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E-1 Appendix E: Detailed Results of the Geotechnical Legal Review The consequences of finding unexpected geotechnical conditions can be devastating to any construction project. As a result, it is common for the affected parties to argue that someone else should bear the financial impact of these conditions. Contractors often argue that the owner provided it with information that was wrong or misleading, or that it would be unfair for the contractor to bear these risks. Owners may argue that the contract shifts the risk of unexpected site conditions to the contractor, or that the contractor did not properly investigate the site to assess conditions in formulating its bid. Differing Site Conditions The construction law landscape is littered with hundreds of published opinions from federal and state courts around the country that address geotechnical disputes on specific projects. Most of these disputes arise out of interpreting what is commonly known as the âDiffering Site Conditionsâ (DSC) clause of the contract. The DSC clause was first introduced by the federal government in 1927, when it was known as the âChanged Conditionsâ clause. This clause was intended to eliminate the contingency factors in bidding, and intended to place the risk of unexpected site conditions on the federal government (Pronchick 1990). The federal governmentâs DSC clause is found in Federal Acquisition Regulation (FAR) Â§52.236- 2: (a) The contractor shall promptly, and before such conditions are disturbed, give a written notice to the Contracting Officer of: (1) subsurface or latent physical conditions at the site which differ materially from those indicated in this contract, or (2) unknown physical conditions at the site of an unusual nature, which differ materially from those ordinarily encountered and generally recognized as inhering in work of the character provided for in this contract (emphasis added).
E-2 (b) The Contracting Officer shall investigate the site conditions after receiving the written notice. If the conditions do materially so differ and cause an increase or decrease in the Contractorâs cost of, or of the time required for, performing any part of the work under this contract, whether or not changed as a result of the conditions, an equitable adjustment shall be made under this clause and the contract modified in writing accordingly. This clause has been the model for DSC clauses used by state and local governments. It has likewise been used in industry standard form contracts published by, among others, the American Institute of Architects (AIA), the Design-Build Institute of America (DBIA), and the Engineers Joint Contract Documents Committee (EJCDC). Substantial literature discusses the policy and benefits of the DSC clause. One leading case is Foster Construction v. United States,1 where the court provided a clear explanation of the DSC clauseâs purpose: 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.2 At this writing, the Foster case is over 45 years old, but (as will be seen below) continues to be cited by courts as the explanation for why DSC clauses are in contracts for construction projects. The clause gives the owner the benefit of paying only for the actual costs incurred when 1 435 F.2d 873 (1970). 2 Id. at 887.
E-3 the differing site condition actually arises â as opposed to the unliquidated contingency for a problem that may never surface. It also helps to avoid the acrimony that can occur in the absence of such a clause, as the parties fight over who bears the risk of unexpected site conditions. Following the lead of the federal government, most other public and private owners use a DSC clause for the same reasons as expressed in Foster. Notwithstanding that some type of DSC clause is included in most contracts for construction projects, and the recognition of the benefits and purpose of such clauses, there has been a significant amount of litigation over what constitutes a DSC and whether the contractor actually has the right to recover for its cost and time overruns. This has provided industry with clear guidance of the principles associated with contractor rights and obstacles to recovering on DSC claims. Importantly, most of these principles are not dependent on the type of project delivery system used on the project. Differing Site Conditions Principles Arising from Design-Bid-Build Projects This section will discuss the legal aspects of DSC claims. It will first review the body of DSC case law arising from design-bid-build projects, based on over 50 years of case precedent. It will then review some of the legal issues and case law that has arisen on design-build project relative to geotechnical issues, including some of the reported decisions addressing DSC claims. As evident from a reading of the federal DSC clause, there are two types of differing site conditions â commonly known as âType 1â and âType 2â conditions. A Type 1 DSC is triggered by a physical condition differing materially from conditions indicated in the contract documents. By contrast, a Type 2 DSC is independent from what is contained in the contract documents, and is defined as a physical condition of an unknown and unusual nature which one would not reasonably expect to encounter. The sections below will address some of the issues that commonly
E-4 arise in the case law with respect to these two types of DSCs. The cases that are cited below were all delivered through a design-bid-build delivery system, although, their principles are equally applicable to design-build projects. Common Elements of DSCs While Type 1 and Type 2 conditions have different standards and are intended to cover different situations, they do share common elements. They are both required to be âphysical conditionsâ that are âat the siteâ of the work. Moreover, these conditions must âdiffer materiallyâ from those baseline conditions either indicated in the contract documents (for Type 1) or which one would normally expect to encounter (for Type 2). The âphysical conditionâ requirement is generally easy to satisfy. The most common conditions have related to soil characteristics, presence of rocks in different qualities or quantities, subsurface water and a variety of artificial and manmade conditions, such as pipelines, artifacts, debris, etc. In essence, the type of condition which qualifies for recovery under the clause is virtually wide-open. However, some contractors have tried to expand the scope of the DSC clause to include physical forces that increase the contractorâs efforts, such as the general unavailability of a work site, material and labor cost increases, and political, legal or governmental conditions. Courts have refused to consider these to be DSCs (Loulakis et al. 1996). The âat the siteâ requirement suggests that the project location is the only place where a DSC can occur. This raises the question, however, of how areas that are technically âoff-site,â such as borrow pits, quarries and access roads, are to be treated. There have been only a few cases addressing this issue, which cases suggest that such off-site areas can be subject to a DSC remedy
E-5 if their use was so integral to a contractorâs performance that the owner should be responsible for the conditions.3 A case which allowed recovery under a DSC theory was Kaiser Indus. Corp. v. U.S.4, where the government owned the only two quarries in the area and made them available without charge to the contractor as approved sources for the type of rock suitable for the project. The contract cautioned that other quarry sources could not be used without the Contracting Officer's permission. The contractor selected one of the two quarries but was forced to abandon operations because it encountered over 60% waste and found it increasingly difficult to locate suitable rock. Once the contractor moved to the other âapprovedâ quarry it easily obtained the requisite quantity and quality of rock, experiencing only a waste factor of 10%. A different result was reached in L.G. Everist Inc. v. U.S.,5 where the court concluded that a quarry was not considered âat the siteâ and denied a DSC recovery. The quarry was not identified or mentioned in the contract, and under the contract the contractor was made solely responsible for the acquisition of rip rap required for the project. Since the quarry supplied a sufficient quantity and quality of rock, the contractor bore the risk of the higher cost than it anticipated. The âdiffer materiallyâ requirement has had little case law discussion, although it is recognized as a major factual hurdle for a claimant to overcome. The mere fact that a condition differs from the baseline is not enough to satisfy the test â there must be objective evidence to demonstrate that there is a greater amount of work than one would normally have expected, or that a different method of performance was required. When the contractor must make increased effort, 3 Id. 4 340 F.2d 322 (Ct. Cl. 1965). 5 231 Ct. Cl. 1013 (1982).
