Measuring Delay Damages: Overhead and the Eichleay Formula

You have proven that a delay occurred, effectively addressed the common and most applicable defenses and sifted through a few available methods to calculate damages.  While these other methods, the Total Cost Method and the Modified Total Cost Method, pertain mostly to the actual work done, they do not assist in recovering jobsite or general and administrative overhead.  Luckily enough, the courts have been kind enough to create a formula to allow for calculating the monetary amount for home-office overhead that corresponds to the unplanned increase in resources as a result of a delay.  This post will discuss what is known as the Eichleay Formula,[i] which is used to approximate the amount of unabsorbed overhead that is a result of a particular delay.

Jobsite Overhead

Additional jobsite overhead is recoverable only for the expenses that are incurred because of compensable delays.  Jobsite overhead, specifically, may include, but is not limited to, jobsite supervision, additional salaries during the delay period, construction expenses for the project trailer, utilities and equipment rentals.  While this sounds similar to the Total Cost Method—lumping all related costs together for recovery—the contractor bears the burden of appropriating the damages and must credit the owner with expenses that are recouped elsewhere.[ii]

Eichleay Formula

While this formula sounds great, its use is limited to situations where the government is a party to the contract.  It has been further complicated by various rules that attempt to define when its use is permissible.  Modern cases show that the application of the Eichleay Formula is limited to contracts that do not provide an alternative formula for calculating home-office overhead.  Further, use of the Eichleay Formula is only proper if there is competent evidence of actual home-office overhead damages that were sustained while the contractor was in “standby mode.”  The meaning of “standby mode,” and how it is established, is discussed shortly.  Home-office overhead has been described as the “costs that are expended for the benefit of the whole business, which by their nature cannot be attributed or charged to any particular contract.”[iii]  Costs that are directly attributable to a job are direct costs and are not included in the Eichleay analysis.  The fourth circuit, in dicta, found that the Eichleay Formula “seeks to equitably determine [the] allocation of unabsorbed overhead to allow fair compensation of a contractor for government delay.”[iv]  Simplified a great deal, under this formula, a portion of the contractor’s total home-office overhead incurred during the contract period is allocated to the contract that is delayed.

Use of the Eichleay Formula depends on proof of three elements:  1) occurrence of a government-imposed delay; 2) a requirement, by the government, that the contractor “standby” during the delay; and 3) while “standing by,” the contractor was unable to take on additional work.[v]  Once the contractor proves the first two elements, the burden shifts to the government “to show either:  1) that it was not impractical for the contractor to obtain replacement work during the delay, or 2) that the contactor’s inability to obtain such work, or to perform it, was not caused by the government’s suspension.”[vi]  Once all three elements are successfully established, the Eichleay Formula is applied.  The formula follows a three-step process where each step is dependent on the previous, and is expressed as follows:

1. Total Project Billings ÷ Total Company Billings × Total Home-Office Overhead During Actual Contract Period = Overhead Allocated to Project
2. Overhead Allocated to Project ÷ Actual Days of Project Performance (including delay) = Rate of Overhead Allocated to Project Per Day
3. Rate of Overhead Allocated to Project Per Day × Number of Days Delayed = Amount of Home-Office Overhead Allocated to Project.[vii]

While the Eichleay Formula is the only proper method of calculating unabsorbed overhead in the federal courts, some federal courts and states have adopted a modified version or a completely different formula.[viii]  In Capital Elec. Co. v. U.S., the modified variation assumed that the home office overhead rate from the original contract period holds the same for the delayed period.[ix]  New York, which has been critical of the Eichleay Formula, uses a formula known as the Manshul formula.[x]  One of the biggest differences between the two formulas is that the Manshul Formula includes direct costs, whereas the Eichleay Formula does not include direct costs.  The main source of criticism is due to the fact that the Eichleay Formula, according to the New York court, requires no direct proof over any increased overhead.  These criticizing courts, however, have generally failed to remember that the Eichleay Formula quantifies unabsorbed overhead rather than increased overhead.

Use of the Eichleay Formula, or any of the other formulas mentioned, is only available when the contract involves the government and the contract does not provide any other formula to determine home-office overhead.  These limitations are arguably offset, however, by the broad reach of the formula; compensating for the approximate amount of unabsorbed overhead resulting from a particular delay.  Despite different formulas being used, some critical opinions of the Eichleay Formula and a modified Eichleay formula being used, when the contract fails to provide an alternative formula for calculating home-office overhead, according to the federal courts, the original Eichleay Formula is the only proper method to calculate unabsorbed overhead.