Payne Hackenbracht & Sullivan
Eichleay Formula
One of the cost elements of a contractor's business that it is permitted to recover as a portion of its contract price is its home office overhead. Traditionally, home office overhead includes such items as the salaries of the home office staff, expenses of the home office, telephone, copier, rent, supplies, dues and subscriptions, insurance, etc. By its nature, home office overhead cannot be traced or identified with any one particular construction project, thereby precluding a direct costing of home office overhead expenses to specific contracts.
When a delay occurs, which extends the project, there is a disruption of the income stream for that particular project, which affects home office overhead. A reallocation of home office overhead may be necessary, but such a reallocation is difficult because of the indirect nature of the home office overhead costs. Therefore, home office overhead is allocated on an approximate basis, generally using some formula to determine the allocation. Such an allocation is necessary when performance of the contract is extended, by government caused delays, past the contract completion date. The most widely recognized formula for allocating home office overhead in delay cases is the Eichleay formula. The formula and the evolution of its application will be traced in detail, with an emphasis on the current trends.
The decision of the Armed Services Board of Contract Appeals in Eichleay Corporation, ASBCA No. 5183, 60-2 BCA 2688 (1960), aff'd on recon., 61-1 BCA 2894, established a formula for the calculation of unabsorbed home office overhead, often referred to as "extended overhead." The formula provided the following:
Contract Billings
Total Billings during period of performance x Total Overhead (General and Administrative Expense) during period of contract performance = Overhead allocated to Contract
Allocated Overhead = Daily Contract Overhead
Days of Performance
Daily Contract Overhead x Days of Delay = Claim Amount
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 days of government-caused delay.
The "Eichleay formula" was subsequently applied by the boards of contract appeals as a reliable method of calculating the delay damages resulting from extended performance. Unfortunately, the decision of the Armed Services Board of Contract Appeals in Savoy Construction Company, Inc., ASBCA Nos. 21218 et al., 80-1 BCA 14,392 (1980), and the decision of the General Services Board of Contract Appeals in Capital Electric Company, GSBCA Nos. 5316 et al., 83-2 BCA 16,548 (1983), threw the applicability of the formula into question. Although the Savoy and Capital Electric decisions were subsequently reversed by the United States Court of Appeals for the Federal Circuit, the law has continued to evolve as new rulings are issued. In Capital Electric v. United States, 729 F.2d 743 (Fed. Cir. 1984), the court held that the Eichleay formula was the appropriate method of calculating extended home office overhead under the suspension of work clause, if a compensable delay had occurred and the contractor could not have undertaken other projects.
Public authorities have argued that a delay in contract performance ordinarily does not increase the total amount of home office overhead a contractor incurs in connection with a particular contract, but merely shifts or spreads that overhead over a longer period of time. The overhead, therefore, which continues for an extended period of time, is absorbed by other contract work. According to the government, the only situation in which a contractor can recover for such extended overhead is where the delay in performance (1) requires the contractor to hire additional home office personnel or incur additional overhead expenses, or (2) prevents the contractor from taking on other work it would have been able to assume had there not been a delay. The United States Court of Appeals for the Federal Circuit rejected this argument in Capital Electric, and stated, in the concurring opinion, that:
Although superficially plausible, the government's argument does not withstand more penetrating analysis based upon the theory on which extended overhead is allowed as an element of delay damages. By definition, this type of overhead cannot be directly attributed to the performance of a particular contract, yet it is an essential part of the contractor's total cost of doing business. Some basis, therefore, must be found for allocating this total overhead among the various contracts in connection with which it is incurred.
APPLICATION OF THE EICHLEAY FORMULA
In 1984, the Federal Circuit held that the Eichleay formula was the most appropriate method of allocating home office overhead. Capital Electric, supra. Although there was considerable inconsistency among various federal agencies as to the applicability of Eichleay, it appears that the 1992 decision by the United States Court of Appeals for the Federal Circuit in C.B.C. Enterprises, Inc. v United States, 978 F.2d 669 (Fed. Cir. 1992) has given more clear direction to the use of the Eichleay formula. In C.B.C., the court expressly held that the Eichleay formula was limited to those situations in which there was a government caused delay, disruption or suspension of work, and that it did not apply to those situations in which the time for performance of the work had been extended by the performance of additional work. This narrowing of the application of the Eichleay formula focused on the factor of uncertainty due to the disruption, suspension or delay of contract performance and traced this concept of an uncertain delay through prior court and board decisions which had endorsed the use of the Eichleay formula.
