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Eichleay Formula

Attorneys - Federal Government Contracts - Eichleay Damages

What is Unabsorbed Home Office Overhead?

When a project is suspended, a contractor will continue to incur monetary damages that cannot simply be turned off until the project resumes.  These damages can be characterized as home office overhead or field overhead (often referred to as general conditions).  Home office overhead covers the cost to run the home office such as administrative staff, rent, utilities, advertising, etc.  Field overhead include costs to run field operations such as project management, rental equipment, fencing, office trailer, storage, etc.

To qualify as field overhead, the cost must be charged directly to the project.  Thus, a project manager who works on several projects simultaneously should use timesheets to allocate his time to each project.  Job overhead can reduced to daily burn rate to calculate delay damages incurred during an unreasonable suspension period.  Home office overhead, however, is not so easily calculated.

Home office overhead expenses are necessary to run a company such as accounting and payroll services, salaries for upper-level managers, general insurance, utilities, taxes, and depreciation.  When a project is suspended, it does not generate any revenue to support home office expenses.   That slice of home office overhead no longer being financed by the suspended contract is referred to as “unabsorbed overhead.”  This unabsorbed overhead must be shouldered by other contracts and the cost of performing the remaining work on those contracts (work that was not delayed/suspended) increases. Without an upward adjustment in contract price, the company’s profitability drops.

On February 3, 2016, the Defense Contract Audit Agency ("DCAA") revised Chapter 12 of its Contract Audit Manual ("CAM"), which includes a good discussion of Eichleay damages. DCAA CAM, Chapter 12 (February 3, 2016) We encourage you to review this manual to obtain the Government auditor's perspective of your Eichleay claim.

When is a Contractor Entitled to Unabsorbed Overhead?

In an appeal from the United States Court of Federal Claims, the United States Court of Appeals for the Federal Circuit stated that “the Eichleay formula is the only means for calculating recovery for unabsorbed office overhead.”  Melka Marine, Inc. v. United States, 187 F.3d 1370, 1374-75 (Fed. Cir. 1999)  It is used to calculate the amount of unabsorbed home overhead a contractor can recover when the government suspends or delays work on a contract for an indefinite period.

To demonstrate entitlement to Eichleay damages, the contractor must first prove:

  1. A Government-caused delay that was not concurrent with a delay caused by the contractor or for some other reason. Sauer Inc. v. Danzig, 224 F.3d 1340, 1347-48 (Fed. Cir. 2000)
  2. The original time for performance of the contract was extended as a result of this delay, or that the contractor finished the contract on time or early but had planned to finish even sooner. Interstate Gen. Gov’t Contractors, Inc. v. West, 12 F.3d 1053, 1058-59 (Fed. Cir. 1993)
  3. The contractor was required to remain on standby during the delay.

Once the contractor proves these three elements, the Government must prove that it was not impractical for the contractor to take on replacement work and thereby mitigate its damages. Melka, 187 F.3d at 1376, 12 F.3d 1053, 1058-59 (Fed. Cir. 1993)

If the Government meets its burden of production, the contractor bears the burden of persuasion that it was impractical for it to obtain sufficient replacement work. P.J. Dick, Inc. v. Principi, 324 F.3d 1364, 1370 (Fed. Cir. 2003)

What is the Stand-By Requirement under Eichleay Formula?

To demonstrate standby, the contractor must show that the suspension period was for an indefinite duration and that the Government could resume performance on short notice. This requirement was discussed, in detail, in Oak Environmental Consultants v. United States, 77 Fed. Cl. 688 (2007):

Indefiniteness is the very characteristic that distinguishes a period during which resources can be allocated elsewhere, versus one in which the uncertainty of resumption creates a risk of breach if a contractor does not stand at the ready.  The indefiniteness, as related to home office overhead, restricts a contractor from making organizational changes that could otherwise be made, such as “laying off” employees and shifting resources elsewhere.  See Wickham Contracting Co. v. United States, 12 F.3d at 1577-78; see also Capital Elec. Co. v. United States, 729 F.2d 743, 748 (Fed. Cir. 1984) (Friedman, J., concurring) (“[I]t is, ordinarily, not practicable to lay off main office employees during a short and indefinite period of delay.”).  In making the inquiry as to whether the contractor was put on standby, the court should first determine whether the contracting officer has issued a written order that suspends all the work on the contract for an uncertain duration and requires the contractor to remain ready to resume work immediately or on short notice. 

