Geotechnical Information Practices in Design-Build Projects (2012)

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8 CHAPTER TWO CASE STUDIES IN LEGAL AND CONTRACTUAL ISSUES ASSOCIATED WITH DIFFERING SITE CONDITIONS INTRODUCTION One of the most important issues confronting owners, designers, and contractors on any transportation project is the nature and predictability of geotechnical conditions. Geotechnical conditions not only have an enormous impact on project design, but also directly affect project cost and schedule. This is particularly true for “differing geotech- nical conditions,” sometimes called “changed conditions,” which are conditions that materially differ from what the contractor should have reasonably expected when it priced its contract. As discussed throughout this report, differing site conditions create project challenges, all of which leads to a fundamental question—who should bear the financial risk of these conditions? This chapter will address the legal and contractual issues associated with differing site conditions. It will consider public policy issues, contractual approaches, and common methods that some owners use to shift liability to the con- tractor. This chapter will also address how the DB process affects the administration of differing site condition risk. DIFFERING SITE CONDITIONS CLAUSE Some owners believe that contractors should assume full risk of differing site conditions (Christensen and Meeker 2002). The basic flaw in this approach is that contractors cannot accurately value the risk of geotechnical unknowns. If they try to price the risk, they may include contingencies that either price themselves out of the procurement or (if the price is low enough to win the contract) may not be sufficient to dealing with the actual conditions. Many sophisticated contractors will simply not play in this arena—they refuse to bid on a contract where they face unlimited risk of differing site con- ditions (Loulakis et al. 1995; Centennial Contractors 2004). Over time, it has become far more common for owners to agree that they are in the best position to accept the risk of differing site conditions. To accept this risk, they use what has become known as a DSC clause. One of the most frequently cited cases on DSCs is the United States Claims Court decision in Foster Construction v. United States, 435 F.2d 873 (1970), where the court provided a clear explana- tion of the purpose of the DSC clause: 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. A DSC clause gives a contractor cost and time relief for (1) subsurface or latent physical conditions encountered at the site differing materially from those indicated in the contract; or (2) unknown physical conditions at the site of an unusual nature, differing materially from those ordinar- ily encountered and generally recognized as inherent in the work provided for in the contract (23 CFR 635.109). This helps the owner as well, in that the owner pays only for the actual costs incurred if these conditions are actually encoun- tered, as opposed to an unliquidated contingency for a prob- lem that may never occur. The industry and court decisions have commonly referred to the two situations described in the preceding paragraph as Type 1 and Type 2 differing site conditions. A Type 1 differ- ing site condition focuses on conditions that are indicated in the contract documents. Classic examples include (1) rock or water at different elevations than shown in the geotechni- cal report, (2) unknown underground utilities, and (3) soil that contains different characteristics than identified in the contract documents. By contrast, a Type 2 differing site con- dition is independent from what is set forth in the contract documents and is defined by what one would reasonably expect to encounter in performing the work (Loulakis et al. 1995). Examples could include soil compacting or rock frac- turing differently than one would reasonably expect. FEDERAL POLICY ON THE USE OF DIFFERING SITE CONDITION CLAUSES There is a strong policy in favor of using DSC clauses in federally funded construction contracting. The federal DSC clause, contained in Federal Acquisition Regulation (FAR) 52.236-2, has been the model for dealing with the risk of unforeseen site conditions in standard-form contracts,

9 including those published by the American Institute of Archi- tects and the Engineers Joint Contract Documents Commit- tee. Although the FAR language may differ slightly from that used in other private and public construction contracts, the differences are relatively minor and do not substantively affect the contractor’s ability to recover the additional costs and time caused by differing site conditions. Federal policy regarding the owner assuming differing site condition risk is evident in federal-aid highway projects. 23 CFR 635.109 contains policies, requirements, and pro- cedures for the following DSC clause, which is mandated by the 1987 Surface Transportation and Uniform Relocation Assistance Act to be included for all federal-aid highway projects unless prohibited or otherwise defined pursuant to state law. (i) During the progress of the work, if subsurface or latent physical conditions are encountered at the site differing materially from those indicated in the contract or if unknown physical conditions of an unusual nature, differing materially from those ordinarily encountered and generally recognized as inherent in the work provided for in the contract, are encountered at the site, the party discovering such conditions shall promptly notify the other party in writing of the specific differing conditions before the site is disturbed and before the affected work is performed. (ii) Upon written notification, the engineer will investigate the conditions, and if it is determined that the conditions materially differ and cause an increase or decrease in the cost or time required for the performance of any work under the contract, an adjustment, excluding anticipated profits, will be made and the contract modified in writing accordingly. The engineer will notify the contractor of the determination whether or not an adjustment of the contract is warranted. (iii) No contract adjustment which results in a benefit to the contractor will be allowed unless the contractor has provided the required written notice. (iv) No contract adjustment will be allowed under this clause for any effects caused on unchanged work. (This provision may be