One of many examples of a DSC can be where a contractor encounters unexpected underground rock – or maybe differing soil, water or utility piping, etc. Examples of things generally not categorized as DSCs are extreme weather conditions, labor/equipment shortages, increased material costs or political/economic events. A good general definition of a DSC might be:

• an unanticipated physical condition that significantly differs from what was expected by the contractor at or before the time the contractor executed the contract; and
• the DSC could have only been discovered through investigations or tests beyond those a contractor would reasonably be expected to perform under the circumstances.

A DSC can be a game changer for the contractor. The DSC can lead to a major change – sometimes millions of dollars – in what it will now take the contractor to complete the project, as well as a significant change to the projected completion date. But the contractor does not necessarily get extra payment and time for this change. First, if there is no contract provision stating the contractor gets compensated for a DSC, then the contractor could easily be out of luck. As just one example, in Texas, unless there is a DSC contract clause, Texas courts often state the extra work resulting from the DSC (e.g., removing the unforeseen rock) was a necessary part of the performance of the contract; thus, no extra time or money for the contractor. Courts in other states have had similar holdings, as have federal courts dealing with federal project DSC claims.

A key issue for the contractor is often to first ensure there is actually a DSC clause in the contract. A DSC clause that many contractors may be familiar with is in the AIA (American Institute of Architects) A201-2007 contract form at Section 3.7.4, stating: “If the Contractor encounters conditions at the site that are (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 Documents, the Contractor shall promptly provide notice to the Owner and the Architect before conditions are disturbed and in no event later than 21 days after first observance of the conditions.” Similar DSC language can be found in other standardized contract forms, such as the ConsensusDocs, Design Build Institute of America (DBIA) and Engineers Joint Contract Documents Committee (EJCDC) forms, as well as the Code of Federal Regulations (CFR) governing federal projects.

But even with a DSC contract clause, the contractor must be aware of other issues that could undermine its DSC claim. For example, the contractor generally will want to ensure it follows the contract’s procedures for making a claim, including meeting deadlines for making a claim (e.g., the 21 day deadline in the AIA contract above), submitting documentation with the claim and which party(s) to submit the claim to (e.g., the owner AND architect, in the AIA contract above). Another issue the contractor may have to address: is the DSC significant enough to allow a claim under the contract’s DSC clause? For example, under the AIA language above, is DSC “materially” different from the conditions indicated in the contract document or “materially” different from those ordinarily found to exist?

The contractor must also assess whether there are other clauses in the contract stating the contractor has “thoroughly examined the site and satisfied itself as to the conditions which will be encountered.” If such clauses exist, they can inhibit the contractor’s DSC claim, despite the existence of a DSC clause elsewhere in the contract. Additionally, attention must be given to what other contract provisions say, if anything, about who has responsibility for design deficiencies or whether the contractor can rely upon the accuracy of any soils report provided. Finally, did the request for bids require the contractor to attend certain pre-bid meetings or to drill test holes on the site and, if so, did the contractor take these steps? If not, the contractor’s DSC claim might be defeated by an argument that the DSC was foreseeable.

DSCs are complicated. Much will depend on the law of the state governing the project, the terms of the contract, and, of course, the type and severity of the DSC (or DSCs) the contractor actually encounters. But being aware of – and then meticulously documenting and trying to address – the above DSC issues can be critical for ensuring the bottom line is not derailed by DSCs.