Government Contracting Database
It is well established that a contractor is entitled to recover unabsorbed home office overhead during a government caused suspension of work under the Eichleay formula. P.J. Dick Inc. v. Principi, 324 F.3d 1364 (Fed. Cir. 2003); Mech – Con Corp. v. West, 61 F.3d 883, 884 (Fed. Cir. 1995); Appeal of Eichleay Corp., ASBCA No. 5183, 60 – 2 BCA ¶ 2688, 1960 WL 538, aff’d on reconsideration, 61 – 1 BCA ¶ 2894, 1960 WL 684. The contractor’s prima facie case for Eichleay damages consists of two elements: (1) the government caused a suspension or delay of uncertain duration; and (2) the contractor was on standby during the suspension or delay. Mech-Con Corp., 61 F.3d at 886 (citing Interstate Gen Gov’t Contractors v. West, 12 F.3d 1053, 1056 (Fed. Cir. 1993)). A suspension is of uncertain duration if the contractor lacks definitive information as to when the suspension will end. Oak Envtl. Consultants, Inc. v. United States, 77 Fed. Cl. 688, 700 (2007). The standby element requires not only an uncertain delay but also a showing that the contractor must be ready to resume work “immediately or on short notice.” P.J.Dick, 324 F.3d at 1371 (citing Interstate, 12 F.3d at 1055, 1057 n. 4.).
The Eichleay formula remains the only accepted method to calculate unabsorbed home office overhead. Nicon, Inc. v. United States, 331 F.3d 878, 888 (Fed. Cir. 2003) (“We reaffirm that the Eichleay formula as it is set forth in our precedent is the exclusive formula for the calculation of damages for unabsorbed overhead due to a period of government-caused delay.”).
As stated by the Federal Circuit, the Eichleay formula is as follows:
1. Contract billings / Total billings for contract period x Total overhead for contract period = overhead allocable to the contract.
2. Allocable overhead / Days of performance = Daily contract overhead
3. Daily contract overhead x No. days delay = Amount claimed.
West v. All State Boiler, Inc., 146 F.3d 1368, 1379 (Fed. Cir. 1998).
Generally, unabsorbed overhead consists of the time-sensitive indirect costs 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.
Interstate Gen. Gov’t Contractors, Inc., 12 F.3d at 1058.
Once a contractor has established prima facie entitlement to Eichleay damages, “burden of production shifts to the government to show that it was not impractical for the contractor to take on replacement work and thereby mitigate its damages.” P.J. Dick Inc. v. Principi, 324 F.3d 1364, 1370 (Fed. Cir. 2003). The Federal Circuit has clarified that replacement work does not mean any “additional work” but rather work to which the contractor may allocate its unabsorbed costs:
[T]he government cannot rebut a prima facie showing of entitlement to recovery under Eichleay simply by showing that the contractor continued its normal operations, including continuing to bid on and perform “additional” contracts. We believe, in fact, that it would be inconsistent with the purpose behind Eichleay recovery to require a contractor to cease all normal, ongoing operations during a government – caused suspension on one contract in order to guarantee its recovery of unabsorbed overhead costs. A healthy contractor may well be simultaneously engaged in multiple contracts, at different phases of performance. A government-imposed suspension during performance of one contract will not necessarily affect a contractor’s ability to obtain and perform others. . . it would be senseless to allow only the most and least successful contractors to recover indirect costs when the government suspends performance of a contract and requires the contractor to stand by during the suspension while providing a majority of contractors with no avenue for relief. A requirement that a contractor shows the impossibility of taking on any additional work solely because of the government’s acts would run counter to public policy as well as industry practice . . . . Thus, to prevent recovery, the government must rebut a contractor’s prima facie case by showing either (1) that it was not impractical for the contractor to obtain other work to which it could reallocate its indirect costs, or (2) that the contractor’s inability to obtain other work was caused not by the government’s suspension but by some other circumstance . . .
West v. All State Boiler, Inc., 146 F.3d 1368, 1376 (Fed. Cir. 1998) (emphasis added).
Updated: July 13, 2018