There are two types of differing site condition claims–Type I and Type II claims. Generally, a contractor may make a Type I differing site condition claim where the contractor encounters a subsurface or latent physical condition at the project site that differs materially from the conditions indicated in the parties’ contract.
Under a Type II claim, a contractor may assert a DSC claim where there are unknown and unusual physical conditions at the project site that differ materially from those ordinarily encountered and generally recognized as inherent in work of the character provided for in the parties’ contract.
Both Type I and Type II DSC claims can be difficult to prove. Last week, after having a seven-day trial, a federal court rejected a subcontractor’s $2.4 million DSC claim in Phillips & Jordan, Inc. v. United States.
In Phillips & Jordan, the United States Army Corps of Engineers entered into a $32.4 million contract to construct the first phase of the C-44 Reservoir/Stormwater Treatment Area Project in Martin County, Florida. The general contractor then entered into a $5.5 million subcontract with another company for the excavation, embankment, and demolition work at the project.
The general contractor submitted a $4.8 million pass-through claim on behalf of the subcontractor in which the subcontractor contended that it incurred additional costs because of a defective soil specification. The Corps denied that claim, and the subcontractor appealed the denial of its claim by filing a complaint (through the general contractor) against the federal government in the United States Court of Federal Claims.
The subcontractor’s complaint focused on two issues. First, the subcontractor asserted a DSC claim because the subcontractor contended that it encountered soils at the site that were different from what the contract specified the subcontractor would encounter. Second, the subcontractor claimed there was a DSC because the quantity of soil the subcontractor excavated from the canal was insufficient to construct the embankment (i.e., there was a material imbalance).
The court rejects the DSC claim regarding alleged differing soils
One of the primary issues in the case was whether the soils the subcontractor encountered differed from the soils it expected to encounter based on a reasonable interpretation of the contract. The subcontractor thought it was going to encounter “shelly sand” at the project, which the subcontractor characterized as sand with 30-40% shell by weight.
The court rejected the subcontractor’s soils DSC claim, in part, because nothing in the contract documents defined the term “shelly sand.” In particular, the court noted that the term “shelly sand” had no technical definition under the soil classification system that was used for the project.
Finally, the court relied on the fact that the Corps issued site characterization reports and detailed data from soil borings, none of which used the term “shelly sand.” The court also emphasized that the subcontractor’s president did not review the actual soil analysis from which contractors could set their expectations for the project.
As a result, the court denied the subcontractor’s soils DSC claim as follows:
[T]he Court concludes that Plaintiff cannot succeed on its differing site condition claim with respect to the soil content because it cannot prove either of the first two elements of such a claim. First, a reasonable contractor, looking at the contract specifications for Type 2 soil, would not read that specification as providing a representation that contractors could expect to encounter 30% shell content by weight. Second, Plaintiff cannot show reasonable reliance on its own interpretation of the contract specifications with respect to soil content.
Thus, the court held that the federal government was entitled to judgment as to the subcontractor’s soil DSC claim.
The court denies the DSC claim regarding alleged material imbalance
As to the material imbalance DSC claim, the Corps argued that it had already issued a contract modification to address that claim and, as a result, the subcontractor had already been fully compensated for the material imbalance issue. The subcontractor argued that the contract modification did not fully compensate it for the costs it incurred due to increased haul distances, out-of-sequence work, and other related activities.
The court concluded the material imbalance DSC claim must fail because the subcontractor could not show entitlement to additional damages beyond the compensation provided for in the earlier contract modification. Specifically, the court noted that the subcontractor’s “chosen method for recording costs makes it impossible for the Court to determine whether that modification offered complete compensation for the imbalance.”
Since the subcontractor had the burden of proof to show a DSC and resulting damages, the court needed a sufficient basis to find, more likely than not, the subcontractor incurred costs for which the contract modification provided incomplete relief. Because the subcontractor failed to carry its burden, the court found that the federal government was entitled to judgment as to the material imbalance DSC claim.
The court rejects the subcontractor’s modified total cost damages theory
In an effort to prove its damages, the subcontractor pursued damages under the disfavored modified total cost theory. The court noted that to use the modified total cost theory, the subcontractor had to show:
(1) the impracticability of proving actual losses directly; (2) the reasonableness of its bid; (3) the reasonableness of its actual costs; and (4) lack of responsibility for the added costs.
The court found that even had the subcontractor prevailed as to liability on one of its DSC claims, the subcontractor could not show entitlement to damages for two reasons.
First, the subcontractor could not satisfy the second requirement of a modified total cost claim–the reasonableness of the subcontractor’s bid. The court noted that “[t]he average bid is often the most appropriate method by which the Court can evaluate what a reasonable bid would have been.” In short, the court found that the subcontractor’s bid was unreasonably low for multiple reasons, including the fact that the subcontractor’s bid was 25% and 74% lower than the average of the other two subcontract bids for excavation and embankment work.
Second, the subcontractor failed to satisfy the fourth element to a modified total cost claim (i.e., the subcontractor was not responsible for the added costs). The court noted that the subcontractor failed to account for about $459,000 of costs that were omitted from its bid price or outside the scope of the claim.
More importantly, the court found that the subcontractor “failed to account for its own responsibility in employing the strategy that substantially contributed to the costs of longer haul distances and out of sequence work.” Since the subcontractor “failed to segregate costs related to the compensation it was provided under [the contract modification] from the additional costs it alleged to have incurred,” the subcontractor “failed to establish that it lacks responsibility for the additional costs.”
It also appears that the court found it suspicious that the amount of the subcontractor’s claim changed frequently over the course of the litigation. It started at $4.8 million in the original claim submitted to the Corps. Ultimately, the claim was reduced to $2.4 million in the subcontractor’s post-trial brief.
In sum, the court concluded that the subcontractor could not satisfy two elements of a modified total cost claim. That failure would have been “fatal to its claim,” even if the subcontractor had prevailed as to liability on its DSC claims. As a result, the court held that the subcontractor was entitled to no additional compensation.
Bottom Line: DSC claims can be difficult to prove. In addition to ensuring adequate proof as to liability, contractors asserting a DSC claim must focus on damages from the very beginning. Given that total cost claims are strongly disfavored and continue to be rejected by courts, contractors must also consider tracking their additional costs as best they can while working on the project. Otherwise, even if you prevail as to liability, it’s possible your claim may still fail for lack of proof as to your damages. This is a scenario that may be avoided by consulting with experienced construction counsel when issues with a project first arise, even before the initial claim is submitted to the owner.
For more on these topics, follow me on LinkedIn and subscribe to this blog.