E-6 and incur additional costs in dealing with the unforeseen site condition, it can generally show a material difference and obtain an equitable adjustment (Loulakis et al. 1996). Unique Type 1 Requirements To establish entitlement for a Type 1 claim, the contractor must show that the physical conditions actually encountered differed materially from the conditions indicated in the contract documents. Because the type of conditions represented in contract documents can be limitless, Type 1 DSCs have been found in myriad circumstances where the conditions were materially different than indicated in the contract documents, including natural conditions (e.g., rock, water and soil) and manmade conditions (e.g., unforeseen pipes or in different depths or locations). There are also numerous cases finding Type 1 DSCs when soil conditions behaved differently than indicated by the contract documents â such as soil that was more difficult to compact than indicated by the contractâs bearing ratios.6 The predicate for a Type 1 DSC is that the claim be based on âindications in the contract documents.â The primary documents that form the âcontract documentsâ are geotechnical reports, bidding documents, and contract drawings and specifications. One case even found a report referenced in a note on a contract drawing to be sufficient as a baseline for a DSC claim (Loulakis et al. 1996). In an attempt to override the DSC clause, some owners provide contractors with information, but state that such information is excluded from the contract documents. This occurred in P.J. Maffei Bldg. & Wrecking Corp. v. U.S.,7 where the solicitation documents stated that certain drawings were furnished âfor information only and will not be a part of the contract documents.â The U.S. Court of Appeals for the Federal Circuit held that the contractor assumed the risk that such information was inaccurate when it based its bid on data contained in the 6 Id. 7 732 F. 2d 913 (Fed Cir. 1984).
E-7 drawings. Notwithstanding this result, courts have generally taken a very liberal view of what constitutes a âcontract document,â as they will look at the purpose of the DSC clause (as articulated in the Foster decision) and assess whether the owner should have expected that the contractor would use the data in developing its bid (Loulakis et al. 1996). âIndicationsâ in the contract documents are often explicit â such as geotechnical reports that state affirmatively âno rock is expected.â However, many of the cases discuss non-explicit âindications,â and confirm that all that is required to prove a Type 1 DSC is enough of an indication in the contract documents for a bidder to form a reasonable understanding of what site conditions should be expected. For example, DSCs were allowed when: ï· The contractor encountered french drains instead of solid pipes. It submitted evidence that industry practice was to describe and label perforated french drains, and that the ownerâs failure to do so in the plans constituted an implied representation that the pipe was solid. ï· The contractor encountered wet, instead of dry, conditions. It assumed it would encounter dry conditions during excavation, because the contract required that the concrete be poured in the dry and made no mention of the necessity of a special seal prior to pouring concrete. Contractors also have to prove that that the site conditions they encountered were unforeseeable. In determining this, courts generally look to all the information available to the contractor, as well as to any information that would have been discovered on a reasonable visual inspection of the site. As a result, if the actual site conditions are anticipated based on the contract or information obtained or that could have been obtained during a reasonable site inspection, the contractor will not be able to recover. Actual knowledge that the conditions are other than those
E-8 indicated in the contract documents will also preclude recovery. The standard for determining foreseeability adopts the perspective of the reasonable and prudent contractor.8 Unique Type 2 Requirements Unlike a Type 1 DSC, a Type 2 DSC does not require contractual indications regarding the conditions expected at the site. Rather, a Type 2 DSC deals with situations where the contractor has encountered a physical condition that was unknown or unusual and could not be reasonably anticipated by the contractor from its study of the contract documents, its inspection of the site, and its general experience, if any, in the area of the project. The burden of establishing a Type 2 DSC is more difficult than establishing a Type 1 DSC, since a Type 1 DSC is based upon relatively objective criteria (i.e., contract indications), whereas a Type 2 DSC is based upon subjective criteria (i.e., unknown or unusual conditions). Charles T. Parker Construction Co. v. United States is the case often cited regarding the proof of a Type 2 DSC: A Government construction contractor seeking to establish a âcategory twoâ changed condition is confronted with a heavy burden of proof . . . the Government has elected not to presurvey and represent the subsurface conditions with the result that the claimant must demonstrate that he has encountered something materially different from the âknownâ and the âusual.â This is necessarily a stiffer test because of the wide variety of materials ordinarily encountered when excavating in the earth's crust.9 Courts considering Type 2 DSCs have found entitlement based on the same types of physical conditions found to constitute Type 1 DSCs. Consequently, contractors have recovered for unanticipated rock and stone, unstable soil conditions, artificial debris, and old railroad timbers, 8 Id. 9 193 Ct. Cl. 320, 433 F.2d 771 (1970).
E-9 logs and other foreign matter. They have also recovered when geotechnical properties behave differently than expected â such as rock not fracturing as expected, or soil not compacting as expected. The key is for the contractor to show what the norm for the area is and that other contractors have not encountered such material in similar work (Loulakis et al. 1996). Notice of Claim All DSC clauses require that the contractor provide some form of notice to the owner of the DSC upon discovery of the condition. The notice provision is intended to provide the owner an opportunity to view and/or correct the situation before conditions are disturbed or to find a viable alternative. Although failure to comply with the notice provisions does not always bar a contractorâs claim as a matter of law, it can create an impediment in some states that have adopted a strict philosophy of notice (Loulakis et al. 1996). Site Inspection Most construction contracts require the contractor to investigate the site before bidding in order to ascertain the projectâs conditions. For example, FAR Â§52-236-3 (the Site Investigation clause) provides: 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
E-10 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. The site investigation clause is relevant to DSC claims because if the contractor should have discovered the condition through a reasonable inspection, then the contractor will be unable to recover. As the court in McCormick Construction Co. v. United States stated: âa contractor who knows or should have known the facts of the conditions at the site is estopped to claim a changed condition. Where he knows or has opportunity to learn the facts, he is unable to prove . . . that he was misled by the contract.â10 The level of investigation required of the contractor in a pre-bid inspection is not excessively burdensome. For a Type 1 claim, the contractor is not required to discover latent conditions that require more time or expertise than that possessed by a reasonable contractor. The contractorâs duty is to make a reasonable visual inspection â there is no duty to obtain information available only to a geological expert. A contractor is not required to resort to expensive or elaborate tests or procedures (Loulakis et al. 1996). 10 18 Cl. Ct. 259, 265 (1989).
E-11 The limited nature of the contractorâs duty to investigate site conditions is consistent with the holding in Foster, where the court found that the duty to investigate the site must be balanced against the right to rely on government provided site information: Faithful execution of the policy requires that the promise in the changed conditions clause not be frustrated by an expansive concept of the duty of bidders to investigate the site. That duty, if not carefully limited, could force bidders to rely on their own investigations, lessen their reliance on logs in the contract and reintroduce the practice sought to be eradicated â the computation of bids on the basis of the biddersâ own investigations, with contingency elements often substituting for investigation.11 Without such a balance, the DSC clause would have no effect, and contractors would be forced once again to include contingencies for site conditions in their bids. The contractor in Foster recovered because the site conditions were not shown in the government logs and could not have been discovered on a visual inspection without the help of technicians or trained geologists (Loulakis et al. 1996). Disclaimers and Exculpatory Clauses It is well recognized that some owners have attempted to escape liability for DSC claims through disclaimers or exculpatory clauses. Generally, these attempts have been unsuccessful â particularly when the exculpatory language is in direct conflict with the purpose and broad language of the DSC clause, which expressly puts the risk of unforeseen conditions on the owner. Given this, most courts have been reluctant to enforce disclaimers (Loulakis et al. 1996). For example, a disclaimer stating simply that the site information is not reliable or guaranteed for accuracy will rarely be successful. As long as the information is part of the contract 11 435 F.2 at 887.