In Oak Environmental, the suspension letter stated “Your performance of the subject contract is hereby suspended . . . effective immediately through May 1, 2004.”  The Court held that the suspension period was indefinite because there was “nothing in the letter to relieve the contractor of its contractual responsibility to resume work on the contract if called to do so by the government.”

Does my Bonding Capacity Have to Be Maxed Out to Get Eichleay? 

No. While bonding capacity is sometimes relevant under Eichleay, just because a contractor has excess bonding capacity or is bidding on other work, does not bar recovery under Eichleay. United States, Department of Veterans Affairs v. All State Boiler, Inc., 146 F.3d 1368 (Court App. Fed. Cir 1998), [“Neither the contractor's bidding on new contracts as completion of the contract at issue approached nor the fact that the contractor had excess bonding capacity during the suspension period precluded recovery of indirect costs using the Eichleay formula.”]; Melka Marine, Inc. v. United States, 187 F.3d 1370 (Fed. Cir. 1999) [“Bidding on other projects can also support, rather than undercut, a contractor's argument that it was impractical for it to obtain replacement work, particularly if the projects that are bid upon could not be commenced and/or completed within the government-caused delay.”]

What Are the Government Defenses to an Eichleay Claim?

  • The Government delay/suspension did not cause any extension in the actual time of performance beyond the original or previously revised contract performance date.
  • The contractor was or was not able to begin work on the next new contract in the extension period because of continuing work on the delayed/suspended contract.
  • The contractor did or did not secure a replacement contract(s) or other substituted work between the start of the delay/suspension period and the end of the period of extension beyond the original or previously revised contract performance date.
  • Evidence of contractor-caused delays that were concurrent with the alleged Government delay or suspension.
  • Evidence that the contractor was aware of differing site conditions or other causes of the asserted Government-caused delay prior to the original bid submission.
  • Evidence that the contractor was unable to obtain replacement work because its bonding capacity was limited due to circumstances unrelated to the Government-caused delay/suspension.

How to I Demonstrate the Inability to Obtain Replacement Work During the Suspension Period?

Section 12-805.4 of the DCAA Contract Audit Manual includes a good discussion of how to determine whether a contractor was able to obtain a replacement contract or substitute work during the suspension period.  DCAA CAM, Chapter 12 (February 3, 2016)  The DCAA states that “replacement contracts (Government and commercial) are contracts with work that would not have been obtained and performed had there been no delay.”  This statement captures the essence of what needs to be proven.  In other words, if a contractor would have performed new work as part of its normal business operations, that work should not be credited as “replacement work” towards a suspension of work.  However, if the contractor is able to temporarily reassign his crew to another project during the suspension period, which he would not have done but for the suspension, then this would truly constitute “replacement work.”  Because suspensions of work are typically indefinite or open ended, the Government bears a heavy burden proving this.

How do I calculate Eichleay damages?

The three step Eichleay formula is as follows:

Step 1 (Overhead Allocable to Delayed Contract)

Total Contract Billings for Contract x (Total Company Overhead)  = Overhead Allocable to Contract
Total Company Billings
  

Note: Contract Billings, Total Company Billings and the Total Company Overhead should be for the same time interval, i.e., the delayed contract’s actual total performance period.

Step 2 (Daily Contract Overhead Rate)

Overhead Allocable to Contract = Daily Contract Overhead Rate
Actual Days of Performance

Note:  Actual performance days include the original or revised completion date and the extension period.

Step 3 (Unabsorbed overhead)

Daily Overhead Rate x Days of Delay = Unabsorbed Overhead caused by Government Delay
 
 
PRACTICE TIP:  AVOID USING EICHLEAY FORMULA IF YOUR COSTS ARE DIRECTLY TIED TO PROJECT
 

Proving the right to Eichleay damages can be challenging.  The contractor must prove that it was on standby for an indefinate period of time and could not find replacement work.  If a cost is billed directly to the project, by definition it is a "direct cost" and not subject to the Eichleay formula.  Direct costs typically consist of supervision, rental equipment, office trailer, fencing, scaffolding, mobile johns, on-site labor and other costs dedicated to the project.  These costs are  thus readily distinguishable from "indirect home office" costs.    In the Appeal of TROMEL CONSTRUCTION CORP, PSBCA Nos. 6303, et al. (June 27, 2013) the Board confirm this distinction where it held that extended field supervision costs were recoverable due to excusable delays even though the contractor was unable to satisfy the Eichleay formula.  

Further Questions? Contact a Government Contract Lawyer at jmm@manfredonialaw.com

 

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