Recovery of Unabsorbed Home Office Overhead
Under the Eichleay Formula: The Standby Test

Delays or suspension of a contractor's performance frequently increase the contractor's "direct" costs of performing the work. A contractor's "direct" costs "arise solely because of and are attributable directly to performance of a specific contract" (West v. All State Boiler Inc., 146 F.3d 1368, 1372 (Fed. Cir. 1998)). Common direct costs increased by delay or suspension are site overhead and site supervision costs.

A contractor also incurs "indirect" costs. These "indirect" costs "are not attributable to one contract in particular but arise because of [the contractor's] general operations. Indirect costs are usually those costs that are "incurred despite construction inactivity on a project, such as home office overhead, including accounting and payroll services, general insurance, salaries of upper level management, heat, electricity, taxes, depreciation'" (All State Boiler, 146 F.3d at 1372 (quoting Interstate General Government Contractors Inc. v. West, 12 F.3d 1053, 1058 (Fed. Cir. 1993)). "A contractor recovers its indirect costs by allocating them on a proportionate basis among all of its contracts" (All State Boiler, 146 F.3d at 1372).

Calculation of damages for a contractor's daily unabsorbed overhead costs is most commonly done using the Eichleay formula. Named after a 1960 Armed Services Board of Contract Appeals decision, the formula multiplies a contractor's daily unabsorbed overhead by the number of days of government-caused performance delay to determine the contractor's damages (Eichleay Corp., 1960 ASBCA LEXIS 1207, 60-2 BCA (CCH) 2688, 13,568 (1960)). Indeed, in federal construction contracts when a contractor satisfies the prerequisites for application of the formula, the Eichleay formula now is the exclusive acceptable method for calculating unabsorbed home office overhead damages, except in limited special circumstances (Wickham Contracting Co. v. Fischer, 12 F.3d 1574, 1579-80 (Fed. Cir. 1994)).

Calculation of the damages amount under the Eichleay formula requires three steps: (1) to find allocable contract overhead, multiply the total overhead cost incurred during the contract period times the ratio of billings from the delayed contract to total billings of the firm during the contract period; (2) to get the daily contract overhead rate, divide allocable contract overhead by days of contract performance; and (3) to get the amount recoverable, multiply the daily contract overhead rate times the days of government-caused delay (Capital Electric Co. v. United States, 729 F.2d 743, 747 (Fed. Cir. 1984)).

Recovery under the Eichleay formula, however, is not automatic in cases where the contractor was delayed: It is "an extraordinary remedy" (All State Boiler, 146 F.3d at 1377). First, the contractor must "show that a government-imposed delay occurred" (Sauer Inc. v. Danzig, 224 F.3d 1340, 1348 (Fed. Cir. 2000)).

The proof of causation to recover unabsorbed overhead arising from government delay differs for application of the Eichleay formula from the causation proof for recovery of direct costs arising from delay.

The two prerequisites to application of the Eichleay formula are: (1) the contractor must be on "standby" and (2) the contractor must be "unable to take on other work" (Interstate General, 12 F.3d at 1056.)

The "standby" test "focuses on the delay or suspension of contract performance for an uncertain duration, during which a contractor is required to remain ready to perform" (Interstate General, 12 F.3d at 1058). The contractor bears the burden of proof on the "standby" test.

The second test, the "other work" test, is the government's to prove. The government must demonstrate "that it was not impractical for the contractor to take on replacement work and thus avoid the loss" (All State Boiler, 146 F.3d at 1381).

This month we highlight a new case decision discussing the meaning of "standby" for purposes of recovering unabsorbed overhead resulting from government-caused delay under the Eichleay formula, Charles G. Williams Construction Inc. v. White, 326 F.3d 1376 (Fed. Cir., May 5, 2003).

In Williams Construction, the contractor was awarded a fixed-price contract to improve and to renovate a government building. The work was divided into two phases, north and south. The government was to vacate that portion of the building phase upon which the contractor would be working.

There were substantial delays. The government failed to vacate the south phase timely, which caused substantial delays in the contractor's performance. The government issued a large number of change orders, many of which provided for additional payment to the contractor.

