Beware of the Unknown: Concealed or Unknown Conditions Clauses in Construction Contracts

construction contracts unknown conditions such as subsurface rock

Fourth in a series of articles addressing key provisions in construction contracts

In construction contracts, good contract drafting principles encompass not only the expectations of the parties, but also the appropriate management and allocation of risks. Some of those risks arise from possibilities and conditions that are simply not known at the time the contract is drafted. Clauses addressing concealed or unknown conditions — also referred to as differing site conditions — reflect both of these principles.

Concealed or Unknown Clauses in Relation to Scope of Work and Contract Price

A concealed or unknown conditions clause is related to the contract terms that set the scope of work. A contractor is obligated to provide, and owners are obligated to pay for, matters within the defined scope of the work, as set by the contract terms and contract documents. Descriptions of the scope of work often speak to items that are expressly excluded from the scope. Common exclusions address removal of rock or replacement of unsuitable soil. A concealed or unknown conditions clause should not replace excluded items, but itself is a key provision.

Discovery of an unknown condition has the potential to greatly increase the costs of construction,  thereby impacting the price of a construction contract. The purpose of the clause is to allocate to an owner the risks (money and time) that result from discovery of conditions after construction has commenced.

However, even though risk is assigned to the owner, it doesn’t make the clause categorically against an owner’s interest. Without it, the original price necessarily should have been higher, because the contractor would have to increase the initial price in order to assume the risks of unknown conditions. Given that, it’s recognized that unknown clauses encourage competitive bidding. Bidders do not have to price for all unknown contingencies, and the costs of them are incurred only if they actually impact the construction.

Differing Site Conditions – Types I and II

The risks managed by these clauses are generally viewed in two types — commonly referred to as Type I and Type II differing site conditions. Whether a condition qualifies as a Type I or Type II differing site condition depends on what is in the contract documents.

Type I conditions are:

  • subsurface (often rock or unsuitable soil) or otherwise concealed (such as behind existing walls)
  • physical in nature
  • materially different from the conditions represented in the contract documents (plans, specifications, scope documents, etc.).

A Type II condition is:

  • unknown
  • a physical condition
  • of an unusual nature,
  • one that differs materially from those ordinarily encountered and generally recognized as inherent in the type of construction at issue.

The primary distinction between Type I and Type II conditions is whether the condition is at odds with that shown in the contract documents, or is one that varies from that ordinarily found in similar construction.

Drafting Considerations for Differing Site Conditions

Differing site conditions clauses are common, and sample language is found in many industry standard contract forms. Consider whether typical language should be revised to serve project interests, in order to better plan for and control the economic consequences. A few practical pointers:

  • Timely notice. A contractor should give prompt notice to the owner of the discovery of an unknown condition. The American Institute of Architects reduced the notice requirement time from 21 days to 14 days in its 2017 version of the A201.
  • Detailed description of condition that will qualify. Subsurface rock may be the most prevalent differing site condition. An owner and contractor may know that rock will impact grading and foundation work, but not know in advance the scope and extent of the impact. The contract may include language that sets parameters governing whether removal of rock is within the contract price, or will justify a change order. For example:
    • Mass rock excavation: a change order will be issued for removal of material that cannot be ripped with _______________ (identify equipment).
    • Similar provisions could be utilized for trench rock excavation and footings excavation.
    • Establish parameters on the area of removal of rock — such as X number of feet or inches beyond a wall, below the bottom of a footing, or wider than a required trench.
  • Pricing. Is it appropriate to agree in the contract to unit prices that will apply if specified conditions are encountered?
  • Not just subsurface. Issues encountered aren’t limited to subsurface conditions. Given that, the clauses should include “concealed or unknown” conditions, not simply rock removal or unsuitable soil removal and replacement. In some projects, it may be prudent to go further and express with specificity whether certain conditions will qualify. The likelihood of the existence of a problem may be reasonably certain, but if its extent is unknown, it cannot be reasonably priced in advance. For example, if it is known that potential problems behind existing finishes in a renovation have not been priced, it’s better to express that — either in the scope or the differing site condition clause — rather than argue in the future whether the condition encountered should have been expected by the contractor.
  • Specifications and other contract documents.
    • Careful review of specifications and other contract documents is required, whether or not there is a differing site condition clause.  
    • Recognize some owners will not permit differing site conditions clauses. For example, in North Carolina Department of Transportation Standard Specifications for Roads and Structures, differing site conditions clauses were replaced years ago with “Overruns and Underruns of Contract Quantities.”
    • Realize that a differing site conditions clause will not be interpreted apart from other provisions of a construction contract. Scope of work descriptions, site inspections obligations, the existence and contents of geotechnical reports (particularly if identified as contract documents) and other terms will be relevant.

About the Author

D. Anderson Carmen

Andy Carmen focuses his practice on construction law matters, creditor representation and serves as a mediator and arbitrator.
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