omitted by the SHA’s [state highway agency] at their option.) Unlike its mandate for the use of a DSC clause on other projects, 23 CFR 635.109(c) does not require DOTs to use a DSC clause in a DB contract. Instead, the regulation states that a DOT “may consider” the use of a DSC clause when “appropriate for the risk and responsibilities that are shared with the design-builder.” The strong federal policy for DSC clauses is also evident by FHWA’s Geotechnical Guideline No. 15, “Geotechni- cal Differing Site Conditions,” dated April 30, 1996. This 36-page guideline provides an abundance of information on the geotechnical aspects of differing site conditions, includ- ing advice on adequate site investigation, disclosure and pre- sentation of subsurface information by highway agencies, and the use of such information in mitigating or resolving contractor claims of differing site conditions (FHWA 1996). General Requirements for Relief Under a Differing Site Condition Clause Although Type 1 and Type 2 DSCs are intended to cover different situations, they share several common elements (Loulakis et al. 1995). They are both required to be physical conditions at the site of the work. Moreover, these conditions must differ materially from those baseline conditions either indicated in the contract documents (for Type 1) or that one would normally expect to encounter (for Type 2). Certain common requirements also have arisen as a matter of case law, including the need for prompt notice and the contrac- tor’s obligation to conduct a reasonable site investigation (Loulakis et al. 1995). To qualify for relief under either condition, a contractor must demonstrate that the condition is a physical condition. The most common conditions have related to soil character- istics, presence of rocks in different qualities or quantities, subsurface water, and a variety of artificial and man-made conditions such as pipelines, artifacts, and debris. Although the type of physical condition that qualifies for recovery under the clause is virtually wide open, there are some con- straints. For example, the term “physical condition” has not been interpreted to include physical forces that increase a contractor’s efforts, such as the general unavailability of a work site (Loulakis et al. 1995). A typical DSC clause specifically discusses physical con- ditions “at the site,” suggesting that the project location is the only place where a DSC can occur. This raises the question, however, of how areas that are technically off the site, such as borrow pits, quarries, and access roads, are to be treated. Although only a few cases have addressed this issue, they suggest that such off-site areas can be subject to the DSC clause if their use is so bound up with the contractor’s per- formance that the owner should be responsible for the condi- tions (Loulakis et al. 1995). For example, Kaiser Industries Corp. v. United States, 340 F.2d 322 (Ct. Cl. 1965), allowed recovery under a DSC theory because the government owned the only two quarries in the area and approved their use. Sev- eral other cases have recognized the contractor’s ability to claim DSCs when the borrow pits or quarries are designated in the contract documents as an approved source of material. Although there is little case law discussion about the issue of an alleged differing site condition needing to be mate- rially different from the baseline condition, it is clear in practice that this is a major factual hurdle for a contractor to overcome. A condition that differs from the baseline is not enough to satisfy the test; there must be objective evidence to demonstrate that the difference creates a greater amount

10 of work than one would normally have expected or requires a different method of performance (Loulakis et al. 1995). Unique Type 1 Differing Site Condition Requirements Type 1 differing site conditions are far more commonly encountered and consequently are addressed more fre- quently by the courts and boards than Type 2 conditions. To establish entitlement to an equitable adjustment for a Type 1 claim, the contractor must show that the alleged differ- ing site condition was materially different from conditions “indicated” in the contract documents. The contract indica- tions need not be “explicit or specific, but only enough to impress or lull a reasonable bidder not to expect the adverse conditions actually encountered” (Kelleher 2009). In some instances, determining contract “indications” is relatively easy. If a geotechnical report is included as part of the contract documents and shows rock at elevations far below where they are actually encountered, it is easy for a contractor to meet the burden of showing a contract “indication.” Con- trast this with a situation where a contractor is responsible for installing concrete cylinder piles for a bridge, and the specifi- cations establish minimum tip elevations for the piles and the means and methods for driving the piles. If the contractor hits refusal before achieving the minimum tip elevations, it might argue for DSC relief on the grounds that the contract indicated that the soil conditions would not be so dense as to make driv- ing the piles by the prescribed process impossible. In certain situations, a contract indication may be derived from documents that are not part of the contract. For exam- ple, in the City of Columbia v. Paul N. Howard Co., 707 F.2d 338, 340 (8th Cir. 1983), the federal court of appeals held that soil borings were a “contract indication” even though the borings were contained in an appendix to the plans and specifications that was expressly excluded as a contract doc- ument. In this regard, the court stated, The test boring logs do not have to be strictly considered “a part of the contract documents” (which the Appendix states they are not) to be binding on the [owner] to the extent of their own accuracy. We can accept the [owner’s] argument that the Appendix is not an item listed in the Table of Contents (but is in addition to the Table of Contents) and therefore the Appendix is not a part of the contract. The clause entitles the contractor to reimbursement when there are ‘conditions at the site differing materially from those indicated in the contract.’ Even though the logs may not be included in the contract, they are ‘indicated’ in the contract. Note that other courts have refused to consider any docu- ment that was not specifically incorporated into the contract (Kelleher 2009). The following are examples of Type 1 differing site con- ditions where express representations of conditions in the contract documents were found to have differed materially from the actual conditions encountered include: • Variance from actual field conditions. During construc- tion of a highway retaining wall, a contractor discovered that the actual interface point for two portions of the wall varied significantly from the point indicated in the spec- ifications from the DOT. To build the wall as required by the plans, the contractor had to remove a substantial amount of rock that was unforeseen at the time of its bid. In Thomas M. Durkin & Sons, Inc. v. Dep’t of Transp., 742 A.2d 233 (Pa. Commw. Ct. 1999), the court found that the contractor had justifiably relied upon the DOT’s representations and was entitled to claim that it encoun- tered a Type 1 DSC (Kelleher 2009). • Muddy versus dry conditions. In Beco Corp. v. Roberts & Sons Constr. Co., 760 P.2d 1120 (Idaho 1988), the Supreme Court of Idaho found the subsurface mud to be materially different from the dry conditions indi- cated by the contract documents and affirmed the contractor’s recovery for a Type 1 DSC. The contract documents stated that no water was noted in any of the test holes drilled in the area. During construction, the contractor encountered “subsurface mud covered by a cracked and deceptively dry looking surface. …” (Kelleher 2009). • Hard clay versus soft mud. In C.J. Langenfelder & Son, Inc., Maryland Department of Transportation 1000 (Aug. 15, 1980), the contract specifications required the contractor to remove soft mud, silt, and sand in a river-dredging project. When the contractor encountered hard, undisturbed clay instead of the soft materials specified, the board concluded that the DOT should have recognized that the contractor encoun- tered a Type 1 DSC (Kelleher 2009). • “Balanced” excavated materials. A contract for air- port service roads and taxiways contained defective specifications that incorrectly stated that the amount of dirt excavated from the project site was roughly equivalent to the amount needed for fill-in require- ments (a “balanced project”). In Ace Constructors, Inc. v. United States, 499 F.3d 1357, 1364 (Fed. Cir. 2007), the court held that the contractor encountered a Type 1 DSC and could recover its costs for the purchase of the additional soil necessary to comply with the contract’s fill requirements (Kelleher 2009). Unique Type 2 Differing Site Condition Requirements As noted above, Type 2 DSCs do not depend on what is indicated in the contract documents. Rather, the conditions encountered must be unusual and differ materially from those reasonably anticipated, given the nature of the work and the locale. To qualify as sufficiently “unknown and unusual,” the condition encountered by the contractor does not have to be in the nature of a geological freak (e.g., frost

11 occurred when a contractor encountered subsurface water (as expected), but its flow rate was unusual and unforesee- able (Kelleher 2009). IMPEDIMENTS TO RECOVERING UNDER A DIFFERING SITE CONDITION THEORY Even the most liberal of DSC clauses include other clauses that attempt to minimize or reduce claims under them. These include clauses relating to site inspection and notice. Some owners will include clauses that seek to limit a contractor’s ability to rely on information provided during the bidding process. Whether these additional contract clauses bar or foreclose recovery under a DSC clause usually depends on the specific circumstances of each case (Kelleher 2009). Site Inspection The site inspection clause required by the federal govern- ment (FAR 52.236-3) reads as follows: The Contractor acknowledges that it has taken steps reasonably necessary to ascertain the nature and location of the work, and that it has investigated and satisfied itself as to the general and local conditions which can affect the work or its costs, including but not limited to (1) conditions bearing upon transportation, disposal, handling, and storage of materials; (2) the availability of labor, water, electric power, and roads; (3) uncertainties of weather, river stages, tides, or similar physical conditions at the site; (4) the conformation and conditions of the ground; and (5) the character of equipment and facilities needed preliminary to and during work performance. The Contractor also acknowledges that it has 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 site, including all exploratory work done by the Government, as well as from drawings and specifications made a part of this contract. Any failure of the Contractor to take the actions described and acknowledged in this paragraph will not relieve the Contractor from responsibility for estimating properly the difficulty and cost of successfully performing the work, or for proceeding to successfully perform the work without additional expense to the Government (FAR 1984). This clause is relevant to the DSC clause, because if the contractor discovered the condition through a reasonable inspection then it cannot use the DSC clause to recover (Loulakis et al. 1995). In essence, a contractor cannot be allowed to claim that it was misled by the existing conditions if it could have learned the status of the conditions through a reasonable inspection (Loulakis et al. 1995). The level of inspection required of a contractor is not excessively burdensome, and a contractor is not required to discover latent conditions that require more time or exper- tise than a reasonable contractor would have (Loulakis et al. 1995). In addition, there is ample case law that even if a in the tropics) (Kelleher 2009). However, it is clear that the burden for proving a Type 2 DSC is more substantial than for a Type 1 DSC. Proof of a Type 1 DSC is based on relatively objective information (i.e., the contract), whereas proof of a Type 2 DSC is based on subjective criteria (i.e., unknown and unusual conditions) (Loulakis et al. 1995). The key to recovery for a Type 2 DSC is to evaluate the contractor’s actual and constructive knowledge of working conditions in the area (Kelleher 2009). For example, aware- ness of a condition at the site that is common knowledge to other contractors working in the area, and thus reasonably ascertainable by inquiry, may be attributed to the contractor (Kelleher 2009). Some contractors have been able to recover on Type 2 claims by establishing unexpected quantities of material