There were defects in the government specifications. But there also were deficiencies in the performance of the contractor and of some of its subcontractors.

The contractor completed one of the phases 93 days after the extended completion date. The government terminated the other phase for the government's convenience.
The Armed Services Board of Contract Appeals allowed some of the contractor's claims. However, the Board denied the contractor's Eichleay unabsorbed home office overhead claim.

The Board held that the contractor had failed to satisfy the "standby" test, despite the government-caused delays. The Board found that the contractor "has not proved that performance of the work was suspended or significantly interrupted during the period" involved (Williams Construction, 326 F.3d at 1380). The Board found that "the site was manned without significant interruption" by the contractor and its subcontractors (who performed 89 percent of the work) throughout the contract performance period (Williams Construction, 326 F.3d at 1381).

The Board placed special emphasis on the fact that both the government's auditor and the contractor's expert witness agreed that the contractor "did not have any reduction in their flow of direct costs." In the words of the auditor, "[T]his contract continued to absorb its equitable share of general and administrative expenses; they didn't have to go out and replace work because the work was being replaced by this additional effort on this contract" (Williams Construction, 326 F.3d at 1380). In other words, the contractor's additional compensated changed work was providing the direct cost and revenue such that the home office overhead was not "unabsorbed."

The Board concluded that the contractor had not been on standby for an uncertain duration and denied the Eichleay claim. The contractor appealed.

On appeal, the United States Federal Circuit affirmed the Board's finding against the contractor on the Eichleay claim. In addition to discussing the evidence supporting the Board's findings, the Williams Construction appellate court articulated what evidence it believed was lacking. "There was no evidence that on any particular day [the contractor] was unable to do any work at all on the contract, but still was required to remain able to resume work on short notice. Furthermore, there was no evidence that the government directed [the contractor] to remain so on call" (Williams Construction, 326 F.3d at 1383).

The contractor argued that it need not prove an outright active or constructive suspension to recover under Eichleay. The contractor contended that recovery under the Eichleay formula was appropriate if the contractor showed that the government "significantly interfered with efficient performance of the contract even though the contractor continued to perform."

While that set of facts might entitle the contractor to recover direct costs, the Williams Construction court held that it was insufficient to pass the Eichleay "standby" test. In the words of the court, "As long as the contractor is able to continue performing the contract, although not in the same way or as efficiently or effectively as it had anticipated it could do so, it can allocate a portion of its indirect costs to that contract. There is accordingly no occasion in that situation to resort to 'recovery under the Eichleay formula', which is 'an extraordinary remedy'" (Williams Construction, 326 F.3d at 1382).

Williams Construction is a federal contracts case. It is in that context where use of the Eichleay formula has been most developed. In state courts, and in federal courts applying state law in diversity actions in our readership's geographical region, the Eichleay formula has not been discussed often. Its use has been approved in appropriate circumstances. (See Aircraft Gear Corp. v. Kaman Aerospace Corp., 875 F.Supp. 485, 495-98 (N.D.Ill. 1995) (applying Connecticut law to claim of aircraft subcontractor but where state law non-existent or inconclusive, federal law Eichleay formula caselaw provides guidance). The formula's use has been rejected where inappropriate (See Marino Construction Co. v. Renner Architects, 214 Wis. 2d 589 (1997) (Eichleay formula not relevant where contractor found to be cause of delay)).

Recovery of home office overhead sometimes has been allowed in our region with no discussion of the Eichleay formula. (See Fattore Co. v. Metropolitan Sewerage Commission, 505 F.2d 1 (7th Cir. 1974) (applying Wisconsin law)); Terra Engineering & Construction Corp. v. LaCrosse County, 204 Wis. 2d 113, 1996 Wisc. App. LEXIS 925, *5 (App. Dist. 4, 1996)). Recovery of home office overhead sometimes has been denied where the claimant had other work even though no Eichleay test was discussed. (See Material Service Corp. v. Michaels Pipe Line Construction, 204 Wis. 2d 110, 1996 Wisc. App. LEXIS 912, 24 (App. Dist. 1, 1995)).