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Procurement Perspectives: Site conditions and construction disputes

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by Stephen Bauld

This year, one of the most hotly contested issues was related to site conditions and government construction. I worked with many clients both on the municipal side, as well as the construction industry dealing with disputes over site conditions. Differing site conditions are purportedly one of the most common causes of dispute in construction.
Stephen Bauld
Stephen Bauld

This fact underscores the reality that site conditions are a critical aspect of every construction contract, including both new construction as well as remediation of an existing structure. Even the price for demolition work is predicated upon assumptions relating to site conditions.

Generally, in the United States and United Kingdom, under a fixed price contract, the contractor bears the risk of any unusual or differing site conditions encountered on a project.

For example, if a contractor anticipated that the site would contain fairly typical soils for the local area but encounters instead unexpected rock formations that make excavation more difficult and costly, the contractor would bear the risk of those conditions and is not entitled to extra compensation for additional costs encountered.

Canadian construction contracts generally reverse this burden. Under General Conditions 6.4 of CCDC-2 where the consultant determines that the conditions at the place of work are materially different, a change order or change directive will normally be issued.

It is assumed that this differing site conditions clause encourages more aggressive bidding. The downside, of course, is that it results in the owner bearing the risk. To some extent, the shift in risk is justified because it means that owners need to pay the additional cost of such unforeseen conditions only if and when they are encountered. In theory, the owner thereby avoids the probability that the contractor would include a contingency allowance in its price, if the risk were imposed on the contractor.

However, for the following reasons, some doubt must be expressed as to whether a differing site condition clause has the intended effect.

The first is that the clause applies only when the conditions are of a kind that cannot reasonably be anticipated. The critical cause of dispute in relation to "differing" conditions is what constitutes an unanticipated condition. This issue does not evaporate merely because the risk is transferred.

Second, even when it is accepted that the conditions do differ from the norm, the valuation of the resulting additional cost can itself be a subject of dispute. The change order process — on which the CCDC-2 approach relies — often leads to dispute.

Third, while neither the owner nor the contractor are ideally placed to avoid the risk of differing site conditions, there is a strong argument that the contractor is the party best placed to mitigate the additional cost that results where that risk actually arises.

Forth, assignment of risk to the contractor allows for the possibility of spreading the risks among other owners since the adjustment to price made if the risk is assumed by the contractor is uniform. While few owners can spread the risk of cost overruns in relation to site conditions, since they do not carry on enough construction activity to do so, contractors can do so. Thus, the traditional allocation to the contractor performs an insurance function.

Nevertheless, even taking these considerations into account, it does not follow that the traditional allocation of risk exclusively to the contractor constitutes a preferable approach. The more information that a contractor has about subsurface conditions, the more accurate the bid price will reflect actual conditions.

Where owners have access to geotechnical information, they should be required to disclose it. If the actual underground conditions are worse than the geotechnical information provided, the owner should be responsible for at least some portion of the cost, for the simple reason that if the contractor had known of the true condition, it certainly would have increased its bid to reflect them.

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com.

Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

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