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Aug 302014

A recent Federal Circuit decision will likely have a major impact on future schedule delay claims and disputes. Metcalf Construction entered into a contract agreement with the Navy to build 212 duplex housing units in Hawaii. The contract included a standard differing site condition (DSC) clause with a independent duty provision for the contractor to perform its own pre-bid soil investigation. After award, Metcalf performed a soil investigation that found highly expansive soils which could have posed a significant risk of slab-on-grade failure if the duplexes were built in accordance with the Navy’s original design. The design had to be altered and Metcalf submitted two formal DSC claims to the government requesting additional compensation for direct costs and delay damages. The Contracting Officer denied the claims. Metcalf proceeded with the changed design and performed the work in accordance with the new geotechnical recommendations to properly deal with the expansive soils. Needless to say, the project and ran into significant cost overruns due to the DSC and schedule delays. The Navy paid Metcalf $49 million, but Metcalf’s actual costs exceeded $76 million.

DSC’s are typically characterized as one of two types: (1) the conditions encountered at the site differ materially from those indicated in the contract (Type I), or (2) the conditions encountered at the site differ materially from those normally encountered (Type II).

Type I Differing Site Conditions Claims

An owner may be required to provide an equitable adjustment for a Type I differing site condition if: (1) the contract indicated the conditions that the contractor could expect to find at the site; (2) the conditions indicated in the contract differed materially from the actual conditions; (3) the actual conditions were reasonably unforeseeable based upon all the information available to the contractor at the time of bidding; (4) the contractor acted as a reasonably prudent contractor in interpreting the contract documents; (5) the contractor reasonably relied on its interpretation of the contract and contract-related documents; and (6) the contractor incurred additional costs as a result of the difference between the expected conditions and the actual conditions.

Court Decision

In the original court case, the Court of Federal Claims found in favor of the government. It determined that the Metcalf case did not meet the threshold of a Type 1 differing site condition and that the DSC clause’s requirement for Metcalf to perform its own pre-bid soil investigation shifted all of the risk of the DSC to Metcalf. In early 2014, the U.S. Federal Circuit Court of Appeals reversed the original Court of Federal Claims decision citing that the DSC clause did not fully shift all risk to Metcalf.

Potential Consequences

The potential consequences of the Federal Court’s reversal could be significant. The Federal Circuit ruled that the Court of Claims had applied the wrong legal standard and misinterpreted certain provisions of the contract. The judges ruling is summarized as follows:

Even requirements for pre-bid inspection by the contractor have been interpreted cautiously regarding conditions that are hard to identify accurately before work begins, so that the duty to make an inspection of the site does not negate the changed conditions clause by putting the contractor at peril to discover hidden subsurface conditions or those beyond the limits of an inspection appropriate to the time available.

The Metcalf appeal should be seen as a major win for general contractor and will likely have a significant influence over contract documents and dispute resolution proceedings in the future.