E-12 documents, the contractor generally has a right to reasonably rely on the information. This is particularly the case when an owner provides express indications of the conditions, and the contractor cannot, due to time constraints or denial of access, perform its own investigation to verify the indications and generally ascertain the site conditions. Similarly, a disclaimer will generally not bar recovery when a pre-bid site inspection would have revealed no more accurate information than is contained in the governmentâs documents (Loulakis et al. 1996). Consider Syblon-Reid Co.,12 where the disclaimer stated that the quantities in the contract documents were estimates only, and that each bidder was responsible to make its own determinations as to the volume of material to be removed. The Interior Board of Contract Appeals held that the disclaimer was invalid because it was impossible to estimate the quantity of sediment to be removed accurately. In that situation, it was reasonable for the contractor to base its bid on the express estimate provided by the government. Despite the traditional reluctance of courts to enforce disclaimer language, and the strong policy inherent in the DSC clause, there are several decisions that enforce disclaimers. The owner in Frontier Foundations, Inc. v. Layton Construction. Co,13 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 subsurface conditions. The contract also included a site inspection clause which specifically stated that the contractorâs 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. 12 IBCA No. 1313-11-79, 82-2 BCA (CCH) Â¶16,105 (1982). 13 818 P.2d 1040 (Utah 1991).
E-13 Recovery in Absence of a DSC Clause Some owners have taken the position that despite the benefits of a DSC clause, they would rather shift all of the risk of such conditions to the contractor. In the absence of such a clause, recovery for unforeseen conditions is difficult at best. For example, in Ruby-Collins, Inc. v. City of Charlotte,14 the contractor on a city water main construction project planned to use excavated soil for backfill, based upon the soil data shown in the engineering report included as part of the bidding documents. Because of high moisture content, over 20% of the soil excavated from the trenches was unsuitable for backfill, requiring off-site soil to be used. The court rejected the contractorâs DSC claim on the basis that there was no DSC clause in the contract and that the risk of this problem was shifted to the contractor. Notwithstanding that result, it should be noted that contractors have been successful in recovering costs for the problems of unforeseen conditions even if they do not have a DSC clause in the contract. Common theories of recovery include fraud, misrepresentation and breach of implied warranty. These legal theories, if available based upon the facts of a particular case, are clearly more difficult to prove than recourse to a simple DSC clause. However, the owner remains exposed to liability. An example of a case where the legal theory of misrepresentation was accepted as a potential basis for recovery is City of Columbia v. Paul N. Howard Co.15 In this case, the contractor alleged that it had relied to its detriment on a misrepresentation in the boring logs, which were far different than the actual soil conditions encountered. The contract stated that the boring logs were only for reference and not a part of the contract documents. The Eighth Circuit reversed 14 740 F. Supp. 1159 (W.D. N.C 1990). 15 707 F. 2d 339 (8th Cir. 1983).
E-14 a lower court ruling for the city, concluding that it was a question of fact as to whether the contractor was justified in relying upon the boring logs even with the disclaimer. In Champagne-Webber, Inc. v. City of Fort Lauderdale,16 the documents for construction of a bridge indicated sandy soil conditions throughout the site. The contract did not warrant the soil dataâs accuracy, but it did not disclaim accuracy either. Given this, the court concluded that the data became a representation for which it could be held liable. Consider also PT&L Construction Co. v. New Jersey Department of Transportation,17 where a highway contractor sued the DOT for extra excavation and delay costs incurred after encountering unanticipated subsurface conditions that required almost 1000% the amount of stripping originally called for in the contract. The contractor had shown that the state had superior knowledge obtained prior to bid that soggy soil conditions would make the work more difficult and that this constituted an actionable misrepresentation of site conditions. Geotechnical Liability Issues on Design-Build Projects The reported case law that has arisen to date on design-build projects involving geotechnical issues largely falls into two categories. One category is the treatment of DSC claims. The other category involves disputes in the development of the geotechnical design, and the flexibility that a design-builder has to make design decisions. Each is discussed below. Proving a DSC Claim on Design-Build Projects The DSC case law that has developed on design-build projects to date has largely considered the same issues that exist on design-bid-build projects. The major issues relate to: (a) pre-award information provided by the owner that formed the basis for the design-builderâs 16 519 So. 2d 696 (Fla. Dist. Ct. App. 1988). 17 108 N.J. 539, 531 A. 2d 1330 (1987).
E-15 technical and commercial proposal; (b) the materiality of the differences between this information and the actual site conditions; (c) the notice provided by the design-builder; and (d) the impact of disclaimers in the contract on the contractorâs DSC remedies. All of this presupposes, of course, that there is a DSC clause in the design-build contract. Consider Appeal of CCI, Inc.,18 where the design-builder was not able to prove that its $35 million Type 1 DSC claim was valid. The project involved the design and construction of a pier and seawall in Iraq, and the governmentâs RFP contained some limited information about site conditions. The design-builder argued that it had to develop a different design concept once it determined that the site conditions were materially different from what it expected. In rejecting the claim, the Board of Contract Appeals found, among other things, that the design-builder had: (a) not conducted a reasonable site investigation which would have revealed the type of conditions actually found; (b) failed to reasonably consider the soils reports that were included in the RFP, even though they were âfor information only,â and (c) not demonstrated that the conditions it experienced were âmaterially differentâ from those indicated in the contract documents. The design-builder in Appeal of Nova Group, Inc.19 fared no better on its DSC claims. The $11.5 million contract was for the design and construction of a new open-ocean permanent supply pier with mooring dolphins on San Nicolas Island, California. Nova experienced a variety of alleged DSCs based upon differences in the boring logs and geotechnical reports and actual conditions. According to Nova, this information indicated that: (a) sedimentary bedrock would be encountered; (b) pure clay soil would not be present; (c) shears, faults and fault zones would not be encountered; (d) there would not be severely disturbed bedrock at specific depths; and (e) 18 14-1 BCA P 35546 (A.S.B.C.A.), ASBCA No. 57316, 2014 WL 1168783 (2014). 19 10-2 BCA P 34533 (A.S.B.C.A.), ASBCA No. 55408, 2010 WL 3327870 (2010).
