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Contractual Provisions May Negate Contractors’ Ability to Rely on Owner-Provided Specifications

While typically an owner impliedly warrants the information, plans and specifications it provides to a contractor†, the decisions in two recent United States Court of Federal Claims cases (see Metcalf Constr. Co. v. United States, 102 Fed. Cl. 334 (2011) (Metcalf I), and Metcalf Constr. Co. v. United States, 107 Fed. Cl. 786 (2012) (Metcalf II)) demonstrate that a contractual provision requiring a contractor to conduct its own independent investigation may negate the contractor’s ability to rely on owner-provided specifications.

The heart of the Metcalf cases, in which the design-build contractor’s $27 million claim for increased construction costs was denied, involved the duty to independently investigate soil conditions on a project.

Metcalf Construction Company, a design-build contractor (aka “Engineering, Procurement, & Construction contractor” or “EPC contractor”), recently sued the Navy, as owner, to recover for, amongst other claims, differing site conditions on a large Hawaiian military housing project. The Navy counterclaimed for liquidated damages due to contractor’s alleged failure to complete the project on time.

During the bidding process, the Navy represented that the soil conditions for the project were “slightly expansive,” but the contract also expressly stated in the bid request that the contractor was to make an independent soil condition investigation. The contractor did not investigate and found once excavation and construction began that the soil was “moderately to highly expansive.” This significantly increased the contractor’s cost of construction for the project.

The Court of Federal Claims found that there was no differing site condition based on the represented and actual soil conditions, in part because the contract required the contractor to perform its own soil test. The Court found that this requirement to conduct an independent soil investigation negated any representation by the Navy or reliance thereon by the contractor. The contractor was thus barred from recovering the $27 million of added costs related to the differing site conditions it encountered.

(The case was recently argued on appeal before the United States Court of Appeals for the Federal Circuit. A decision on that appeal is still pending.)

Design-builders should heed this case as a cautionary tale. Prudence may indicate that site conditions be independently investigated before bidding and relying on owner-supplied specifications for design-build/EPC-type projects.

For more information about these cases or any area of construction law, please contact Steve Theising at STheising@KDDK.com or (812) 423-3183; or contact any member of the KDDK Construction Law Practice Team.

† See United States v. Spearin, 248 U.S. 132 (1918)

About the Author

Steven M. Theising

Steven M. Theising, an attorney at Kahn, Dees, Donovan & Kahn, LLP (KDDK), in Evansville, Indiana, practices primarily in the areas of business, construction, real estate, tax, and collection and creditors’ rights law. Steve utilizes his accounting and financial background to provide both legal and practical business analysis in negotiating, resolving and closing business, construction and real estate transactions and disputes. He also assists clients with addressing and resolving environmental and estate planning issues.