A tale as old as time: A supposedly “balanced” jobsite ends up requiring additional soil imports/exports, and the earthwork subcontractor performs additional work to fulfill its obligations in accordance with its contract. Is the earthwork subcontractor entitled to additional money or stuck with the agreed upon price for this additional work? The United States Court of Appeals for the Fifth Circuit recently addressed this scenario in D2 Excavating, Inc. v. Thompson Thrift Construction, Inc., et al.

The D2 Excavating Court looked to the language of the subcontract in holding that the earthwork subcontractor bore the risk that the work would be more difficult than anticipated and was not entitled to additional compensation due to unforeseen challenges.

Thompson, as general contractor, solicited a bid from D2 to perform site grading and excavation work. D2 ultimately entered into a subcontract with Thompson that contained the following provision.

Execution of this Agreement by the Subcontractor is a representation that the Subcontractor has visited the Project site, become familiar with local conditions under which the Work is to be performed and correlated personal observations with requirements of the Contract Documents. The Subcontractor shall evaluate and satisfy itself as to the conditions and limitations under which the Work is to be performed, including without limitation: (1) the location, condition, layout, and nature of the Project site and surrounding areas; (2) generally prevailing climactic conditions; (3) anticipated labor supply and costs; (4) availability and cost of materials, tools, and equipment; and (5) other similar issues. Accordingly, Subcontractor shall not be entitled to an adjustment in the Contract Price or an extension of time resulting from Subcontractor’s failure to fully comply with this paragraph.

D2 did not evaluate the site in person because of rain.  Instead, it reviewed a topographical survey of the site, the planned final elevations, and used simulations to evaluate the property before signing the subcontract.

The contract also contained language stating that the site was “balanced” (D2 would not have to import or export any dirt) but also that it was “[D2’s] responsibility to balance [the] site.”

As D2 began excavation, it soon realized the site was not balanced and “a lot” of dirt needed to be hauled off from the site. Additionally, D2 soon realized that it would have to excavate different jobsite areas multiple times because of the alleged mismanagement by Thompson; there was one site that had to excavated six different times.

Thompson orally agreed to cover the extra costs and pay for the extra work – an oral change order. After D2 became concerned that Thompson would not actually pay for the additional work, D2 stopped working.  At that time, 98.6% of the excavation was complete. D2 filed suit alleging Thompson breached the subcontract. The trial court ruled in D2’s favor requiring Thompson pay for the “excess” excavating work. Thompson appealed, and the court of appeals overturned the district court’s ruling in part.

Although no party disputed that the work was more than D2 expected, the language in the subcontract and D2’s actions (or, really, inactions) were the focus of the court of appeals. The Court distinguished between “additional work” and “extra work,” defining additional work as “that required in the performance of the contract and without which it could not be carried out” and extra work as “work […] arising outside and independent of the contract, something not required in its performance.”

D2’s main breach of contract argument was that that the contract written by Thompson expressly stated that the site was balanced, but it was not. The Court was not convinced. Citing to the 1907 Lonergan case and the more recent MasTec  and Interstate Contracting cases, the Court reiterated the long-standing and much-debated rule in Texas, that, “the party doing the work bears the risk that it will end up being more difficult than anticipated unless the contract shifts that risk to the buyer of the service.”

D2’s subcontract did not allocate the risk that the site would be unbalanced to Thompson.  Instead, that risk remained with D2, borne out by requirements in the subcontract that D2 “evaluate and satisfy itself as to the conditions and limitations under which the [w]ork is to be performed” and that D2 have “’visited the [p]roject site, become familiar with local conditions under which the [work] is to be performed and correlated personal observations with requirements of the [c]ontract [d]ocuments.’”

Based on this analysis of the subcontract language, the Court ruled that D2 assumed the risk for the additional work and that the subcontract price was the maximum recoverable amount.

But what about the oral change order? The Court stated that change orders must meet the basic requirements of contracts and be supported by valid “consideration”.  A promise to fulfill a pre-existing obligation, “past consideration” is legal parlance, will not suffice. Since D2 was already obligated to export the excess soils under the subcontract agreement without additional compensation beyond the subcontract price, hauling excess dirt was not valid consideration.  The Court held that the oral change order was void.

Allocation of the risk in prime contracts and subcontract agreements can tip the balance between a job being profitable and unprofitable.  The attorneys in our Austin and Dallas offices have significant experience writing, negotiating and litigating construction contracts and are available to answer any questions you may have.

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