at the site or more vegetation than anticipated (Lou- lakis et al. 1995). The following are other examples of Type 2 DSCs: • Hard clay. A site preparation contractor encountered an unusual amount of clay material during its attempt to install sand drains needed for a bridge replace- ment project. The court in Sutton Corp. v. Metro Dist. Comm’n, 667 N.E.2d 838, 842 (Mass. 1996), held that the subsurface conditions encountered by the con- tractor differed substantially from those ordinarily encountered in the installation of sand drains using the methods specified in the contract (Kelleher 2009). • Subsurface water. A water table was found to be much higher than could have been reasonably anticipated. The court in Loftis v. United States, 110 Ct. Cl. 551 (1948) found this to be a Type 2 DSC, as it concluded that dry and stable subsurface conditions were reason- ably anticipated, even though they were not indicated in the contract (Kelleher 2009). • Buried pipe and debris. While installing an under- ground electrical conduit, a contractor encountered asphalt, concrete, rebar, and other debris that damaged its directional drilling equipment on 19 separate occa- sions. Because the unanticipated subsurface materials differed considerably from the clay and occasional river rock common in the area, the board of contract appeals, in Parker Excavating, Inc., ASBCA No. 54637, 06-1 BCA ¶ 33,217 (2006), concluded that the contractor encountered a Type 2 DSC (Kelleher 2009). Type 2 DSCs may also be alleged when material at the site behaves differently than expected. Thus, even though clay was expected to be encountered at a site, percolating water caused the clay to behave in an unusual, erratic fash- ion with an unexpected tendency to slide, and a court found that there was a DSC (Kelleher 2009). Similarly, the unex- pected shrinkage of soil, which materially increased the number of cubic yards of earth in a dam, was an unexpected property of the soil that constituted a Type 2 DSC (Kelleher 2009). Another example of a successful Type 2 DSC claim

12 clause stating that the contractor’s failure to become familiar with the prevailing work conditions would not relieve the contractor from responsibility for performing work at no additional cost to the owner. The court held that reliance on the logs was not reasonable because it did not take into consideration the clear disclaimer language in the contract (Loulakis et al. 1995). Another important case is Millgard Corp. v. McKee/ Mays, 49 F.3d 1070 (5th Cir. 1995), where the court rejected a contractor’s DSC claim based on technical defenses. The court enforced a disclaimer that stated that the geotechni- cal report was (1) for the bidders’ information only; (2) not a warranty of subsurface conditions and therefore took no responsibility for the accuracy, true location, and extent of soil tests prepared by others; and (3) not a part of the con- tract documents. In addition to enforcing the disclaimer, the court noted that because the geotechnical report was not a part of the contract documents, the contractor could not use it to support a Type 1 DSC claim, as its data would not form contractual “indications” of expected site conditions. Add- ing to the contractor’s problems was that the instructions to bidders contained a clause that the bidders were expected to perform their own independent site investigation (Loulakis et al. 1995). Compliance with Notice Requirements The final general obstacle to recovery is the notice portion of the DSC clause, which requires that the contractor alert the owner to the existence of the alleged DSC, giving the owner an opportunity to evaluate the conditions before they are disturbed. Depending on state law, the failure to do so may preclude a contractor from recovering damages caused by a differing site condition. For example, a court decision arising out of the Big Dig in Boston, Earth Tech. Env’t and Infrastructure, Inc. v. Perini/ Kiewit/Cashman, 2004 WL 2341397 (Mass Supp. 2004), held that a soil excavator’s notice to the general contractor of unexpected levels of contaminated clay 4 years after the condition was discovered was neither prompt nor before the condition was disturbed, as specifically required by the con- tract. The court held that the unexcused failure of the excava- tor to comply with the contractor’s notice provisions forever barred the otherwise valid DSC claim (Kelleher 2009). Cer- tain states, such as Virginia, require strict compliance with contractual notice provisions and will not waive them under any circumstances, even if there was no prejudice to the owner by the contractor’s failure to give notice. In some states, the courts may excuse the lack of strict compliance if there is actual knowledge of the condition by the owner or its agent, or if the owner suffers no prejudice from the contractor’s failure to give written notice. For exam- ple, in Ronald Adams Contractor, Inc. v. Mississippi Trans- contractor has not done a site investigation, it still has the ability to make a claim under the DSC clause if a reasonable site investigation would not have disclosed the conditions (Loulakis et al. 1995). Exculpatory Clauses Another potential obstacle for a contractor claiming under the DSC clause are broad exculpatory clauses disclaiming liabil- ity for the accuracy of plans, specifications, borings, and other subsurface data. An example of such a clause follows: Information, data, and representations contained in the contract documents pertaining to the conditions at the site, including subsurface conditions, are for information only and are not warranted or represented in any manner to accurately show the conditions at the site of the work. The Contractor agrees that he shall make no claims for damages, additional compensation or extension of time against the Owner because of encountering actual conditions in the course of the work which vary or differ from conditions or information contained in the contract documents. All risks of differing subsurface conditions shall be borne solely by the Contractor (Kelleher, 2009). Many courts have held that these clauses do not have the sweeping effect the drafter of the clause may have desired. This is particularly true when the exculpatory language is broad and in direct contradiction to the DSC clause (Lou- lakis et al. 1995). For example, in Woodcrest Construction Co. v. United States, 408 F.2d 406 (Ct. Cl. 1969), the United States Court of Claims allowed