Government Contracting Database
A well-recognized method of proving extended job site overhead is to derive a daily rate by dividing the total job site overhead costs by the total number of days of performance and then multiplying the daily rate by the number of days of delay. Shirley Contracting Corp., ASBCA No. 29848, 85 – 1 BCA ¶ 17,858 (1985) ; Kemmons-Wilson, Inc., ASBCA No. 16167, 72 – 2 BCA 9689 (1972) ; McGraw & Co. v. United States, 130 F. Supp. 394, 400 (Ct. C1. 1955).
Home Office Overhead
The unabsorbed home office overhead is perhaps the most difficult concept in delay damages. Basically, the contractor is asserting that because of the delay the particular project lasted longer, thus affecting his ability to take on additional work and, therefore, not allowing him to prorate or absorb his home office overhead cost on a new project.
In other words, a contractor charges the cost of his home office to all of his various projects based on some pro – rata or percentage approach. If a project is delayed, since he is receiving no more direct compensation for that project in that time frame, that project then is under absorbing its fair share of the home office cost. This, in turn, forces the other projects to over absorb those home office costs. While this concept is difficult to understand it is generally recognized and accepted by the federal government and there are numerous decisions by the Boards and Courts substantiating the validity of the request for the cost involved.
The calculation for unabsorbed office overhead cost in federal contracts is based on a formula known as the Eichleay Formula. The Eichleay Formula originated from a decision before the Armed Services Board of Contract Appeals in 1960. The formula is a straightforward three-step formula for calculating the pro – rata portion of the home office overhead cost attributable to this particular project. The result of the formula is a daily unabsorbed home office overhead rate which is then multiplied by the number of days of compensable delay. A more extensive outline of the Eichleay Formula is available within this database.
There have been numerous decisions by the Boards and Courts concerning the use of the Eichleay Formula for calculating unabsorbed home office overhead. Suffice it to say, that it is accepted by the federal government as reasonable compensation to the contractor for his unabsorbed home office costs during a delay period. However, the contractor should be prepared to demonstrate to the government that because of the delay it precluded him from bidding other work because of a limited bonding capacity. The contractor should document other projects upon which he was unable to bid because of the fact that his bond was tied up on this particular job which was delayed.
It should be noted that if the delay costs which are being requested relate back to the Suspension of Work clause in the contract. The Suspension of Work clause specifically precludes compensation for profit. However, if the delay was occasioned by a change under the Changes Clause or by a differing site condition under that clause then the contractor is entitled to profit.
The Court of Appeals for the Federal Circuit mandates the use of the Eichleay formula where entitlement to extended overhead is proven. H.J. Lyness Constr., Inc. v. United States, 121 Fed. Cl. 287, 292 (2015), aff’d, 652 F. App’x 972 (Fed. Cir. 2016) (citing Wickham Contracting Co. v. Fischer, 12 F3d 1574 (Fed Cir 1994)). A contractor proves entitlement to the use of Eichleay when it demonstrates that the delays encountered were of uncertain length, sporadic, disruptive, and the contractor could not practically reduce its overhead costs or acquire replacement work to absorb the overhead.
Updated: June 26, 2018