The United States Court of Federal Claims’ ruling in Metcalf Construction Co. v. United States, 102 Fed. Cl. 334 (2011). is currently on appeal to the United States Court of Appeals for the Federal Circuit. At issue in the case are multiple disputes between a design-builder and the federal government in connection with a housing project that went awry. Among the various issues in the case is a dispute over differing site conditions (“DSC”) and the design-builder’s claim arising out of the discovery of those conditions. In the view of many, the Court of Federal Claims deviated from precedent in its ruling, misapplied the prevailing test for DSC claims, and may have radically shifted risk in government contracts in the process. The Court of Federal Claims’ ruling garnered the attention of contractors and design-builders throughout the country, and both the American Institute of Architects and the Design-Build Institute of America have filed amicus briefs with the Court of Appeals for the Federal Circuit in an effort to identify the errors of the Court of Federal Claims and the profound impact that that Court’s ruling could have in the industry.

The Differing Site Conditions Clause

The DSC clause is a contractual mechanism for allocating risks and costs associated with unknown site conditions that could not have been anticipated through a reasonable site inspection. By lending predictability to an otherwise unpredictable contingency, DSC clauses have become a fixture in modern standard form contracts. Indeed, the Federal Acquisition Regulation (FAR), American Institute of Architects General Conditions, ConsensusDOCS and Federation Internationale des Ingenieurs-Conseils (FIDIC) forms all contain clauses addressing differing site conditions and the allocation of risks and costs among the contracting parties. The popularity of DSC clauses extends beyond these forms, however, as the clauses are used routinely in a broad range of private and public contracts.

DSC claims are commonly characterized as either Type I claims or Type II claims. Type I claims refer to subsurface or latent physical conditions that differ materially from the conditions indicated in the contract. Type II claims, on the other hand, refer to unknown physical conditions at the site that are of an unusual nature and differ materially from those ordinarily encountered and generally recognized as inherent to work of the character being performed pursuant to the contract.

In 1970, the United States Court of Claims (the predecessor to the new existing Court of Federal Claims) in Foster Construction C.A. & Williams Bros. Co. v. United States, 435 F.2d. 873 (Ct. Cl. 1970), articulated the underlying purpose for the modern DSC clause. The policies advanced through DSC clauses include the enhancement of the procurement process and the minimization of the risk to bidders of adverse subsurface conditions on construction projects. In the view of the Foster Construction court, the DSC clause accomplishes these goals by taking “the gamble on subsurface conditions out of bidding” and allowing bidders to avoid weighing contingent costs. The Court also noted that DSC clauses do not benefit the contractors only. “The Government benefits from more accurate bidding, without inflation for risks which may not eventuate. It pays for difficult subsurface work only when it is encountered and was not indicated in the logs.”

The Foster Construction court prophetically cautioned that the use of the mandatory changed conditions clause in federal contracts required that the terms of the clause “not be frustrated by an expansive concept of the duty of bidders to investigate the site. That duty, if not carefully limited, could force bidders to rely on their own investigations, lessen their reliance on logs in the contract and reintroduce the practice sought to be eradicated—the computation of bids on the basis of the bidders’ own investigations, with contingency elements often substituting for investigation.” In the years following Foster Construction, many other cases have tested the parameters of the DSC clause and the relative duties of the contracting parties. While the test for such claims has been refined over time, the core considerations of streamlining and enhancing procurement and avoiding uncertain consequences for unanticipated conditions remain.

The Applicable Test For DSC Type I Claims

In 2008, the United States Court of Federal Claims decision in International Technology Corp. v. Winter, 523 F.3d 134 (Fed. Cir. 2008), discussed the boundaries of the DSC clause on a Navy project in Stockton, California. The case involved a contractor’s DSC claim for additional costs arising out of the contractor’s treatment of contaminated soil encountered during the course of the project. After identifying the DSC claim as Type I, the Court articulated the legal test applicable to the claim and the four essential elements on which the contractor bore the burden of proof.

The contractor must prove that a reasonable contractor reading the contract documents would interpret them as making a representation as to the existing site conditions.

  1. The contractor must prove that the actual site conditions were not reasonably foreseeable to the contractor based on information available to the contractor outside of the contract documents such that the contractor’s reliance on the indications in the contract was reasonable.
  2. The contractor must prove that it in fact relied on the contract indications.
  3. The contractor must prove that the conditions differed materially from those represented and that the contractor suffered damages as a result.
  4. While the first element is primarily a legal argument based on interpretation of written terms in the contract, the remaining three elements call for a fact-intensive inquiry for the court and/or review board. Notably, the burden of demonstrating each of these four elements is placed squarely upon the contractor asserting the claim, meaning that any claimant must sufficiently document each of these elements throughout the course of performing the project. Ultimately, in International Technology, the Court reasoned that the claim was not appropriate because: i) the representations were made in a report; ii) the contract itself did not contain any specific indications of the soil condition; iii) the contract did not state that the contractor could rely on the representations in the report; and iv) it was foreseeable that the reports were wrong because the contractor was aware of certain inaccurate testing methods.