a contractor to recover under the DSC clause despite the extremely broad exculpatory pro- visions in the contract. The court stated, The effect of an actual representation is to make the statement of the Government binding upon it, despite exculpatory clauses which do not guarantee the accuracy of a description. …Here, although there is no (express) statement which can be made binding upon the Government, there was in effect a description of the site, upon which plaintiff had a right to rely, and by which it was misled. Nor does the exculpatory clause in the instant case absolve the Government, since broad exculpatory clauses … 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 (citing Felhaber Corp. v. United States, 151 F. Supp. 817, 825 (Ct. Cl.)). Despite the traditional reluctance of the courts and boards to enforce disclaimer language, and the strong policy inher- ent in the DSC clause, several decisions have enforced cer- tain disclaimers. The owner in Frontier Foundations, Inc. v. Layton Con- struction Co., 818 P.2d 1040 (Utah 1991) provided boring logs from a representative area near the site but expressly limited their use by stating that the logs were not part of the contract documents and were not a warranty of subsur- face conditions. The contract also included a site inspection

13 portation Commission, 777 So. 2d 649 (Mississippi 2000), the DSC clause in a highway improvement contract placed an equal burden on the contractor and the DOT to discover and notify the other of unforeseen conditions. As a result, the court excused the contractor’s failure to give formal notice of unsuitable soil conditions, concluding that the DOT’s actual knowledge of the poor conditions made it pointless to require the contractor to give notice of those same conditions (Kelle- her 2009). Likewise, in Weber Construction Inc. v. County of Spokane, 98 P.3d 60 (Wash. Ct. App. 2004), the court held that a county waived strict compliance with the contractual notice terms by failing to respond to a road contractor’s repeated requests for guidance on the disposal of boulders that were unsuitable for use as fill (Kelleher 2009). DIFFERING SITE CONDITIONS AND THE DESIGN-BUILD PROCESS A host of unique issues are associated with the investiga- tion and liability for site conditions under a project delivered through the DB process. Depending on when the design- builder is retained, the design-builder may have significant responsibility for predesign site evaluation and may be responsible for developing the geotechnical program. This responsibility, coupled with the fact that the design-builder develops the design and drafts the construction documents, mandates that the parties consider which site condition risks the owner retains and which will be transferred (Loulakis and Shean 1996). Authors on this topic have suggested many approaches, including the following: One way to address site condition risks in Design-Build contracting is for the Owner to establish during the development of its concept documents and design criteria a listing of geotechnical assumptions based upon either a preliminary site exploration program or information from previous building programs. This information is then considered a baseline for the Design-Builder to rely on that, if incorrect, triggers the application of the Differing Site Conditions clause. Alternatively, the Owner and the Design-Builder can agree upon an investigation program that will be used as the baseline for differing site conditions claim (Loulakis and Shean 1996). This “baseline” approach has been used extensively on tunneling projects and is typically included through the use of GBRs. This was undertaken on the Tren Urbano project in Puerto Rico, and established a mechanism for the parties to address the design-builder’s responsibility for subsidence claims and damages (Essex 2007; Hatem 2011). Several agencies have adopted creative contractual approaches to handling site condition risk on DB projects. Virginia DOT (VDOT) uses a Scope Validation process, whereby the design-builder is given a period of time after contract award to determine if there are any inconsistencies or defects in the Contract Documents that should be cor- rected. This is intended to include investigation of site con- ditions as well as designs proffered by VDOT in the RFP documents. The purpose of this approach is to address an issue that has long plagued DB contracts: can the owner shift the risk of errors in its RFP documents to the design-builder? Most courts that have considered this issue have rejected the notion of shifting these risks to the design-builder based on the Spearin doctrine, in which the owner implicitly warrants the sufficiency of its bidding documents (Mitchell 1999; Cushman and Loulakis 2001). The Scope Validation pro- cess is a way of handling this directly. A recent version of VDOT’s clause reads as follows: 2.2.1 Scope Validation Period. The term ‘Scope Validation Period’ is the period of time that begins on the Date of Commencement and extends for the number of days listed in Exhibit 1. During the Scope Validation Period, Design-Builder shall thoroughly review and compare all of the then-existing Contract Documents, including without limitation the RFP Documents and the Proposal, to verify and validate Design-Builder’s proposed design concept and identify any defects, errors, or inconsistencies in the RFP Documents that affect Design-Builder’s ability to complete its proposed design concept within the Contract Price and/or Contract Time(s) (collectively referred to as ‘Scope Issues’). The term ‘Scope Issue’ shall not be deemed to include items that Design-Builder should have reasonably discovered prior to the Agreement Date. 2.2.2 Scope Validation Period for Non-Accessible Areas of the Site. The Parties recognize that Design- Builder may be unable to conduct the additional geotechnical evaluations contemplated by Section 4.3.2 below because it will not have access to certain areas of the Site within the Scope Validation Period set forth in Section 2.2.1 above. Design-Builder shall notify Department at the meeting set forth in Section 2.1.2 of all such non-accessible areas and the dates upon which such areas are expected to become accessible. If Department agrees that such areas are non-accessible, then, for the limited purpose of determining Scope Issues that directly arise from geotechnical evaluations for such areas, the term ‘Scope Validation Period’ shall be deemed to be the thirty (30) day period after the date the specified area becomes accessible for purposes of conducting the geotechnical evaluation. 