In Construction Contracts
Nobody likes surprises in construction work, because they almost always increase costs. Who pays for job-site surprises, things unanticipated by the owner, architect, or contractor, is often a bone of contention. In new construction, this might be subsurface conditions such as ledge or large boulders that must be removed. In remodeling, it could mean rotted or insect-damaged framing, foundation problems, the presence of toxic materials such as lead, asbestos, or radon, or any number of things that lurk behind walls and ceilings.
Common hidden or concealed conditions include pipes or wires that are in unexpected places, damaged, or obsolete and need to be relocated or replaced. In other cases, expected components are missing: a necessary vent pipe, beam, or other building component was never installed or was removed at some point. I’ve seen more than one home held up by a wing and a prayer, rather than a proper structural frame (this is possible because all buildings are engineered with a large safety factor, so they tend to sag over the years rather than collapse).
There is some overlap in meaning, but in general the term “changed” or “differing” conditions refers to job-site conditions that are different from what’s in the plans and specs, while “hidden” or “concealed” conditions are those that are hidden from sight and not obvious. Hidden conditions are especially common in renovations, since most of the structure is hidden from view. Changed conditions may reflect an error or omission in the plans that ends up adding costs to the project.
Most contractor agreements have a “hidden,” “concealed,” or “changed” conditions clause, which attempts to pass those costs to the homeowner. From the contractor’s perspective, why should he have to pay for things that were not indicated on the plans and could not have been reasonably anticipated? Owners, on the other hand, tend to think that the contractor should have known about these problems based on his experience and site investigations.
With no such clause in the contract, courts have generally supported owners as long as they did not willfully withhold information about the job. If you know that the foundation is settling and that you share the house with a termite colony, you must disclose this. Courts have generally ruled that contractors are responsible for what they should have known had they done a thorough job inspection, following customary trade practices. Even with a hidden or changed conditions clause, courts may rule against a contractor who should have discovered the problem with a reasonably thorough site inspection before bidding.
Still some contracts try to place on the owner all responsibility for changed or hidden conditions. This is unfair since some problems should have been anticipated by a professional contractor who made a reasonable effort to inspect the plans and building site. Avoid a contract with blanket language such as:
Any work not indicated in the plans or specifications, that must be added, repaired, or replaced as a result of hidden, concealed, or changed conditions, or that is required for compliance with building codes or other regulations, shall result in a change order, and shall be paid for in full by the Owner, subject to the terms and conditions of this contract.
More owner-friendly (and architect-friendly) contracts like the AIA contracts, place at least some of the burden on the contractor to carefully review all plans and to carefully examine the job site before bidding.
For example AIA’s short-form contract A105 reads as follows below. Keep in mind that if you provide the plans, and no architect is involved at this point, you can substitute “Owner” for “Architect”:
10.3 If concealed or unknown physical conditions are encountered at the site that differ materially from those indicated in the Contract Documents or from those conditions ordinarily found to exist, the Contract Sum and Contract Time shall be subject to equitable adjustment.
8.1.1 Execution of the Contract by the Contractor is a representation that the Contractor has visited the site, become familiar with local conditions under which the Work is to be performed and correlated personal observations with requirements of the Contract Documents.
8.1.2 The Contractor shall carefully study and compare the Contract Documents with each other and with information furnished by the Owner. Before commencing activities, the Contractor shall (1) take field measurements and verify field conditions; (2) carefully compare this and other information known to the Contractor with the Contract Documents; and (3) promptly report errors, inconsistencies or omissions discovered to the Architect.
NOTE: This is why you’ll often see “Contractor to verify all measurements on site” stamped on most construction drawings.
The contractor’s duty to verify field conditions places a greater burden on him to examine the job site and makes it more difficult for him to pass on costs to the homeowner. In my own experience, there is usually visible evidence of rotten or bug-infested framing that is apparent to a competent building professional. Similarly, in new construction, there is usually evidence of subsurface water problems or subsurface ledge, but the extent of the problem may not be easy to determine.
If problems are suspected, it is worthwhile to tear down some plaster or drywall to get a better look, or make additional test borings to assess subsurface conditions. Then you will be in a better position to negotiate a fixed price, or at least an allowance, prior to construction. For example, the contract may refer to the presence of ledge and provide an allowance, based on X dollars per cubic yard of ledge removed. With rotted framing, the estimate could contain a best guess of the cost to replace, with a similar allowance based on the amount of wood replaced, perhaps with a guaranteed maximum. Anything you can do to nail down costs or at least set some reasonable limits will help you control costs and help avoid disputes.
Bottom line: Minimize surprises and conflicts by doing the extra work needed up front to identify potential “hidden” problems. Use contract language that makes the contractor responsible for verifying field measurements and conditions, so the burden of hidden conditions is shared fairly by both parties.