E-16 slaking would not be encountered at any degree that would affect constructability. When actual conditions varied, it affected Novaâs design and constructability, delaying the project and resulting in a claim for over $6 million. The Board examined all of the contract documents to determine what they indicated. While it agreed with some of Novaâs contentions, it specifically noted that there was nothing in the documents that addressed slaking one way or the other. Consequently, it concluded that there could be no Type 1 claim for that issue. While it found that for some of the areas there were material differences between what was indicated and what was actually found (e.g., shears and fault zones), it did not find that these issues caused the damages alleged by Nova. Hence, the entire claim was rejected. The above two cases are representative of how a trier of fact considers DSC claims, whether on a design-build or design-bid-build project. Each decision is almost 30 pages long and demonstrates the fact-intensive nature of the dispute. The decisions recite the Type 1 and Type 2 DSC standards, and then address each element of the claim that something was different from what a reasonable bidder should have expected. The Impact of Design-Builderâs Obligation to Conduct Post-Award Geotechnical Investigations One of the major differences between design-build and design-bid-build is that the ownerâs geotechnical investigation may be limited, with the design-build contract requiring that the design- builder conduct, as part of its design process, a comprehensive geotechnical assessment of the site. Owners will also frequently include broad disclaimers of liability for the geotechnical information furnished by the owner during the procurement process. As a consequence, when a design-builder claims that it encountered a DSC based on the ownerâs geotechnical information, the owner argues that the claim should be denied because: (a) the geotechnical information it provided was
E-17 preliminary, incomplete, and, based on contractual disclaimers, could not be relied upon by the design-builder; and (b) the design-builder had the contractual duty to perform the full geotechnical assessment (Loulakis et al. 2015). This argument was essentially what the Navy used in Metcalf Construction Co. v. United States,20 one of the most well-publicized U.S. construction law cases in decades.21 While the trial court agreed with the Navy, the Court of Appeals for the Federal Circuit reversed the trial courtâs decision, and provided an informative opinion as to how DSC claims are to be treated on design- build projects. Metcalf involved a Navy procurement for a $48 million housing facility at a Marine Corps base. The RFP included a soils report that identified the soils as having âslight expansion potential,â and noted that this was relevant to certain features of the project, such as concrete foundations. It also stated that the soils report was for âpreliminary information only,â with the contract obligating the design-builder to conduct its own soils investigation after contract award. After award, Metcalfâs geotechnical engineer discovered that the soilâs swelling potential was âmoderate to highâ (i.e., not âslightâ) and recommended some design changes to deal with those conditions. Metcalf promptly notified the Navy, and the parties then had protracted discussions over what to do. Almost a year after the issue arose, the Navy rejected the DSC claim, and Metcalf used post-tension concrete slabs to mitigate the time and cost of over-excavating and importing select fill. Another soils issue involved the presence of chlordane, a chemical contaminant. The RFP stated that chlordane was present at the site but that remediation actions would not be required, 20 742 F.3d 984 (Fed. Cir. 2014). 21 In addition to the issue of disclaimers, the Metcalf decision also addressed the governmentâs implied duties of good faith and fair dealing.
E-18 since the levels were deemed âacceptable.â Metcalf later discovered soils with higher levels of chlordane than expected and incurred costs to remediate. The Navy refused to reimburse Metcalf for substantial remediation costs. Metcalfâs total claim, inclusive of other alleged breaches by the Navy of its duty of good faith and fair dealing, was approximately $25 million. In ruling in favor of the Navy, the trial court concluded that because Metcalf had to investigate the soil conditions during performance, Metcalf could not rely upon the RFPâs representations about the soil characteristics. The Court of Appeals for the Federal Circuit flatly rejected this, finding that the lower court misinterpreted the contract: Nothing in the contractâs general requirements that Metcalf check the site as part of designing and building the housing units, after the contract was entered into, expressly or implicitly warned Metcalf that it could not rely on, and that instead it bore the risk of error in, the governmentâs affirmative representations about the soil conditions.22 The appellate court differentiated between Metcalfâs post-award obligation to conduct additional investigations and Metcalfâs pre-award right to reasonably rely upon the Navyâs geotechnical information as it bid the project. Citing the Foster case, the appellate court stated that the DSC clause was incorporated into the contract to âtake at least some of the gamble on subsurface conditions out of bidding.â23 It also highlighted that the phrase âfor preliminary information onlyâ was not an effective disclaimer.24 The phrase, the court held, âmerely signals that the information might change (it is âpreliminaryâ). It does not say that Metcalf bears the risk if the âpreliminaryâ information turns out to be inaccurate.â25 22 Metcalf, 742 F.3d at 995-96. 23 Id. at 996. 24 Id. 25 Id.
E-19 The appellate courtâs opinion in Metcalf is consistent with substantial precedent that supports the DSC remedy for contractors in spite of disclaimers and discussed in Section A.6 above. Consequently, even though Metcalf is not binding on state courts, it is highly likely that a state court would find it valuable precedent for dealing with a design-build contractâs broad contractual disclaimer for the ownerâs geotechnical information. As noted in the preceding section, the ability to succeed on a DSC claim is premised upon the reasonableness of the contractorâs interpretation of the owner-furnished information and obligation to conduct a reasonable site investigation. In Appeal of Lovering-Johnson, Inc.,26 the design-builder on a Navy housing project in Illinois was not able to prove that its interpretation was reasonable. As a result, the Armed Services Board of Contract Appeals largely denied the design-builderâs claim for over $6.8 million and 267 days of alleged delays. The claim was based on issues that arose during the design phase, which resulted in the design-builder (âLJIâ) submitting its final design drawings to the Navy 15 months later than planned. One of LJIâs primary arguments was that the Navy required it to perform âunfunded preliminary design studies,â that included the projectâs storm drainage system. The contractâs performance specifications required that the system be capable of handling a 10-year storm and runoff from adjacent properties. In preparing its design, LJI relied on certain solicitation drawings by the Navy, which depicted various-sized drainage pipes. LJI contended that due to an alleged DSC of high flow rates and large culverts, it ultimately had to use wider pipes in its design than those shown on the initial drawings. The Board rejected LJIâs claim on several grounds, stating: 26 ASBCA No. 53902, 05-2 B.C.A. (CCH) Â¶ 33126, 2005 WL 3100998 (Nov. 17, 2005).
E-20 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.27 According to the boardâs decision, an adequate site investigation would have revealed the presence of the twin 60-inch culverts and potentially âhuge flowsâ from off-site water sources. In addition, the board believed LJIâs reliance on the drawings was misplaced given that the solicitation drawings were not detailed and the pipe systems identified were ambiguous. Importantly, the board concluded that the Navyâs RFP design was not âfinalâ and that its RFP package expressly identified that any concepts and information contained therein would have to be verified prior to LJIâs development of the âfinalâ design. Stated differently, it was LJI, not the Navy, which was responsible for designing the drainage system.28 Geotechnical Design Decisions Several cases have addressed conflicts between owners and design-builders over foundation designs. Some of these cases were raised in the context of a DSC, and others focused solely on the ability of the design-builder to make its own design decisions. In Appeal of PBS&J Constructors, Inc.,29 the design-builder filed an appeal to the Armed Services Board of Contract Appeals when the Corps of Engineers refused to allow it to use spread footings to support balconies on a barracks project. The RFP documents identified drilled piers as a ârecommended foundation system.â They stated that spread footings were not considered a viable alternative and, therefore, not allowed. The contract required the design-builderâs 27 2005 WL 3100998 at 20. 28 This case addressed two other topics that are addressed in this section â design review processes and the ability of LJI to make changes to the design included in its proposal. 29 ASBCA No. 57814, 2014 WL 3821353 (July 25, 2014).
E-21 geotechnical engineer to provide design calculations to support its ultimate recommendation. The design-builderâs proposal specified that it would use a drilled pier system, but did not specifically state what would be used for the balconies. During design development, the design-builderâs initial geotechnical report showed the balconies supported by concrete piers. The final foundation design, however, contained a revised geotechnical report, and showed for the first time the possibility of using spread footing foundations. Based on the record before the board, it appeared the design-builder wanted to use spread footings. It was behind schedule due to installation problems with drilled piers on other areas of the project and was looking to save time and money. The Corps refused to allow this, believing that it was entitled to strict compliance with the contract, which had disallowed spread footings and required deep foundations. PBS&J argued that the contract was ambiguous, because, among other things: (a) it allowed the use of spread footings for small structures, which, it contended, included a balcony; and (b) the RFPâs foundation specifications were not prescriptive, as they used the terms ârecommendedâ and ârecommendations,â which the design-builder argued were not ârequirements.â The board rejected PBS&Jâs ambiguity argument. It was influenced by the fact that, for much of the contract performance period, PBS&J had interpreted the contract as not allowing spread footings for the balconies, as its early designs had shown the use of concrete piers. The board additionally noted that if the contract contained ambiguities, they were so obvious that PBS&J should have asked about them prior to bidding. The board found that the Corps had acted reasonably in rejecting the change to spread footings, as the building was on expansive soils, and there was a possibility that balconies supported by spread footings would move more than the rest of the structure, which was supported by the drilled piers.