2.2.3 Submission Requirements for Scope Issues. If Design-Builder intends to seek relief for a Scope Issue, it shall promptly, but in no event later than the expiration of the Scope Validation Period, notify Department in writing of the existence of such Scope Issue. Within twenty-one (21) days of such notice, Design-Builder shall provide Department with documentation that sets forth, among other things: (a) the assumptions that Design-Builder made during the preparation of its proposal that form the basis for its allegation, along with documentation verifying that it made such assumptions in developing its proposal; (b) an explanation of the defect, error or inconsistency in the RFP Documents that Design-Builder could not have reasonably identified prior to the Agreement Date: and (c) the specific impact that the alleged Scope Issue has had on Design-Builder’s price or time to perform the Work. Within a reasonable time after Department’s receipt of the documentation described in the preceding sentence, the Parties shall promptly meet and confer to discuss the resolution of such

14 existence of a DSC. The first is a Virginia case involving a claim by a contractor against VDOT, with the case analyz- ing the contractor’s failure to meet the notice requirements of the contract and an alleged Type 2 DSC. The second is a Colorado case on a federal project that considered several defenses raised by the owner against the contractor’s DSC claim. The third case involved a federal DB project where the design-builder claimed that the government provided incorrect information about existing culverts, which caused the design-builder to incur additional design efforts. Virginia DOT v. AMEC Civil LLC Commonwealth of Virginia v. AMEC Civil, LLC, 699 SE2d 499 (2010) is one of the most significant construction law cases addressed by the Virginia Supreme Court in many years. The litigation involved a claim by AMEC Civil, LLC (AMEC) against VDOT on a $73 million contract for the construction of the Route 58 Clarksville Bypass in Meck- lenburg County that was delayed by more than 20 months. Following completion of the project, AMEC submitted a $25 million claim to VDOT for a number of individual claim items related to differing site conditions, defective design, delay, and acceleration. VDOT denied the claim and AMEC ultimately filed suit. One of the most significant issues raised in the court proceedings was whether AMEC had given proper written notice of its claims. The trial court rejected VDOT’s argu- ment that AMEC had failed to literally comply with the con- tract and Virginia claim statute. It ruled that actual notice was an appropriate substitute for written notice and that, in any event, VDOT had received written notice of many of AMEC’s claims. As a result, the trial court rendered a ver- dict for AMEC of nearly $22 million. VDOT appealed to the Virginia Court of Appeals, which reversed the trial court’s decision on a number of claims, including claims subject to VDOT’s lack of notice defense. The Appeals Court held that a contractor is required to give timely written notice to VDOT of claims and that AMEC had not done so for most of its claims. This ruling resulted in a substantial reduction in the award to AMEC, which caused AMEC to appeal to the Virginia Supreme Court. The Supreme Court agreed with the Court of Appeals that written notice is required, and addressed the requirements for written notice. First, the Court noted that the Virginia Code specifies that written notice “must announce the contractor’s ‘intention to file [a] claim.’” The statute also requires that such notice be given either “at the time of the occurrence” of the claim or at the “beginning of the work upon which the claim…is based.” The court said, “[a]t a minimum, to satisfy the written notice requirement, the written document at issue must give notice of the contractor’s intent to file its claims and must be ‘given to [VDOT]’ by letter or equivalent communi- Scope Issues. If Department agrees that Design-Builder has identified a valid Scope Issue that materially impacts Design-Builder’s price or time to perform the Work, a Work Order shall be issued in accordance with Article 9 hereof. If Department disagrees that Design-Builder has identified a valid Scope Issue that materially impacts Design-Builder’s price or time to perform the Work, then Design-Builder’s recourse shall be as set forth in Article 10. Notwithstanding anything to the contrary in the Contract Documents or as a matter of law, Design- Builder shall have the burden of proving that the alleged Scope Issue could not have been reasonably identified prior to the Agreement Date and that such Scope Issue materially impacts its price or time to perform the Work. 2.2.4 Design-Builder’s Assumption of Risk of Scope Issues. The Parties acknowledge that the purpose of the Scope Validation Period is to enable Design-Builder to identify those Scope Issues that could not reasonably be identified prior to the Agreement Date. By executing this Agreement, Design-Builder acknowledges that the Scope Validation Period is a reasonable time to enable Design- Builder to identify Scope Issues that will materially impact Design-Builder’s price or time to perform the Work. After the expiration of the Scope Validation Period, with the sole exception of those Scope Issues identified during the Scope Validation Period and subject to valid requests for Work Orders in accordance with Section 2.2.3 above, the Parties agree as follows: 1. Design-Builder shall assume and accept all risks, costs, and responsibilities of any Scope Issue arising from or relating to the Contract Documents, including but not limited to conflicts within or between the RFP Documents and Proposal; 2. Design-Builder shall be deemed to have expressly warranted that the Contract Documents existing as of the end of the Scope Validation Period are sufficient to enable Design-Builder to complete the design and construction of the Project without any increase in the Contract Price or extension to the Contract Time(s); and 3. Department expressly disclaims any responsibility for, and Design-Builder expressly waives its right to seek any increase in the Contract Price or extension to the Contract Time(s) for, any Scope Issue associated with any of the Contract Documents, including but not limited to the RFP Documents (VDOT 2010). Another contractual approach taken by owners on DB projects has been to develop contingencies and allowances for certain potential differing site conditions. For example, the Southern Nevada Water Authority concluded that the risk of potential water intrusion on its Lake Mead Intake #3 DB project, a 3-mile-deep tunnel, was so significant that it was far better for it to use a grouting allowance and assume the risk of grouting than to have the design-builder absorb this risk. RECENT CASES ADDRESSING DIFFERING SITE CONDITION CLAIMS Each year, a variety of cases discuss the application of the DSC clause. The following three cases are examples of the type of issues that are raised when an owner contests the

