By Tim Gordon
When conditions are encountered on a construction project that are contrary to the information provided to bidders, the parties’ contract should provide a roadmap for how the parties ought to proceed. When the parties’ contract is silent on the issue, the price of contracting increases, uncertainty arises, and the likelihood of disputes increases.
I. Why Have A Differing Site Conditions Clause?
As a general matter, a contractor who enters into a fixed-price services contract assumes the risk that its cost of performing the agreed-upon scope of work will be higher than the contract price. Because contractors assume this risk, they typically include contingencies in their bids for unknown risks. This in turn results in higher bids, which means that owners pay more for the construction.
But if the contract includes a well-drafted differing site conditions clause, the contractor does not necessarily assume the risk of all unexpected conditions that may be encountered. The purpose of including a differing site conditions clause is to encourage contractors to bid the project assuming that the conditions will be as represented or as ordinarily encountered for the type of work. The benefit to the owner is that contractors will not include contingencies in their bids to account for the risk of encountering atypical site conditions. And if the contractor encounters either (1) subsurface or otherwise-concealed physical conditions that differ materially from those indicated in the contract documents, or (2) unknown physical conditions of an unusual nature that differ materially from those ordinarily found to exist and generally recognized as inherent in construction activities of the character provided for in the contract document, then the contractor can request an equitable adjustment pursuant to the contract’s differing site condition clause. See, e.g., AIA A201-2007 § 3.7.4. In short, the differing site conditions “clause permits contractors to enter into fixed price contracts in reliance on the information disclosed to them” and a bidding contractor is “not deemed to have assumed the risk of materially differing subsurface conditions merely by submitting a lump sum bid based on the information available to it.” URS Group, Inc. v. Tetra Tech FW, Inc., 181 P.3d 380, 387 (Colo. App. 2008).
II. What If There Is No Differing Site Conditions Clause?
The absence of a differing site conditions clause does not mean that the owner is free to provide inaccurate information to bidders, or hide relevant known information. A contractor, for instance, could seek rescission of the contract due to mutual mistake if the bid documents contained inaccurate information. Alternatively, an owner’s negligent misrepresentation of material facts prior to the execution of a construction contract may provide the basis for an independent tort claim asserted by a contractor who detrimentally relies on such negligent misrepresentations. Id., at 391 (allowing negligent misrepresentation claim to proceed where URS “alleged that TTFW had negligently provided incorrect information in the RFP and that URS had justifiably relied on the information in preparing its bid”); Keller v. A.O. Smith Harvestore Products, Inc., 819 P.2d 69, 72 (Colo. 1991). One who, in the course of his business, profession or employment, supplies false information for the guidance of others in their business transactions is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information if he fails to exercise reasonable care or competence in obtaining or communicating the information. Id.; Keller, 819 P.2d at 71 n.2.
Additionally, at least in the context of government contracts, under certain circumstances, the government owes a duty to disclose critical information to a contractor that is necessary to prevent the contractor from unknowingly pursuing a ruinous course of action. A failure on the part of the government to disclose crucial information can lead to a finding of contract breach by the government.
III. What About Public Projects?
Bringing a claim for negligent misrepresentation, of course, is not possible if the owner of the project is a governmental entity protected by the Colorado Governmental Immunity Act (“CGIA”) C.R.S. § 24-10-101, et seq. But Colorado courts have held that public works contractors may maintain breach of contract and quantum meruit claims if the government includes inaccurate information in its bid documents.
In CAMAS Colorado, Inc. v. Board of County Com’rs, 36 P.3d 135 (Colo. App. 2001), for example, Jefferson County represented to bidders that it “does not feel that utility relocation work will conflict with the roadway construction and should not have a negative impact on the construction schedule.” Id. at 137. Unfortunately, the utility relocation work did significantly conflict with the roadway construction project. The Colorado Court of Appeals held that the contractor may maintain breach of contract and quantum meruit claims against Jefferson County based on the misinformation in the bid package, and that CGIA did not bar such claims. Id. at 138-39.
Similarly, in Grimm Construction Co., Inc. v. Denver Board of Water Commissioners, 835 P.2d 599 (Colo. App. 1992), the Court of Appeals held that a contractor may maintain a breach of contract claim against the Denver Board of Water Commissioners on the theory that the Board “breached its contractual duty . . . by failing to disclose material information . . . to prospective bidders before awarding the contract.” Id. at 601.
IV. What About Exculpatory Clauses?
Some owners try to get the best of both worlds by including detailed site information in order to entice contractors to bid based on the information provided, but then attempting to disclaim the reliability of such information in hopes of avoiding any claims based on inaccuracies contained in such information. Courts do not always look favorably upon such tactics. “When the government makes a positive statement of fact about the character of work to be performed, upon which the contractor may reasonably rely, it is binding on the government notwithstanding the inclusion of exculpatory clauses in the contract.” Triple R Paving, Inc. v. Broward County, 774 So.2d 50, 56 (Fla. App. 4 Dist. 2000). This reasoning makes sense, as it would be inequitable for the owner to get the benefit of lower bids that make certain reasonable assumptions based on information provided by the owner, but then bar the contractor from seeking an equitable adjustment in the contract price if the information turns out to be false.
Clearly addressing the possibility of encountering conditions is the best way of allocating that risk. A fair and well-drafted differing site conditions clause will benefit both parties to a construction contract by not requiring contractors to build contingencies into their bids for the unexpected, but compensating contractors for when they do encounter the unexpected.
(This article originally appeared in the Summer / Fall 2015 issue of Colorado Construction & Design.)