E-22 Contrast the result in the PBS&J case to that in Record Steel and Construction v. United States,30 where the dispute also involved whether geotechnical design specifications were a requirement or simply a recommendation. The design-build project involved a dormitory at Offutt Air Force Base in Bellevue, Nebraska. Part of the RFP contained a foundation analysis report, with a section entitled âSubsurface Recommendations.â Included in the recommendations was the following language, âDue to the anticipated column loads for a multi-story building, it is believed that improving the site is more viable than reducing the bearing pressure to a very low value â¦. The recommended improvement program is outlined below.â31 The recommended program contained statements that materials be undercut and âshould be excavatedâ from below the bottom elevation of all building footings. In response to the RFP, the design-builder submitted a price proposal informing the Corps of Engineers that it did not believe over-excavation for the foundations would be required but, if site conditions ultimately required over-excavation, it committed to perform this work at no additional cost. The need for over-excavation was discussed during several design meetings both prior to and after contract award. The parties agreed that the design-builderâs geotechnical firm was to conduct field investigations and tests and provide such information to both the design- builder and the Corps. If the resulting data was satisfactory, then the design-builder could proceed with its design without conducting over-excavation. The geotechnical firm concluded that the native soils were adequate to support the buildingâs footings without over-excavation. However, the Corps apparently re-evaluated its position and refused to issue a notice to proceed for the footings unless the design-builder agreed to conform to ârequirementsâ of the subsurface recommendations of the Foundation Analysis 30 62 Fed. Cl. 508 (2004). 31 Id. at 511.
E-23 Report and over-excavate the site. The design-builder complied with this order and submitted a claim for the costs associated with the over-excavation effort. The design-builder argued that the contract unambiguously made over-excavation a design recommendation â not a design requirement. In the alternative, it argued that if the contract was ambiguous, then the ambiguity was latent and should be construed against the government. The government argued that the contract expressly and unambiguously required the design-builder to over-excavate the foundation. After carefully examining the relevant contract provisions, the United States Court of Federal Claims found the contract to be latently ambiguous, and saddled the government with the financial responsibility of the over-excavation. The court first looked at the reasonableness of each partyâs contract interpretations. In finding that the design-builderâs interpretation was reasonable, it first noted that the design-builder, as the designer-of-record, was expected to exercise its professional judgment in designing the dormitory and had to defer only to specific requirements contained in the RFP, not to recommendations. The court then examined how the ârequirementsâ in the RFP were expressed in terms of words like âshall,â âmay,â and âshould.â It found that the most critical aspects of the foundation report used the word âshouldâ instead of âshallâ â and that this expressed a desire for action, but not a binding requirement. It looked to the fact that the foundation report stated that the Corps âbelievedâ that over-excavation was âmore viableâ to improve the site, and couched its report in terms of a ârecommendationâ rather than as a requirement. The court also found the design-builderâs interpretation to be reasonable based on the fact that the Corpsâ initial borings were not conducted within the actual footprint of the dormitoryâs location.
E-24 The court ruled, however, that the Corpsâ contract interpretation fell âwithin the zone of reasonableness.â32 It looked to the fact that the RFP used the verb âshallâ in connection with incorporating the foundation reportâs recommendations into the contract, and that, by referring to the terms âover-excavation and compaction requirements,â there was an argument that the RFP expressly converted the foundation reportâs recommendations into requirements.33 Faced with two reasonable contract interpretations, the court then looked to the rule of contra proferentem for guidance on who should bear the risk of these ambiguities. The four-part test associated with this rule places the risk of the ambiguities on the government when: (a) the contract specifications were drawn by the government; (b) the language used therein was susceptible to more than one interpretation; (c) the intention of the parties does not otherwise appear; and (d) the contractor actually and reasonably construed the specifications in accordance with one of the meanings of which the language was susceptible. The court found that all of these conditions were satisfied. The court also refused to apply the exception to the general rule of contra proferentem (i.e., the patent ambiguity doctrine), which resolves ambiguities against the contractor where the ambiguities are ââso âpatent and glaringâ that it is unreasonable for a contractor not to discover and inquire about them.ââ34 The court did not find this ambiguity obvious, particularly since the Corps had not indicated its view of the mandatory nature of these so-called ârequirementsâ until many predesign meetings between the parties had taken place. Another case addressing foundation disputes during design development is Fluor Intercontinental, Inc. v. Department of State,35 which involved a Department of State (âDOSâ) 32 Id. at 515. 33 Id. at 516. 34 Id. at 517. 35 CBCA 1559, 13 B.C.A. (CCH) Â¶ 35334, 2013 WL 3271335 (May 24, 2013).
E-25 design-build contract with Fluor for an embassy in Haiti. Fluorâs $38 million claim included, among other things, a request for relief from differing site conditions. The RFP documents incorporated a preliminary geotechnical report that indicated that spread footers could be used to support the structure without having to fully undercut the site. This was confirmed by Fluorâs geotechnical engineer and was the basis for Fluorâs proposal. After award, and as required by the contract, Fluorâs geotechnical engineer investigated the site, conducted field testing, and concluded that there were indications that the soil was collapsible, not suitable for supporting foundations, and should be removed. Fluor notified the DOS that the findings constituted a differing site condition, as the RFP documents gave no indication of the need to remove all of the soil. When the DOS indicated that it would likely reject the claim, Fluor asked for direction as to how to proceed. The DOS refused to do so, stating that, ââ¦ this is a design problem â¦. You need to provide an engineering solution that meets the requirements of the contract taking into consideration the questionable bearing capacity of the soil that was clearly noted in the RFP.â Fluor ultimately followed the recommendations set forth in its geotechnical engineerâs report, removed the upper silt layer of the site, and formally claimed a differing site condition. As the dispute proceeded, the DOSâs soil experts opined that the Fluor engineerâs test results were unreliable, were not performed in accordance with accepted standards, and did not necessarily indicate collapsible soil. The Civilian Board of Contract Appeals agreed with these experts and held that the soil was not collapsible, âor collapsible to a degree significant to the design of the foundations.â Because Fluor did not establish the collapsibility of the soil, the board concluded that Fluor failed to meet its burden of proving that there was a differing site condition.
E-26 Fluor argued that the DOS should not have been allowed, âseveral years after the fact,â to complain about the adequacy of its testing plan and methodology. The board disagreed, finding that because the DOS had notified Fluor that it did not believe there was a valid differing site condition, Fluor knew that its claim would be contested. In response to Fluorâs argument that the DOS was obligated to investigate the site and provide direction once Fluor raised notice of the differing site condition, the board stated: The agency did provide direction, rejecting the conclusion that a differing site condition existed and permitting the contractor to proceed as it deemed appropriate under the design- build contract. The agency is not contending that the ultimate foundation design was improper; rather, the agency contends that it is not obligated to provide additional time and/or money under the contract because the contractor has not established the existence of collapsible soils (that is, no differing site condition has been demonstrated to have existed).36 One of the interesting features of the Fluor decision is that it shows how experts can see engineered solutions differently. Fluorâs geotechnical engineer appeared to take a more conservative position on potential soil collapses than the governmentâs testifying experts. This was certainly the prerogative of Fluorâs engineer, given that he was ultimately responsible for the design. The boardâs decision, however, appeared to conclude that Fluorâs engineer based his finding on faulty test results, and that had he conducted proper testing, he might have drawn a different conclusion. Another recent case embassy case found that the design-builder failed to demonstrate that it had a differing geotechnical site condition. In Liquidating Trustee Ester du Val of Ki Liquidation, Inc. v. United States,37 Kullman Industries, Inc. (âKIâ) contracted with the DOS for 36 Id. at 13. 37 116 Fed. Cl. 338 (2014).
