. v. United States, 345 F.2d 535, 539 (Ct. Cl. 1965).

          The furnishing by the owner of detailed subsurface data is in effect an invitation for potential contractors to consider it in pricing their bids.  Indeed, a potential bidder could be faulted for not considering the significance of that data on the anticipated costs of the work.  To the extent the contract documents and the site information furnished in conjunction with them invite or require consideration by the contractor, they may be deemed to indicate anticipated conditions, even in the face of other, disclamatory contract language.

The effect of an actual representation is to make the statements of the Government binding upon it, despite exculpatory clauses which do not guarantee the accuracy of a description.

Woodcrest Construction Co. v. United States, 408 F.2d 406, 410 (Ct. Cl. 1969).

          For example, in United Contractors v. United States, 368 F.2d 585 (Ct. Cl. 1966), the government performed a subsurface investigation, and furnished its boring logs and related information to prospective bidders.  The contract documents recited that the information furnished was to assist bidders in ascertaining the character of conditions to be encountered, but the contract explicitly disclaimed any responsibility that the subsurface indications were representative of what the contractor would encounter.  Nevertheless, the court found entitlement for a changed condition:

          It is true that Provision 1-07 also provided that "the Government does not guarantee that materials other than those disclosed by the explorations will not be encountered, or that the proportions of the various materials will not vary from those indicated by the logs of the explorations."  But we have held, in comparable circumstances, that broad exculpatory clauses (identical in effect with this one) cannot be given their full literal reach, and "do not relieve the defendant of liability for changed conditions as the broad language thereof would seem to indicate."  Fehlhaber Corp. v. United States, 138 Ct. Cl. 571, 584, 151 F. Supp. 817, 825 (1957), cert. denied, 355 U.S. 877.  As Fehlhaber said, general portions of the specifications should not lightly be read to override the Changed Conditions clause.  Ibid.  It takes clear and unambiguous language to do that, for "the provision sought to be eliminated, or subordinated, is a standard mandatory clause of broad application * * *."  Thompson Ramo Wooldridge Inc. v. United States, 175 Ct. Cl. 527, 536, 361 F. 2d 222, 228 (1966).

368 F.2d at 598.

For examples of cases finding a changed condition based on indications furnished to the contractor, notwithstanding disclaimers that all such data was for “information only” and not to relieve bidders from making their own investigation and determination of conditions to expect, see Bignold v. King County, 65 Wn.2d 817, 821-22, 399 P.2d 611 (1965); Walla Walla Port District v. Palmberg, 280 F.2d 237 (9th Cir. 1960); Hersey Gravel Co. v. State, 305 Mich. 333, 9 N.W.2d 567 (1943).

          A particularly cogent discussion of the reasons to subordinate exculpatory language to express indications of site conditions furnished to the contractor is found in Haggart Construction Co. v. State Highway Commission, 427 P.2d 686 (Montana 1967):

Certainly the exculpatory clauses are inconsistent with the statements made concerning gravel sources and the purpose for which such statements were rendered.  Basic notions of fair play, as well as sound principles of public policy, require the contradiction to be resolved in favor of Haggart in this case.

Individual contractors are in a poor bargaining position with respect to the type of road construction contract involved here.  It would be unreasonable to suppose that prospective bidders could obtain more equitable terms, since the customary practice of appellant seems to include the use of these exculpatory clauses.  The contractor is inevitably in a "take it or leave it" situation.  The danger to public interests, implicit in such a case, is pointed out in Ozark Dam Constructors v. United States, D.C., 127 F.Supp. 187, 190:

“A contract for immunity from the harmful consequences of one's own negligence always presents a serious question of public policy.  That question seems to us to be particularly serious when, as in this case, if the Government got such an immunity, it bought it by requiring bidders on a public contract to increase their bids to cover the contingency of damages caused to them by the negligence of the Government's agents. Why the Government would want to buy and pay for such an immunity is hard to imagine.  If it does, by such a provision in the contract, get the coveted privilege, it will win an occasional battle, but lose the war.”

