Hindsight About Unforeseen Site Conditions
Creatively Calculating Damages for a
Type
II Differing Site Conditions Claim
By: Doug Shevelow, P.E.
Reprinted from March 2006 ohioconstructionlaw.com
As promised in my last column, this month’s edition
follows up on the case I focused on in January, a decision from the United States Claims Court where a contractor on a U.S. Army Corps of
Engineers dam project successfully proved a Type II differing site conditions claim. The contractor in . (1990), 19 Cl. Ct. 346, was able to prove that the clay soils it needed to excavate from government-specified borrow areas and then transport and compact to construct the dam were much more difficult to deal with than anticipated. The contractor sued the government for a total of $42 million, approximately $24.5 million of which was attributable to embankment difficulties arising out of differing site conditions.
This column looks at how the court determined exactly what damages the contractor should receive. You may recall that even though the government was liable for damages, the contractor had some culpability, too. It should have recognized there would be some difficulty with the site’s soils—its production estimates were too optimistic for what it should have gleaned from the bid information (high Liquid Limits were a red flag) and from general knowledge of soils in the North Central Texas area (“generally difficult to work with”).
So where did the court end up—closer to the $24.5 million demanded, or the zero dollars offered by the Corps? The court characterized the claim as a “total cost” claim, a characterization that must have sunk the hearts of the contractor’s attorneys because, as the court explained, total cost claims are “generally disfavored in the law.”
After this little scare, the court threw the contractor a lifeline when it concluded that the total cost method may be the “only viable means to identify” the contractor’s costs. Why was this? Because the court applied a four-part test based on case law. The test:
It must be impossible to determine the plaintiff’s actual losses with a reasonable degree of accuracy;
the plaintiff's bid must be reasonable;
the plaintiff’s actual costs must be reasonable; and
the plaintiff must not be responsible for the added costs.
The court had no problem with the first element of the test: the court could not isolate the incremental impact of the nature of the changed condition, making it impossible to determine actual losses. The third and fourth elements were satisfied through testimony from the contractor’s expert witness. But the court had a problem with the second element. It readily acknowledged that the bid was not reasonable. The contractor should have been more cautious in preparing its bid.
However, instead of throwing out the claim, the court took a highly creative step. It developed a theoretical reasonable bid to serve as a damages benchmark. And where did the court find this standard for a reasonable bid? It simply looked at the bid tab for the project and took the bid from another contractor whom the court had already determined to be a reasonable contractor in its analysis of the Type II differing site conditions claim. This “reasonable contractor” bid more than $9.2 million more for embankment than the plaintiff contractor had bid. Its overall project bid was about $8.2 million more than the plaintiff contractor’s, making it the second lowest bidder. The court then reduced the plaintiff contractor’s damages by the $9.2 million by which it underbid the job.
The court’s approach seems fair. It compensated a contractor who had a legitimate grievance because of a significant differing site condition, while preventing the contractor from making a windfall. The court made sure that the contractor felt the consequences of its unreasonably low bid by reducing its damages by an amount equal to the estimated “unreasonableness” of the bid.
How would the court answer a charge that the true full consequences of the unreasonably low bid were not realized, because if the bid had truly been reasonable—at least vis à vis the benchmark reasonable bid chosen by the court—the contractor would not have won the job? I think the answer is easy—the contractor would have broken even by staying home, but despite the award, it still lost several million dollars. This might not make the second lowest bidder feel any better because the numbers tell us that had its bid been selected, it would have made a profit when factoring in the award. But we do not know what the transactional costs were to gain the award, that is the attorney fees, consultant fees, and internal costs of a lengthy trial. Perhaps the second low bidder was in the best position. Some bids it is better not to win.