In the five years since being published, the International Technology test has received a relatively positive response and treatment from the Court of Federal Claims, the Armed Services Board of Contract Appeals, the Civilian Board of Contract Appeals, as well as other courts and publications. The recent case of Metcalf Construction Co. v. United States, however, has controversially raised the question of how the International Technology test is to be applied.

Metcalf Construction Company, Inc. v. United State

Metcalf Construction involved a Navy project for demolition of existing housing and design and construction of new family housing units. Metcalf was the design-builder. While a number of legal and factual disputes arose between the parties in connection with the project, this article is focused solely on the Court of Federal Claims’ treatment of Metcalf’s DSC claim to recover cost overruns due to soil expansion and contamination.

Metcalf’s Soil Expansion DSC Claim

The Navy’s original and revised request for proposal (“RFP”) at the project site included a soil investigation report. The report detailed characteristics of the soil as having “slight expansion potential.” The RFP stated, however, that the soil investigation report was for preliminary information only and advised contractors to perform post-award site design and engineering work, including soil investigation

A few weeks after receiving its notice to proceed, Metcalf hired an independent entity to conduct a soil investigation. The results of that investigation indicated a moderate to high expansive near-surface soil that differed from the soil described in the Navy’s report included in the RFP. Metcalf submitted its DSC claim. The Navy rejected Metcalf’s claim, contending that the claim was late and that the Navy’s soil report was specifically for “preliminary information only” such that Metcalf could not have reasonably relied upon it

On appeal of the Navy’s decision, the Court of Federal Claims did not take issue with the form of Metcalf’s notice of claim. The Court concluded, however, that Metcalf’s claim lacked merit under the International Technology test and its four elements. The Court ruled that Metcalf could not satisfy the first element that the contract documents made any indication of the soil conditions because the Navy’s soil investigation report was for preliminary information only. With respect to the second element, which requires that the actual conditions not be reasonably foreseeable, the Court noted that Metcalf was an established contractor in Hawaii and would have been aware of the problem of expansive soils in the area. With respect to the third element concerning reliance on the indications in the contract, the Court found that Metcalf could only rely on the Navy’s soil report for bidding purposes, but not for performing the project. In sum, although Metcalf incurred additional costs of approximately $4.8 million for the issues with the soil, the Navy was not obligated to pay those costs

Metcalf’s Soil Contamination Claim

The Navy’s RFP stated that the human carcinogen chlorodane was present in the soils but at acceptable levels such that remediation was not required. Metcalf tested the soil conditions on multiple occasions, finding no detectable amounts of chlorodane. Upon excavating the building pads, Metcalf lacked space to store the soil. Before Metcalf could move stockpiles of the soil elsewhere, the Navy required Metcalf to test the stockpiles. The tests found detectable levels of chlorodane. Metcalf submitted notice of the DSC to the Navy, and the Navy rejected the claim in part.

On review, the Court of Federal Claims again utilized the International Technology test to evaluate the merits of Metcalf’s claim. And again, the first element of the test concerning the indications in the contract documents proved to be fatal to Metcalf’s claim. The Court of Federal Claims concluded that a reasonable contractor reading the documents as a whole would not interpret them as making a representation as to the site conditions. The Court acknowledged that the RFP represented the existence of chlorodane but that the known levels were acceptable and no remediation was required. The Court noted, however, that the Navy also submitted an additional report advising Metcalf to conduct an independent assessment. As to the second element concerning foreseeability of the conditions, the Court concluded that it was foreseeable that higher levels of chlorodane could be found because the contract specifications stated that it could be present.

In The Wake Of Metcalf Construction

For design-build entities, the Court of Federal Claims’ opinion in Metcalf Construction provides reason for concern. Certainly, it is commonplace for a design-build contract to require an independent investigation of the owner’s information. Metcalf Construction, however, seems to reflect a dramatic reallocation of risk by turning the design-builder’s independent review into a warranty of conditions and by diminishing the reliability of reports and indications included in RFPs. In doing so, it appears that Metcalf Construction may have accomplished precisely what the Foster Construction court sought to avoid over forty years ago: the elevation and expansion of a bidder’s duty to investigate the site such that bidders will be forced to rely on their own investigations instead of the contract documents. The Metcalf Construction distinction between bid documents (upon which it concluded a contractor cannot rely) and other contract documents (upon which a contractor may rely) certainly undercuts this longstanding policy of providing greater predictability to the procurement process.

Arguably, the Court in Metcalf Construction fumbled the DSC claim analysis under the International Technology test and imposed too heavy a burden on the design-build contractor while allowing the owner to avoid liability for representations made in bid documents. If affirmed and enforced, the result of this case will likely be more uncertainty in project pricing and greater risk for design-build contractors.

For now, both the precedential value of Metcalf Construction and the extent of its reach and applicability remain unclear. Metcalf Construction is not the law of the land and is based on specific facts that are unlikely to have widespread applicability. Nevertheless, the Court of Appeals for the Federal Circuit will likely have the last word on the matter. One hopes that the Court of Appeals will provide clarity to the issue, set aside the Court of Federal Claims’ ruling on the DSC issues, and reaffirm the standard consistent with decades of authority and policy favoring a fair allocation of risk among the project participants.