Friday, September 21, 2012

Latent or Changed Conditions

In construction contracts a bid or negotiated price is based upon both the information provided about the location or site itself and what is visible. After work commences, the contractor may uncover prior work or in site work to prepare the site for the desired construction and find a different conditions than the information or visual inspection would have indicated. These latent conditions can add significantly to the cost of the work. For example sample borings done at the site in different locations could show soil or a quality that may be used, whereas a latent condition could involve uncovering huge boulders that need to be removed or large areas of soil of a quality that must be removed from the site. It could also involve uncovering of soil that is contaminated and must be disposed of in a costly manner. In a renovation to a building a contractor could uncover a significant amount of electrical wiring that does not meet the current building codes and must be replaced.

Most construction contracts will include a latent of changed conditions provision. In those the additional cost of dealing with the latent condition and additional time required to correct the latent condition is determined between the parties. While traditionally it is the owner that bears the cost, the specific term that gets negotiated in the contract may change that so it’s important for the parties to understand exactly what they are agreeing to. I read about a case in Australia where the latent defect clause specifically excluded contaminated soil. In agreeing to that the contractor gave up their right to make claims for latent conditions involving contaminated soil. Contaminated soil was found on site and that one error cost the contractor over two million dollars to correct it which they were not able to claim as a latent condition.

Once the work is completed, the work itself may have latent defect that the owner could not discover by reasonable inspection. Most warranties are intended to cover the contractor’s responsibility to correct latent defects in the construction as you can’t return the work to the contractor and expect a refund. There may also be latent defect in the design that while not discovered during the construction of the work arise at a later point in time. A great example of that was the John Hancock office building in Boston, Massachusetts. The Hancock building was a sixty-story office tower in which the large window wall windows kept blowing out and crashing to the ground. That required a different design and a complete replacement of the windows to correct the problem. It was a combination of contractor warranties and Architect’s errors and omissions insurance that is used to protect against these forms of latent defects.

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