Shifting the Risk of Shifting Sands: A Brief Introduction to Differing Site Condition Provisions

When a contractor breaks ground on a construction project, unexpected conditions beneath the surface can be an expensive surprise. Unanticipated water, rock, or differing soil types can throw budgets and timelines into disarray. Differing Site Condition (DSC) provisions in construction contracts generally place the risk of these unforeseen conditions on the project owner rather than the contractor. Owners and contractors who understand DSC provisions are better poised to manage risk and avoid the costly financial burden in these unforeseen site conditions.

DSC Provisions: A Response to Inflated Bids

DSC provisions were not a common feature of construction contracts until the 1930s.  Prior to that time, contractors often bore the risk of differing site conditions.  Given the significant financial risks involved in, for example, hitting bedrock on a project at three feet instead of the expected five feet, contractors quite rationally adopted the view that the cost of such risks had to be “priced in” as part of the bidding process.  Inflated bids that accounted for such risks became the norm, with contractors collecting a windfall if no costly and unexpected site condition ever materialized. 

A Government Solution

Beginning in the 1930s, the U.S. Government began incorporating DSC provisions into public construction contracts as a way of countering that bid price inflation.  The Government told contractors, in effect, “if you find something unexpected down there, the Government will cover the change in costs.”  This innovation in contracting had the dual beneficial effects of (A) reducing bid prices and (B) reducing the incidence of litigation resulting when differing site conditions occurred.

Almost a century later, DSC provisions are considered standard features of construction contracts, including government contracts and form contracts promulgated by the American Institute of Architects (AIA). 

Type 1 and Type 2 Conditions in DSC Provisions

Although they may differ in wording, DSC provisions typically share some commons features.  These common features are the distinction between “Type 1” and “Type 2” conditions and notice requirements. 

Type 1 conditions can be described as those that differ from the conditions described in the terms of the contract.  In practical terms, Type 1 conditions are often those that differ materially from the geotechnical report or data accompanying and incorporated into the contract. 

Type 2 conditions are more unusual than Type 1.  Type 2 conditions are those that “differ materially from those ordinarily encountered or generally recognized” for the site. 

Notice Requirements

Regardless of the type of condition encountered, notice provisions will apply.  Notice periods may differ from contract to contract, but it is standard practice for a contractor (in order to preserve its rights and protections under the DSC provision) who encounters an unexpected condition to stop work and notify the owner.  Failure to strictly comply with the notice requirements may give the owner a defense to the contractor’s claim for excess costs resulting from the differing site condition.        

DSC provisions have shifted risk in a way that benefits both owners and contractors. By addressing unforeseen site conditions upfront, these provisions help prevent inflated bids, reduce costly disputes, and ensure that projects stay on track. Owners and contractors who understand these provisions can better manage risk, control costs, and navigate unexpected conditions with confidence.

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If you have any questions about this post or other contractual issues, please contact Jon Hollis or another member of our Litigation Team.