E-27 the design and construction of the Tajikistan embassy. KI was ultimately terminated for default and went bankrupt as a result of the project, in large measure because of the geotechnical costs it incurred. The parties had a fundamental disagreement over how geotechnical costs were to be treated within the fixed price contract. KI put very little money in its contract price for foundation and geotechnical work, on the assumption that this work would be treated as an allowance, and that the contract price would be increased to reflect the actual costs of this work. The DOS did not construe the contracting approach as being open-ended, and assumed that KIâs fixed price included all geotechnical conditions, subject to any proven differing site conditions.38 Although the DOS furnished a geotechnical report that warned of poor and collapsible soil conditions, KI did not conduct any meaningful site investigation prior to award. After visiting the site and conducting some tests post-award, KIâs geotechnical expert agreed with the conclusions in the DOSâs report. It used the same soil preparation approach contained in the report â which involved compressing the foundation soils by an extensive flooding and dewatering system. This approach was costly and time-consuming. In considering KIâs claim, the court disagreed with KIâs contract interpretation and held that its fixed price included all of the geotechnical work. The fact that it had little time to conduct a pre-award site investigation was its own problem. If KI had been concerned that it was âbeing pressed into making a premature decision, it had the option of simply not agreeing to the governmentâs terms, unpalatable as that might have appeared at the time.â39 It also concluded that there no differing site condition existed, as there was no indication of anything being materially 38 Part of the reason for this confusion was that DOS was, as the court noted, âeager, indeed desperate, to close the deal on a fixed price contract [as of the close of the fiscal year.] And they may have welcomed KIâs naivetÃ© in agreeing to take on the risk that it could perform at a profit.â 116 Fed. Cl. at 376. 39 116 Fed. Cl. at 377.
E-28 different from what was shown in the contract documents. In drawing this conclusion, the board was critical of KIâs foundation design: It is ironic, and indeed tragic, that the [RFP geotechnical] report prompted [KI] to invest millions in what probably was over-engineering with respect to the foundation work. But KIâs own experts came to the same conclusion and the result was investment in an elaborate watering/compaction/dewatering scheme, which appears to have been unnecessary.40 Note that the opinion contains no succinct explanation for why the court drew this conclusion about over-engineering. There is only the inference that the court believed KI did not conduct a more refined engineering effort because it thought the DOS would be paying for the ultimate cost. Another reported decision discussed the consequences of a transportation agency spending little time to conduct a pre-procurement site investigation and requiring the design-builder to accept the site âas is.â Drennon Construction & Consulting, Inc. v. Department of the Interior41 involved a federal road project in central Alaska. The Department of the Interior (âDOIâ) wanted to widen a campground road from one lane to two, and to eliminate a blind curve. It obtained funding under the American Recovery and Reinvestment Act of 2009 as a âshovel readyâ project and engaged an engineering firm, USKH, to prepare 100% design drawings and a geotechnical report. The DOI provided USKH a digital terrain model based on earlier photogrammetric mapping. When USKH realized the model contained inaccurate control points, it requested $25,000 to perform a more reliable and accurate survey. Concerned about the limited project funding, the DOI denied the request. Instead, the DOI decided to deal with this issue by warning potential bidders of possible inaccuracies in the model, requiring the contractor to perform a survey before commencing work, and using disclaimer language to shift the risk to the contractor. 40 Id. at 376. 41 CBCA 2391, 13-1 B.C.A. (CCH) Â¶ 35213, 2013 WL 996042 (Jan. 24, 2013).
E-29 DOI ultimately entered into a design-build contract with Drennon Construction & Consulting, Inc. (âDrennonâ) to excavate the hillside and design-build a gabion wall along the two-lane road. Drennon conducted a survey demonstrating that the road could not be built as shown on USKHâs drawings. As a result, the road needed to be shifted in the opposite direction, into the hillside, requiring additional excavation and construction of a much higher wall to restrain the contents of the hill from falling onto the road. Drennon also encountered soil problems during excavation, as the hillside slopes collapsed due to the soils being âat or near [its] angle of repose.â In essence, every âscoopfulâ excavated from the slopes caused a mini-landslide from above. Drennon concluded that the hill could not be stabilized and stopped work. Ultimately, the project was scaled back to eliminate the widening of the road, and included only the construction of the gabion wall. Drennon filed a claim with the Civilian Board of Contract Appeals, seeking its costs during the suspension and for the additional gabions not used due to the project redesign. Drennon claimed that the projectâs design was defective and that the geotechnical information provided by the government in the solicitation, on which Drennon relied in pricing the job, significantly differed from the site conditions actually encountered. The board agreed, finding that the bidding documents contained both design defects and representations about the site that materially differed from actual site conditions. The Board found that the DOI bore responsibility for the defective design. The decision noted that both the DOI and USKH knew the design was flawed prior to bid. It called for the road to be widened over the guard rail separating the road from a river, but that was impermissible given the wild and scenic designation of the river. The correction involved moving the road into the hill on the opposite side from the river, an act the board concluded a reasonable bidder could not have
E-30 anticipated, particularly given that the area was covered with snow during the bidding period. It also rejected the notion that âweasel wordsâ (USKHâs phrase used to describe the disclaimer) in the solicitation would shift this responsibility. The board further noted that the solicitation called for the gabion wall to be âapproximately nine feet high at most,â and that about 420 cubic yards of gabions would be needed to build it. Because the road was moved into the hill, Drennon had to excavate much more of the hillside than anticipated. In fact, the wall needed to be 15 feet high and consumed 778 cubic yards of gabions. While the DOI acknowledged that these differences required Drennon to change its construction means and methods, it argued that the use of the word âapproximateâ and the design-build nature of the relationship shifted these risks to Drennon. The board disagreed, stating: The disclaimer that the design might have to be adjusted per a contractor-financed survey alerted bidders to the possibility that the design might have required a bit of tweaking, but cannot reasonably be read to impose on the contractor an obligation to construct the project in a manner significantly different from that envisioned in the contract. With regard to the anticipated height of the wall, â[t]he use of the word âapproximatelyâ . . . obviously does not mean that the relevant quantity is absolute . . . [but it] implies a reasonable accurate representation. . . . Nine feet is not a reasonably accurate representation of what turned out to be fifteen feet.42 The board also concluded that Drennon encountered a DSC. The soil borings allegedly contained between 5.1 and 10.7% fines, described as âslightly silty,â and advised that the hillside would be âcomposed of similar soils.â The actual soils on the hillside, however, contained virtually no fines and the slopes were in a state of incipient failure. As a result, the Board found that it was 42 Id. at 5.