15 event and therefore an act of God, which did not qualify as a DSC. The court noted that Kerr Lake is a dam-controlled res- ervoir with its water level managed by the Corps of Engineers to prevent downstream flooding on the Roanoke River. The sustained elevated water levels were not a natural event, as they resulted from the Corps of Engineers’ exercise of its con- trol over the dam, which dictated the water level of Kerr Lake. This was not sufficient to bar this event as a Type 2 DSC. URS Group, Inc. v. Tetra Tech FW, Inc. URS Group, Inc. v. Tetra Tech FW, Inc., 2008 WL 323767 (Colo.App.) involved a differing site condition dispute on a remediation project. Tetra Tech FW, Inc. (TTFW) entered into a contract with the U.S. Army to serve as program man- agement contractor on an arsenal remediation project at the Rocky Mountain Arsenal. TTFW issued an RFP seeking bids for soil remediation and foundation demolition work on the project. URS Group, Inc. (URS) submitted a bid for $10,857,570 and was awarded the subcontract for the work. URS began demolition, but quickly encountered problems removing the foundations. URS argued that the concrete foundation footings did not conform to the information con- tained in the RFP, and submitted a claim to TTFW under the contract’s DSC clause, seeking a price adjustment of approximately $9 million. The trial court ruled in favor of TTFW, finding that even though TTFW possessed informa- tion regarding subsurface conditions on the project that it did not disclose to bidders, URS had entered into a fixed- price contract and thereby assumed the risk of encountering unknown subsurface conditions. URS appealed to the Colorado Court of Appeals, which overturned the trial court’s ruling because it ignored the fundamental risk-shifting allocation of a DSC clause. TTFW argued that because URS warranted its familiar- ity with the project site and the “physical and other condi- tions, including hazardous substances, materials, agents or vapors, both surface and subsurface…,” the warranty effec- tively overrode the DSC clause. The appeals court rejected this argument, noting that such an interpretation would improperly render the DSC clause meaningless. Indeed, the court reasoned that looking to other clauses in the con- tract to shift liability to investigate site conditions back to the subcontractor, as TTFW proposed, would frustrate the very purpose of the DSC provision. TTFW also advanced several other “assumption of risk” theories based on URS’s conduct, but none were successful. Namely, TTFW argued that irrespective of the DSC provision, URS assumed the DSC risk through its own conduct in establishing a $103,000 contingency in its bid and submitting a lump- sum bid when it knew it did not have complete information. TTFW also argued that as-built drawings of the existing foundations were available at the Rocky Mountain Arsenal library and that URS’s failure to review this information barred its recovery. cation directed to VDOT at the appropriate time.” After ana- lyzing all of AMEC’s claims that were challenged by VDOT for lack of notice, the Supreme Court largely agreed with the Court of Appeals, which resulted in final judgment for VDOT on a substantial portion of the initial verdict for AMEC. AMEC’s differing site conditions claim, which was not subject to a notice defense, was based on AMEC’s construc- tion of Bridge 616 across Kerr Lake, a dam-controlled res- ervoir managed by the U.S. Army Corps of Engineers. The Corps regulates Kerr Lake’s water level, usually maintaining a “normal level” of 300 ft. When the water level rises to 305 ft, the Corps begins releasing water at a certain rate and increases that rate as the water continues to rise. The lake water level was critical to the construction of Bridge 616 because AMEC could not access the lake and complete the columns that hold up the bridge when the water level was too high. The contract contemplated routine fluctuations in the water level of Kerr Lake and AMEC planned to do other tasks during the periods when the lake water level fluctu- ated to a higher level. However, in 2003, the lake water level remained high for 6 months, thereby substantially delaying AMEC’s work, primarily the construction of Bridge 616. VDOT granted a 148-day time extension because of “unusual period of high water levels,” but did not award AMEC com- pensation for the delays. AMEC argued, among other things, that this was a Type 2 DSC and that it was entitled to both time and money. VDOT defended on the grounds that sus- tained water levels could not be a Type 2 DSC because they were a known, predictable condition, and AMEC knew that there had previously been sustained periods of high water. The Supreme Court agreed with AMEC. It found ample evidence from both parties that the sustained elevated water levels were of an “unusual duration,” presenting an “unusual circumstance,” and not ordinarily encountered as inherent in the construction work provided for in the contract. More- over, the unknown physical condition was not one that could be reasonably anticipated by AMEC from its study of the contract, inspection of the site, or general experience as a contractor in the area. The risk of sustained high water in Kerr Lake was unusual, and not one that AMEC was charged with the responsibility of including in its bid. AMEC properly incorporated only the costs associated with routine fluctuations after consulting the U.S. Army Corps’ website and reviewing historical water level information. VDOT benefited from more accurate bidding, without inflation for a risk that might not have eventuated, but now must bear the costs associated with a risk that came to fruition and adversely impacted AMEC’s ability to complete construction as scheduled (Commonwealth of Virginia v. AMEC Civil, LLC, 699 SE2d 499 2010). The Supreme Court also disagreed with VDOT’s argu- ment that the sustained elevated water levels were a natural

