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Differing Site Condition Elements Applied

Introduction

         Under the Federal Acquisition Regulation, the Differing Site Conditions clause at FAR § 52.236-2 is a mandatory clause in most fixed-price federal government contracts. This provision operates to shift the risk of certain unforeseen physical conditions to the government.  As discussed in Chapter 7 of Smith Currie’s Federal Government Construction Contracts (John Wiley & Sons, 2008), the basic tests to establish entitlement to relief under that clause are well established.           

         A “differing site condition”—or “changed condition,” as it is sometimes called—is a physical condition encountered in performing the work that was not visible and not known to exist at the time of bidding and that is materially different from the condition reasonably believed to exist at the time of pricing the contract.  Differing site conditions are classified as either Type I, involving subsurface or latent physical conditions that differ materially from those indicated in the contract documents, or Type II, which involve unusual physical conditions that differ materially from those ordinarily encountered in similar work.

         In general, if these conditions are satisfied, the existence of a differing site condition (“DSC”) triggers entitlement to an adjustment in the contract price or time without having to establish fault by one of the parties to the contract. Given that background, what happens if the contract does not contain a DSC clause and an unforeseen condition is encountered?  Is any remedy available given the basic concept that a contractor bears the risk of site conditions in the absence of a DSC provision?  Simpson v. United States, 172 U.S. 372 (1899).  As illustrated by the decision of the United States Federal Circuit Court of Appeals in International Technology Corp. v. Winter, 523 F.3d 1341 (Fed. Cir. 2008), a basis for relief may be available and the basic elements of a DSC claim may be used to evaluate the contractor’s entitlement.

International Technology - No DSC Clause

         In International Technology the Federal Circuit evaluated a prime contractor’s breach of contract claim against the U.S. Navy using the same factors that are considered for Type I differing site conditions claims even though the parties’ contract did not contain a DSC clause.  The case originated after the Navy awarded the prime contractor, International Technology Corporation (“ITC”), a cost-plus-fixed-fee contract to remove pesticides and related chemicals, including DDT, from soil located at the Naval Communication Station in Stockton, California.  Thereafter, ITC subcontracted with Terra Kleen Response Group, Inc. (“TK”), to use a solvent extraction technology to remove contaminants from the soil at the project site.  TK previously demonstrated the special extraction technology to the government during a pilot program; a fact that would ultimately be important in the outcome of the case.

           Unfortunately, the effectiveness of TK’s solvent extraction technology was limited by high clay concentrations in the soil which the contractors asserted were discovered at the site after the remediation project began.  Specifically, the solvent took much longer to dissolve into soil with high clay concentrations, a condition known as “reduced soil permeability”, thereby greatly increasing treatment time and costs.  At the conclusion of the project, ITC filed a breach of contract claim against the government for additional soil remediation expenses incurred by TK as a result of the unexpected clay concentrations.

           According to ITC, the government misrepresented the soil composition at the site in one of two reports that were referenced by the contract documents.  The two reports, entitled the “Solvent Technology Report” and the “Feasibility Study”, were prepared by a third party contractor for purposes other than the soil remediation project.  ITC argued that the contract documents required the prime contractor to “examine” both reports.  Included in the Solvent Technology Report was a table that listed soil characteristics for samples taken during the pilot program, including the clay content percentages that ranged between 6% and 11%.  Conversely, the Feasibility Study indicated that some of the contaminated soil treated by TK during the pilot program had higher concentrations of clay than what was shown in the Solvent Technology Report tables.

Decision on Misrepresentation Claim

         Both the contracting officer and the Armed Services Board of Contract Appeals denied ITC’s claim for the additional soil treatment expenses and the case was appealed to the Federal Circuit.  That court analyzed ITC’s claim of misrepresentation in the contract documents using the same four factors that are considered in a Type I Differing Site Condition.  To recover increased costs due to a Type I DSC, a contractor must prove:          

  1. That a reasonable contractor reading the contract documents as a whole would interpret them as making a representation as to the site conditions;

  2. That actual site conditions were not reasonably foreseeable to the contractor with the information available outside of the contract documents (i.e., the contractor “relied” on the representations);

  3. The contractor actually relied on the contract representation; and

  4. Conditions differed materially from those represented and that the contractor suffered damages as a result.

         The first element relies on the principle that there cannot be a differing site condition unless the contract indicated what that condition would be.  With that principle in mind, the court stated that ITC could not prove that the contract documents and specifically, the clay composition levels listed in the Solvent Technology Report tables, represented the clay content of the contaminated soil at the project site.  The court observed that the contract documents did not reference the soil composition analysis in the report and merely suggested that a review of both reports would assist the prime contractor in preparing a construction work plan, a quality control plan, and a site specific health and safety plan.  Further, the court noted that the soil composition data contained in the Feasibility Study reflected the presence of clay content that substantially exceeded the percentages listed in the Solvent Technology Report and specifically warned that soil composed primarily of silt and clay might not be suitable for the solvent extraction process.  As a result of these considerations, the court determined that a reasonable contractor could not have interpreted the contract as representing that the soil would contain less than 11% clay composition based on the soil samples contained in the Solvent Technology Report.

         The court further held that even if it were able to conclude that the Solvent Technology Report represented the clay content of the soil at the project site, ITC would not prevail because it could not establish the second element – site conditions encountered were not reasonably foreseeable in light of all information available.  Interestingly, the court’s analysis of the second element focused on the knowledge of TK, and not ITC.  Based on the evidence presented at trial, the court explained that it was unreasonable for TK to rely on the soil composition levels contained in the Solvent Technology Report because of its awareness of flaws in the testing performed during the pilot program.  Testimony from TK’s president revealed that the company was aware that samples used for the Solvent Technology Report were only collected from the perimeter of a large soil stockpile and did not include sampling from deeper portions of that stockpile.  This fact was important because of TK’s acknowledgment that clay is not often evenly distributed through subterranean soil and is often found in concentrated layers, known as lens.  In other words, there was no basis for TK to infer that the pilot program samples would be representative of conditions throughout the site.  Further, the court noted that TK used a completely different sampling methodology, one that included random, deep soil borings, when it evaluated clay content during its work under the ITC subcontract.  Because of known flaws in the sampling methodology underlying the clay composition levels in the Solvent Technology Report, the court determined that TK could not have reasonably relied on any representations in the report.

Comment

           This decision has several practical implications for contractors and subcontractors.  Obviously, the absence of a DSC clause may not leave the contractors without any remedy and the reference to the elements for a Type I DSC provides some degree of certainty to the analysis.  More importantly, the prime contractor was able to rely on its trade subcontractor’s knowledge and evaluation of the conditions in seeking to establish entitlement to relief.  The Federal Circuit did not impose a requirement that the prime contractor’s employees have direct personal involvement in order to establish reliance.

           One topic was not resolved.  That is, is it necessary to show some degree of fault or culpability when asserting a claim for misrepresentation?  While noting that the board had identified proof of culpability as a necessary element for recovery, the court indicated that such might not be necessary if the representation was material.  Unfortunately, the court declined to make a definitive ruling on that potential issue.