E-31 impossible to keep the wall of the excavation open for any period of time, contrary to the conclusions in the geotechnical report. Contractual Disclaimers of Responsibility for Geotechnical Information on Design-Build Projects As noted earlier, many public sector owners attempt to absolve themselves from liability for geotechnical information they furnish to design-build proposers. This is evident from the Metcalf decision, as well as in practice. They do this by using contractual disclaimers that, among other things, warn bidders that their use of such information is âat their own risk,â âwithout any liability to the owner,â and that the bidder âshould independently determine the accuracy of the information.â An example of how disclaimers are used is found in the following excerpts from the design- build contract released by Washington State Department of Transportation (âWSDOTâ) on its SR 99 Alaskan Way Viaduct Replacement Project (WSDOT 2010). This contract makes it clear that, except for some limited exceptions, reference documents are informational and will not form a basis for a claim by the design-builder. Section 3.3 (Reference Documents)43 states, in relevant part: . . . Design-Builder understands and agrees that WSDOT shall not be responsible or liable in any respect for any loss, damage, injury, liability, cost or cause of action whatsoever suffered by any DB-Related Entity by reason of any use of any information contained in the Reference Documents or any action or forbearance in reliance thereon, except to the extent that WSDOT has specifically agreed herein that Design-Builder shall be entitled to an increase in its compensation and/or extension of a Completion Deadline with respect to 43 This contract defined the term âReference Documentsâ to include Geotechnical Memoranda for Design, which were defined as those Reference Document(s) âproviding an interpretation of available geologic data that shall not be used to determine differing site conditions, resolve contractual disputes, or in any way interpret the contract, intents, or obligations of the parties.â
E-32 such matter. Design-Builder further acknowledges and agrees that (a) if and to the extent Design-Builder or anyone on Design-Builderâs behalf uses any of said information in any way, such use is made on the basis that Design-Builder, not WSDOT, has approved and is responsible for said information, and (b) Design-Builder is capable of conducting and obligated hereunder to conduct any and all studies, analyses and investigations as it deems advisable to verify or supplement said information, and that any use of said information is entirely at Design-Builderâs own risk and at its own discretion (WSDOT 2010). Texas DOT (âTxDOTâ) offers a similar provision on its Loop 1604 Western Extension Project. This design-build contract has several clauses that shift risk away from TxDOT relative to liability for reference documents (TxDOT 2013). Section 1.7 (Reference Information Documents) states as follows: 1.7.1 TxDOT has provided and disclosed the Reference Information Documents to DB Contractor. Except as provided in Section 1.2.3: (a) the Reference Information Documents are not mandatory or binding on DB Contractor, and (b) DB Contractor is not entitled to rely on the Reference Information Documents as presenting design, engineering, operating or maintenance solutions or other direction, means or methods for complying with the requirements of the DBA Documents, Governmental Approvals or Law. 1.7.2 TxDOT shall not be responsible or liable in any respect for any causes of action, claims or Losses whatsoever suffered by any DB Contractor-Related Entity by reason of any use of information contained in, or any action or forbearance in reliance on, the Reference Information Documents, except any schedule or monetary relief available hereunder as set forth in Section 13 of this DBA (TxDOT 2013).
E-33 The definition for âReference Information Documentsâ states that such documents were provided to the design-builder âfor informational purposes only and without representation or warranty by TxDOT.â The preceding clauses are examples of the competing goals that occur when an agency attempts to broadly disclaim responsibility for information it provides during the bidding process. While the agencyâs primary goal is to avoid claims arising from this information, its secondary goals are to encourage marketplace competition and avoid excessive bid contingencies. Consequently, even the most one-sided contractual disclaimers generally provide design-builders with some limited relief for differing site conditions and major changes in alignment from that shown in the RFP design. This can lead to confusion, as the contract may not clearly establish what remedies are available to the design-builder for errors in owner-furnished information. As discussed in Section A.6 above, there is some question as to whether the type of disclaimers discussed above are enforceable. Substantial design-bid-build case law supports the view that broad disclaimers of geotechnical information are generally not effective, particularly when the disclaimer is in direct conflict with the purpose and language of a differing site conditions clause (Gransberg and Loulakis 2011). Confronted with any major flaw in the ownerâs RFP documents that increases its time/cost of performance, design-builders will almost certainly argue that the disclaimers should not be construed to shift the consequences of these flaws away from the owner. If the owner disagrees, an impasse will develop and relations will likely be negatively impacted. Moreover, Metcalf and other design-build cases have found that design-builders are entitled to reasonably rely upon such information.
E-34 Contractual Geotechnical Risk Tools Given the above case law, a number of approaches have been developed to better allocate and in some cases, share the risk of geotechnical conditions between the owner and the design-builder. Scope Validation The Virginia Department of Transportation (VDOT) has developed a thoughtful way to address the issues associated with information provided by the agency to design-build proposers. VDOT recognized that if the risk of defective owner-furnished information was shifted to the design-builder, design-build proposal prices would be higher because bidders would put in contingencies to cover this risk. However, because of the uncertainty over whether a court would enforce the disclaimer, VDOT believed it could still be obligated to pay the design-builder if the risk materialized, and that relations on the project could be jeopardized. VDOT decided to confront this issue directly by balancing its need for effective risk transfer and price certainty with the reality that pre-award disclaimers may not be fair to design- build proposers or enforceable. VDOTâs process is called âscope validation.â It establishes a period of time (âscope validation periodâ) where the design-builder can, during the design development process, present claims that relate to deficiencies in owner-furnished information. The scope validation period is generally 120 days after contract award, although this can be adjusted for more complicated projects. After the end of the scope validation period, the design- builderâs claim rights are waived for items not previously raised. VDOTâs standard design-build contract template now includes the following clause (VDOT 2010): 2.2 Scope Validation and Identification of Scope Issues 2.2.1 Scope Validation Period. The term âScope Validation Periodâ is the period of time that begins on Design-Builderâs receipt of Departmentâs Notice to Proceed and extends for
E-35 one hundred twenty (120) days from such date of receipt, unless otherwise stated 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-Builderâs proposed design concept and identify any defects, errors, or inconsistencies in the RFP Documents that affect Design-Builderâs ability to complete its proposed design concept within the Contract Price and/or Contract Time(s) (collectively referred to as âScope Issuesâ). The term âScope Issueâ 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 4.2.2 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 âScope Validation Periodâ 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, provide Department in writing with a notice (âGeneral Noticeâ) of the
E-36 existence of such Scope Issue, which General Notice shall generally explain the basis for such Scope Issue. Within twenty-one (21) days of the General Notice of a Scope Issue, Design-Builder shall provide Department with documentation that specifically explains its support for the Scope Issue (âSupporting Documentationâ), which Supporting Documentation shall include, 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-Builderâs price and time to perform the Work. For the avoidance of doubt: (1) Design-Builder shall not be entitled to raise in its Supporting Documentation any Scope Issues that were not previously addressed in a General Notice; and (2) Design-Builder shall have no right to seek any relief for any Scope Issues that have not been specifically identified in a General Notice provided to Department during the Scope Validation Period. 2.2.4 Resolution of Scope Issues. Within a reasonable time after Departmentâs receipt of the Supporting Documentation described in the Section 2.2.3 above, the Parties shall meet and confer to discuss the resolution of such Scope Issues. If Department agrees that Design-Builder has identified a valid Scope Issue that materially impacts Design-Builderâs 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-Builderâs price or time to perform the Work, then Design- Builderâs recourse shall be as set forth in Article 10. Notwithstanding anything to the
E-37 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. 2.2.5 Design-Builderâs 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-Builderâs price or time to perform the Work. After the expiration of the Scope Validation Period, with the sole exception of those Scope Issues made the subject of a General Notice 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
E-38 Contract Time(s) for, any Scope Issue associated with any of the Contract Documents, including but not limited to the RFP Documents. 2.2.6 Waiver of Rights. The failure of Design-Builder to meet the submission requirements required under Section 2.2.3 above for a Scope Issue, including but not limited to the times for providing notice and documentation of the Scope Issue, shall conclusively constitute a waiver of Design-Builderâs rights to seek relief for such Scope Issue. To date, VDOT has experienced a number of scope validation claims on its design-build projects, including inaccurate survey information on a railroad line and subsurface conditions that differ from those in the RFP documents. There has yet to be any litigation arising out of this clause that is the subject of a reported decision as of yet, although there is at least one dispute that is at the formal dispute resolution stage. The AASHTO Guide for Design-Build Procurement (2008) notes that the approach used by VDOT has also been used by other agencies: Some agencies, including the U.S. Army Corps of Engineers, use a contractual scope validation period. With such provisions, the agency retains the risks of differing site conditions/changed conditions until the design-builder has had the appropriate opportunity to validate the information provided in the request for proposals and to further define the scope of the project. The risks of differing site conditions/changed conditions are then shifted to the design-builder following such scope validation period. It is suggested that agencies conduct initial investigations necessary to prepare an appropriate scope, schedule and price estimate for the work (AASHTO 2008).