427 P.2d at 689.

          Judicial resolution of the tension between affirmative site indications in the contract documents, a changed conditions clause, and disclamatory language is well illustrated by the case of Kit-San-Azusa v. United States, 32 Fed. Cl. 647 (1995).  The first stage of the project there required the contractor to construct a sheet pile cofferdam, and perform mass excavation for a largely-underground pumping plant.  Test borings disclosed predominantly silts, sand, and gravel soils, with (in a few borings) isolated cobbles.  None of the borings identified boulders.

          In attempting to drive sheet piling, though, the contractor encountered immovable obstructions, which almost certainly were boulders or nested cobbles.  In subsequently excavating much of the site, many boulders were unearthed, as were large volumes of cobbles.  The contractor submitted claim for a changed condition.

          The government defended on two theories.  First, it pointed out that while the specific borings showed no boulders and few cobbles, the generic site description told the contractor to expect glacial outwash deposits geotechnically defined as “QW deposits”:  “[Qw material is] generally composed of a heterogenous mixture of silt, sand, gravel, cobbles, and boulders.”  So, the government argued, it had warned bidders to expect boulders.  Second, the government argued that while the borings themselves were represented to be accurate for the small cylinder of material extracted and tested, the government made no representation that any of the borings were representative of surrounding soils.  Therefore, the government argued, the lack of indication of boulders and nested cobbles in specific site data given to bidders could not serve as the basis of a claim of a differing site condition.

          The court’s resolution of the dispute reflects a balancing of all of the relevant portions of the contract, weighing them particularly in the context of the importance a prudent bidder would attach:

          While the contractor cannot ignore the site description, it is entitled to place greater reliance on boring logs if they are numerous and well spaced, as these were.  The specifications’ reference to boulder, even at the site-specific level, was due to the general classification type of the soil.  The Government places too much emphasis on the general classification of the soil and not enough on what was specifically found, at least insofar as what was shown the contractor in the boring logs.  That there were, in a technical sense, boulders in the ground at the site is apparent from the results of excavation at Phase II.  Rock of sufficient size to qualify as boulders was definitely present. . . .

          The court concludes that to the extent there was boulder, and that the boulders interfered with construction, KSA encountered a differing site condition.  To hold to the contrary means that a contractor has to assume from the possibility of boulder in a general type of geologic stratum, that boulder could be encountered at any point, despite the lack of indications in the boring logs.  Such an assumption would be nearly impossible to factor into a bid.  Richard Galster, a private consulting engineering geologist, testified for the Government that one cannot extrapolate more than a foot from a boring log.  Under that approach, the site could have had no boulders, or, according to the Government, it could be virtually solid boulder.  Would there be no differing site condition so long as there was no boulder within a few feet of any of the boring holes?  Clearly at some point the degree of difficulty due to boulder becomes a differing site condition.  That point was reached here.

32 Fed. Cl. at 651 (1995).

          These authorities reflect decades of careful balancing between affirmative indications in the contract documents and purported efforts at disclaiming their significance.  Because the underlying purpose of a changed conditions clause is for the owner’s benefit (reducing the overall costs of performance), language purporting to distance the owner from responsibility for the accuracy of conditions indicated in the contract has tended to be viewed with disfavor, if not outright discarded.

          But the recent Basin Paving case threatens to overturn those well-settled principles, and largely nullify changed conditions clauses as a risk-shifting device.  If the holding of the case prevails as controlling Washington law, and if owners continue to insert disclamatory language in their contract documents, a changed conditions clause will offer little protection to the contractor from escalating costs where conditions prove to be more adverse than expected.

          The prudent contract can protect against that outcome, at least on private projects, by expressly negotiating how much risk shifting the owner is willing to assume, and conversely how much contingency the owner is willing to pay for.  By reminding the owner that to the extent the contractor assumes the risk of adversity he will adjust his pricing upward, the owner can make an informed decision of whether to abide by the promise of a changed conditions clause, or else agree that changed conditions will not warrant extra compensation, in which case the contractor should price the initial contract work to reflect the risk of adverse conditions.