What happens when the owner’s promise that it has conducted due diligence collides with the contractor’s fixed price obligation? It’s time to replace the 60-year old pipeline you acquired years ago along with millions of dollars of other assets that you actually cared about.
Your contractor agrees to a fixed price for all work and materials for the replacement, inspects the entire length of the pipeline, and agrees to conduct such investigations that it deemed necessary for an understanding of the work to be done. Your agreement with the contractor says there are unseen hazards that would increase the cost of replacement, and you represent that you have used “due diligence” to locate such hazards. As it turns out, the as-built drawings aren’t accurate, and there are 794 such hazards, rather than the 282 you warned them about. The result is millions of dollars in cost overruns.
Litigation ensues. What is the result? In this case, the contractor was excused from the fixed price and was entitled to recover some $4 million in cost overruns. The lesson: Know what you own, and be mindful that acquiring old assets for which there are scant records means taking on potential liabilities beyond the ordinary risks of ownership and operation.