E-39 VDOTâs original (2006) scope validation clause is included as an example in the Guide.44 Sharing DSC Risk While the policy behind the DSC clause is to eliminate some of the risk from bidding, transportation agencies have used contract provisions that shift significant risk to the design- builder, particularly on larger design-build projects. According to NCHRP Synthesis 429, WSDOT uses this approach. It quotes a WSDOT survey respondent who stated: âWe [assign] all changed conditions under a certain dollar amount (different amounts for different contracts) to the contractorâs risk. If that threshold is exceeded, then the department pays for the costs above the threshold.â For example, on the SR 520 Pontoon Construction design-build project, WSDOT used the following language in its DSC clause: Notwithstanding the above, the Design-Builder shall be entitled to equitable adjustment adjusting the Contract Price only for the actual, reasonable cost increase resulting from Differing Site Conditions which in the aggregate exceeds $10,000,000.00. The responsibility for the first $10,000,000.00 worth of Differing Site Conditions shall rest solely with the Design-Builder (WSDOT 2009). During procurement, WSDOT received a request for information from a proposer, which stated that the $10 million cap was extraordinary and could result in large proposal contingencies. It asked WSDOT to reconsider this provision. WSDOT declined, stating: Establishing a threshold dollar amount for Differing Site Conditions accomplishes the following: 1) It provides a level of cost certainty for the owner, 2) It provides a level playing field by limiting the liability of the Design-Builder, and 3) Encourages the Design-Builder to develop strategies to limit risks associated with Differing Site Conditions. Providing a 44 Id., Appendix C, Example 18.
E-40 threshold dollar amount for Differing Site Conditions has been used successfully on all WSDOT design-build projects to date. The $10,000,000 threshold for this project is consistent with another WSDOT design-build project of this size and complexity (Tacoma Narrows Bridge) (WSDOT 2009). In essence, WSDOT put proposers on notice that it was willing to pay the $10 million contingency that a prudent design-builder would include in its lump sum price proposal. Effectively, the clause insulates WSDOT from being ânickel and dimed to deathâ with minor differing site conditions claims during the projectâs execution. The Dulles Corridor Metrorail Project used a similar approach to create a âdeductibleâ for DSC risk on its design-build project. This project involves a 23-mile extension of the WMATA subway system (i.e., the Silver Line) and has several major design-build projects as part of its program, including two billion dollar-plus contracts for rail line, stations and systems. While DSC clauses were used, they required that the design-builder bear the first dollar of risk for these conditions (ranging from $2 million to $3 million for the respective contracts). The philosophy was similar to that expressed by WSDOT above. Use of a DSC Clause While FHWA mandates the use of a DSC clause for federal aid highway projects (unless the use of such a clause is contrary to state law), it does not have the same mandate for design- build projects. âInstead, it encourages state DOTs to use this clause when appropriate for the risk and responsibilities that are shared with the design-builder.â (Gransberg and Loulakis 2012). While many DOTs use DSC clauses on their design-build projects, there are some that do not. There are many compelling reasons to use such a clause, particularly given the policies expressed in the Foster case.
E-41 Progressive Design-Build One of the challenges with public sector design-build is that the agency is not able to take advantage of the design-builderâs ideas until after the owner has already developed the preliminary design concepts, since most public owners use some form of bridging documents in order to obtain a fixed price contract from the design-build procurement. For those owners who have complex projects, including major geotechnical risks, there can be a strong benefit in getting early involvement of the design-build team. Owners inclined to do this will use a progressive design-build (PDB) approach. Its core features include the following: ï· The design-builder is retained by the agency before the design has been significantly advanced. ï· The design-builder is selected primarily, if not exclusively, on qualifications, and provides cost estimates on an open book basis. ï· The parties work collaboratively in making design decisions based on cost, operability and other considerations. Under PDB, the design-builder performs its work in two phases. Phase 1 is often called the âPreliminary Services Phase.â The design-builder works with the agency and its consultants to create or confirm the projectâs basis of design, and then advance that design. The design-builder provides ongoing cost estimates as that design develops, to ensure that the agencyâs budgetary requirements are being achieved. At the point in time where the design has achieved an appropriate level of definition, the design-builder will provide a formal commercial proposal (including the overall contract price) for Phase 2 services. The proposal is often established when the design is approximately 50-75% complete, but it can occur anytime up to when the design is 100%
E-42 complete, depending on the amount of control the owner desires to maintain over the design definition. Phase 2 is often called the âFinal Design and Construction Phase.â Once the agency and design-builder agree upon commercial terms, the design-builder will complete the design and construct the facility in accordance with those commercial terms (i.e., the agreed-upon price and schedule). The design-builder will also be responsible for any testing, commissioning, and other services that have been agreed upon. If, for any reason, the parties cannot reach agreement on the Phase 2 commercial terms, then the agency has the right to exercise an âoff-rampâ â where it can use the design and move forward with the project through a design-bid-build procurement, with another design-builder, or any other way it deems appropriate. Phase 1 of the Dulles Corridor Metrorail Project successfully used PDB, and it has also been used extensively in the water and wastewater sector. While several DOTs are considering using it on some of their more complicated projects, only Maryland State Highway has an active PDB procurement. However, given the attributes that PDB offers, specifically in terms of having the design-builder and DOT collaboratively develop designs that reduce risk, there is a logic in considering this as part of a risk management program for projects that have complex geotechnical issues. Dispute Review Boards (DRBs) DRBs are used as a matter of course on tunneling projects, but have not yet had widespread adoption on design-build road and bridge projects. Simply stated, the DRB is a group of three experts that are appointed at the outset of the project to consider disputes that the parties present to them and provide recommendations for resolution. They are highly regarded for many reasons,
E-43 but particularly because of their ability to provide the parties with real-time assessments of their positions and allow the projects to move forward based on those assessments. DRBs can provide an effective way to resolve DSC issues in a cost-effective and timely manner.