School Renovation: Late Notice of Differing Site Condition and a Pay-If-Paid Clause
A contractor holds a $4.2 million fixed-price contract to renovate a 1950s school. The geotechnical report included in the bid documents states bedrock at approximately 4 feet below grade. During excavation for footings, the crew encounters continuous weathered rock at 1.5 to 2.5 feet across 60 percent of the footing area. The superintendent tells the owner's inspector on day 1 and the crew slows. The contract requires written notice within 7 calendar days for differing site conditions; the contractor's written notice is sent on day 9. The owner denies the claim as untimely and directs the contractor to continue. The contractor incurs $185,000 in rock removal and 18 days of delay. The contract also contains a pay-if-paid clause. The owner has not paid the contractor's month 3 application because the owner's lender has not funded the draw. The contractor is considering stopping work.
1. Assess the contractor's entitlement to the rock removal cost and delay, including the notice problem. What steps should the contractor take now?
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Entitlement. The subsurface condition differs materially from the geotechnical baseline (rock at 1.5 to 2.5 feet versus approximately 4 feet). That is a classic Type I differing site condition: the condition differs from what the contract documents indicated. Entitlement depends on notice and on proving the baseline representation was reasonable to rely on.
Notice. The contract requires written notice within 7 calendar days. The contractor gave actual notice to the owner's inspector on day 1 but written notice on day 9. The owner's denial based on timeliness is not automatically conclusive. Many jurisdictions treat notice as a condition precedent, but an owner that had actual notice and suffered no prejudice may be found to have waived strict compliance. The outcome is fact-specific and jurisdiction-specific; do not assume either side wins.
Recommended steps.
- Send a supplemental written notice immediately, attaching the day-1 inspector conversation, daily reports, photographs, and the geotech report.
- Document the quantity: 60% of footing area, actual elevations, equipment hours, and the 18-day delay with a time impact analysis.
- Request a meeting with the owner and designer to establish the baseline; do not rely on the phrase differing site condition alone.
- Continue work under protest if directed, and preserve the claim. A stop-work decision is separate and should not be taken without checking the contract's suspension and termination provisions.
Bottom line. The claim is strong on the merits but vulnerable on notice. The practical strategy is to cure the notice defect with evidence of actual notice and no prejudice, while negotiating a reservation of rights.
2. How should the contractor analyze and respond to the owner's nonpayment under the pay-if-paid clause, and should it stop work?
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Pay-if-paid. The clause is a risk allocation, not a guarantee. Enforceability varies by state. Some states enforce pay-if-paid as written; others treat it as against public policy, and many prompt-payment statutes override it or require payment within a set period. The contractor should not assume the clause is void, and should not stop work solely because the owner has not been paid by its lender.
Analysis.
- Read the clause exactly: does it say payment is a condition precedent, or merely that payment will be made when received? The first is stronger for the owner.
- Check the jurisdiction's prompt-payment act and any anti-waiver statute. Also check whether the owner's nonpayment is due to the lender, which may not be a valid pay-if-paid trigger if the owner has not submitted a proper draw.
- Review the contractor's own payment application for completeness; an incomplete application can justify nonpayment independent of the lender.
- If suspension is permitted, follow the notice and cure period exactly. Wrongful suspension can be a material breach.
Recommended steps. Send a written demand with the application, lien rights notice, and a request for the lender's draw status. Preserve lien and bond rights. Do not stop work until the contract's suspension clause and local law are reviewed. Consider a joint meeting with the owner and lender.