We often hear people from all different backgrounds in the construction industry make the distinction between “Type 1” and “Type 2” differing site condition claims. We see the distinction made in conversations with clients, in drafting and negotiating construction contracts, and at trade association events and construction law related seminars. Indeed, in a recent count, “Type 1” and “Type 2” differing site condition claims were noted in more than 500 judicial opinions in courts across the country.
With all of this attention to the two types of claims, we began to wonder: is there actually any meaningful difference between a “Type 1” and a “Type 2” claim? And, it turns out, the difference appears to be one of semantics.
At least in terms of who will foot the bill for a truly unforeseen site condition (which we all care about)—and as we’ll explain below—whether your company pursues a “Type 1” claim or a “Type 2” claim, the analysis will always be the same. In other words, rather than a meaningful difference we should all know and teach our employees, separating a “Type 1” claim from a “Type 2” claim appears to be a distinction without much of a difference.
Distinguishing a “Type 1” claim from a “Type 2” claim requires attention to detail. “Type 1” differing site condition claims involve site conditions that differ materially from the conditions planned for the construction contract. “Type 1” claims rely on the legal doctrines of misrepresentation and implied warranty to provide relief to a contractor unfortunate enough to encounter a site condition not envisioned in the parties’ contract. In contrast, “Type 2” claims involve site conditions that differ materially from those conditions that are “normally encountered.” “Type 2” claims rely on the equitable doctrine of mutual mistake to provide relief to a contractor for site conditions that were “unknown” or were of an “unusual nature.”
Whether a contractor pursues a “Type 1” or a “Type 2” claim, though, that contractor always seeks the same result- an “equitable adjustment” to the contract price. And when reviewing a differing site conditions claim, courts will always ask the same question: were the conditions the contractor experienced on-site “reasonably foreseeable?”
A site condition is “reasonable foreseeable” if a “rational, experienced, prudent and intelligent contractor in the same field” would have discovered the site condition at the time the contractor submitted its bid. Courts reason that if a contractor should have anticipated certain site conditions, but failed to account for those conditions in its bid, then that contractor cannot force the owner to pay additional contract amounts after the fact. Conversely, if the condition was truly unforeseeable—and a reasonable investigation would not have revealed the condition—the contractor will typically have a strong case to make that an equitable adjustment should be awarded.
Whether a contractor will recover under a “Type 1” claim or a “Type 2” claim will always depend on (1) what information was available to the contractor at the time of its bid, (2) whether the contractor took reasonable steps to investigate on-site conditions, and (3) whether the contractor made reasonable assumptions in its bid. Again, the linchpin is reasonableness—regardless of the type of claim, the contractor will only recover if the condition was not “reasonably foreseeable.”
Thus, whether you pursue a “Type 1” or a “Type 2” claim, your company’s chance of success will depend much more on what your company did (and did not) do at the time you submitted your bid than on the type of claim you pursue. Contractors should always conduct a reasonable investigation before submitting a bid. Complying with that best practice could easily mean the difference between a profitable endeavor and a disastrous outcome on your next construction project.
While we are on the subject, there are a few points worth mentioning about differing site condition claims. There are three key points to keep in mind to ensure success:
- First, that contractors cannot always rely on their contract. Even where contract documents indicate certain conditions exist on a project site, this typically does not excuse the contractor from performing its own independent investigation of site conditions. In H.B. Mac, Inc., 153 F.3d 1338 (Fed. Cir. 1998), for example, a contractor could not recover even though the owner provided eight soil borings in its bid package, indicating that a particular soil type was likely to be found on the project. The court found that it was unreasonable for the contractor to assume that the eight soil borings were representative of the entire project where the area was geologically diverse and the borings were taken under only one-half of the project site. In short, the contractor could not rely solely on the project documents—the contractor was required to conduct its own reasonable investigation.
- Second, remember that a contractor is not required to go to excessive lengths in its investigation. For example, in Pitt-Des Moines, Inc., ASBCA 42 838, 96-1 BCA 27, 941, a contractor was not required to conduct its own costly investigation of a foundation wall where construction plans indicated a particular wall thickness. Similarly, in P.J. Dick, Inc., GSBCA No. 12, 036, 94-3 BCA 27,073, a contractor was not required to hire its own structural engineer or conduct expensive tests. Rather, the contractor is only required to do what is “reasonable”—that is, perform a “reasonable” investigation.
- Finally, remember that whether a contractor will recover on a differing site conditions claim or not will often depend on the terms of the construction contract. Owners wary of risk associated with site conditions may attempt to shift that risk to the contractor through the contract. Contractors should always be on the look-out for risk-shifting provisions. Especially where the risk of differing site conditions is substantial, contractors should always consider who bears that risk in the contract. Building that risk into your bid, or performing a more extensive pre-bid investigation, may be necessary to avoid a disastrous outcome.