16 The appeals court was not persuaded by any of these arguments. It found that including a small contingency in a bid does not preclude a contractor from making a DSC claim when the subsurface conditions differ materially from those indicated in the contract. Moreover, the court ruled that the DSC clause at issue expressly permitted URS to enter into a fixed-price contract that relied on the information pro- vided to it, and that URS was not required to go outside the RFP information provided. The court noted that the as-built drawings at the library were not referenced or included in the RFP, and that the RFP designated other drawings and speci- fications and expressly instructed bidders to rely on these drawings and specifications to perform the work. Appeal of Lovering-Johnson, Inc. In Appeal of Lovering-Johnson, Inc. (2005), the Armed Services Board of Contract Appeals (Board) largely denied the design-builder’s claim for more than $6.8 million and 267 days of alleged delays. The project involved a housing office and community center, 140 family housing units, and associated site improvements at a former Naval Air Sta- tion in Glenview, Illinois. Lovering-Johnson, Inc. (LJI), as design-builder, was required to complete all phases of the work within 915 calendar days, by February 1998. The par- ties determined that LJI’s design would be reviewed by the Navy in increments at 40% complete and 80% complete. LJI originally planned to complete all design work from October through December 1995, with construction to be completed within 18 months. Owing to a number of issues that arose during the design phase, however, LJI did not submit its final design drawings to the Navy until February 1997. In May 2002, more than 4 years after substantial completion of all phases, LJI submitted its claim, which stemmed primarily from the pre-construction design period. The contracting officer denied the claim and LJI appealed to the Board. On appeal, one of LJI’s main theories of recovery was that it was required to perform “unfunded preliminary design studies.” For instance, LJI argued that the government required it to perform extra design work on the storm drainage system. Under the per- formance specifications, LJI was required to design a sys- tem capable of handling a 10-year storm and runoff from adjacent properties. In preparing its design, LJI relied on solicitation drawings by the Navy that depicted various (smaller) sized drainage pipes. LJI contended that because of an alleged DSC of high flow rates and large culverts, it ultimately had to use wider pipes in its design than shown on the initial drawings, and as such, it was entitled to damages. The Board rejected LJI’s argument on several grounds, stating that— Fundamentally, [LJI] misconstrues the extent of its design responsibility. . .[its] differing site conditions (DSC) allegations are premised on the view that the Navy had already done the storm drainage design work for it. According to the Board, an adequate site investigation would have revealed the presence of the twin 60-in. culverts and potentially “huge flows” from off-site water sources. In addi- tion, the Board believed that LJI’s reliance on the drawings was misplaced given that the owner’s solicitation drawings were not detailed and the pipe systems identified were ambiguous. Most important, the Board concluded that the Navy’s design was not “final” and that its package expressly identified that any con- cepts and information contained therein would have to be veri- fied before LJI developed the “final” design. LJI, not the Navy, was responsible for designing the drainage system. Aside from the DSC claim, LJI asserted that the Navy took too long to review its design documents. LJI asserted that in a DB setting, the government’s review of the 40% and 80% design should have been a cursory, “over-the-shoulder” analy- sis of its design. Instead, LJI argued, the Navy approached the design review period as if the contract were a DBB delivery system. In denying LJI’s claims, the Board issued a rather scathing rebuke of LJI and found its design documentation over the course of the project to be “incomplete, submitted piecemeal, error-filled, replete with variations from contrac- tual requirements and otherwise inadequate.” Ultimately, the Board concluded that LJI offered no evidence that the Navy’s comments, disapprovals, or itemization of problems during the design review process were unwarranted, lacked merit, or otherwise caused LJI to perform extra work. CONTRACTOR’S PERSPECTIVE During the interviews, each design-builder was asked to com- ment on the impact of the DSC with respect to geotechnical uncertainty. There was nearly unanimous agreement (10 of 11) that interpreting the agency’s DSC was “a challenge on all DB projects.” The issue was not in understanding the clause’s legal verbiage, but rather in determining how the agency would actu- ally apply the clause to identify what constitutes a DSC. One interviewee called it a “trigger point.” The one interviewee who responded that this issue was a challenge on only “some” rather than “all” DB projects referred to the Washington State DOT (WSDOT) practice of setting a monetary ceiling to the contractor’s DSC risk and directly stating that WSDOT owns the risk for everything above that amount. Chapter five pro- vides details on this practice. This relates to the previously cited trigger point comment of another interviewee. Hence, the outcome is to underline the need for the agency to be as clear as possible in articulating how it intends to apply its DSC clause on a project-by-project basis, and the WSDOT process appears to hold promise as a mechanism to quantify the geotechnical risk-sharing arrangement in each project.

17 CONCLUSIONS The following conclusions can be drawn from this analysis: • The design-builder is entitled to rely on the geotechni- cal information contained in the DB RFP, and the DSC furnishes a mechanism under which the design-builder can claim additional costs and time if the RFP informa- tion does not reasonably match the actual conditions. • To be successful in a DSC claim, the design-builder must rigorously adhere to the notice conditions con- tained in DSC clause.