Shifting the Risk of Differing Site Conditions on Public Works Projects Costs the Taxpaying Public in the Long Run
Under a traditional lump sum contract, the contractor generally bears the risk of unforeseen conditions and is expected to protect itself against the unforeseen or differing site conditions by including a contingency in its proposed bid or price. The basic flaw with this approach is that a contractor cannot accurately access value a true unknown. Even if included, the price contingency may end up being inadequate or, alternatively, grossly conservative. The one constant is that including any contingency increases contract prices and thus works to the detriment of the tax paying public if adverse conditions are not encountered. Since a public works owner may enter into many separate construction contracts in a given year, the potential cumulative effect of these contingencies is so substantial that reallocation of the risk of differing site conditions to the public works owner makes economic sense.
Site conditions that are materially different from those contemplated at the time the contract price was estimated are the source of many disputes between owners and contractors. Unanticipated and changed conditions often result in extra costs and substantially delay and disrupt job progress. In the 1920s, the U.S. government, in an attempt to reduce the contingencies that contractors faced in performing work, began using a "Changed Conditions" clause in its fixed price construction contracts. The purpose of the differing site conditions clause is to place the risk of certain reasonably unexpected site conditions on the public works owner by granting a price increase and a time extension to a contractor who encounters such differing site conditions. The long term effect of a differing site conditions clause is to reduce bid or proposal prices.
As one court explained the inclusion of a differing site conditions clause in the contract:
- "The purpose of the changed conditions clause is 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." (Emphasis added). See Foster Construction C.A. & Williams Brothers Co. v. United States, 435 F.2d 873 (Ct.Cl. 1970).
The inclusion of Changed Conditions clauses in government contracts is now so uniform that virtually every state and federal public works contract contains such a provision.
Recently, a local sewer district included the following note in its plans for the project:
"Existing underground utility information for gas, power, phone, cable, water services and sanitary side sewers has not been shown on the drawings. It is the contractors [sic] responsibility to locate and identify all existing utilities such that the contractor can accurately bid and construct the project."
Clearly, the purpose of this exculpatory note is to place the risk of unforeseen utilities on the contractor and vitiate the effectiveness of the differing site conditions clause. Aside from the fact that this type of plan note will cost the sewer district's constituents in the long run, because contractors faced with such a note, will have four (4) options:
- To bid the project without doing a complete investigation and put a contingency in their bids, which will increase the price of construction across the board;
- Bid the project without a contingency and take the risk (if the risk does eventuate the matter will likely end up in a costly claim and as indicated below, the claim will very likely be decided against the public works owner in this instance);
- Perform the investigation, invest the money, and then put the cost of that investigation in its bid, which will again, cost the constituents of the sewer district in the long run; or
- Opt to not bid at all, which will deprive the sewer district of representative market pricing for the project.
In Washington, the sewer district's inclusion of the note may have no force and effect since, under RCW 19.122.040, project owners are required to indicate the existence of underground facilities in the contract documents and when not shown, the contractor is entitled to an equitable adjustment by law. The sewer district's attempt to eliminate the differing site conditions clause may be trumped by the public policy (the statute) which requires that the sewer district reveal the location of underground utilities in the contract documents. The bottom line is, in the long run, the taxpaying public is not served by attempts to eliminate the differing site conditions clause in public works contracts.
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