As a result of C.B.C., the application of the Eichleay formula will be limited to those situations in which there has been a suspension of work, a disruption of the work or government caused delay not attributable to performing additional work. Community Heating & Plumbing Co. Inc., ASBCA Nos. 37981 et. al., aff'd 987 F.2d 1575 (Fed. Cir. 1993). The contractor must prove that there has been a delay, disruption or suspension of the work caused by the Government and that he has suffered some damages as a result of the delay.
THE STANDBY TEST FOR APPLICABILITY
Subsequent to the reversal of Capital Electric and Savoy by the United States Court of Appeals for the Federal Circuit, it appeared that the agencies which accepted the Eichleay formula were applying a two-part test to determine whether the contractor was entitled to recover under the formula. That informal test required that the contractor demonstrate that a delay occurred and show that either:
(1) The bonding capacity of the company had been limited and totally absorbed by the contract work; or
(2) There had been an inability to obtain other work which could absorb the extended overhead.
After Capital Electric, various courts and boards held that application of the Eichleay Formula would be dependent upon the contractor proving that it had to "standby." Standby was proven if the contractor could prove that it had idled forces, impaired bonding capacity or could demonstrate that it had uncompensated home office costs incurred during the delay. Ricway, Inc., ASBCA No. 29983, 86-2 BCA 18,841 (1986); Pathman Construction Co., GSBCA No. 7343, 85-2 BCA 18,897 (1985); Stephenson Associates, GSBCA No. 6573, 6815, 86-3 BCA 19,071 (1986); R.G. Beer Corporation, Eng BCA No. 4885, 85-3 BCA 19,012 (1985); Richerson Construction, Inc. v General Services Administration, GSBCA Nos. 11611, et. al., 93-1 BCA 25,239.
The ASBCA, in particular, has held that in order for a contractor to recover compensation through the application of the Eichleay formula it must demonstrate that its forces had to standby or that it was impractical to undertake other work, thereby showing that it suffered some damage. Gregory Constructors, Inc., ASBCA No. 35960, 88-3 BCA 20,934; Boublis Electric, Inc., ASBCA No. 34056, 89-3 BCA 22,094. However, the test that contractors had to show idled forces has now been rejected by the United States Court of Appeals for the Federal Circuit. In Interstate General Government Contractors, Inc. v. West, (Dec. 6, 1993, No. 92-1430), that court held that the contractor did not have to show that its work force had been idled. Rather, the court stated that the standby test was met by a contractor if it could demonstrate the following:
It simply requires that the overhead be unabsorbed because performance of the contract has been suspended or significantly interrupted and that additional contracts are unavailable during the delay when payment for the suspended contract activity would have supported such overhead. Suspension or delay of contract performance results in interruption or reduction of the contractor's stream of income from direct costs incurred.
The Federal Circuit further stated in Interstate that the "proper standby test focuses on the delay or suspension of contract performance for an uncertain duration during which the contractor is required to remain ready to perform." However, the court then retreated, making its decision less clear, by stating that this standby test had to be coupled with a showing that the contractor had an "inability to take on additional work. "Apparently, the prior cases of proving standby by showing impaired bonding capacity (Richerson), inability to obtain other projects, (Shirley Contracting Corp., ASBCA No. 29848, 85-1 BCA 18,019 and R.G. Beer, supra.) or impracticality of taking on other projects (IPS Group, Inc., ASBCA No. 33182, 88-3 BCA 21,142) are still viable in light of this language in Interstate.
It is clear from the Federal Circuit decisions in Capital Electric, C.B.C. Enterprises, and Interstate that the only acceptable formula for calculating home office overhead in delay, disruption or suspension of work matters is the Eichleay formula. The Federal Circuit laid to rest any doubt about the exclusive use of the Eichleay formula in Wickham Contracting Co., Inc., January 6, 1994, No. 93-1146, when it held that it was the only formula for calculating unabsorbed home office overhead. The court emphatically stated that no other formula could be used. The Armed Services Board of Contract Appeals in Gregory Constructors, Inc., ASBCA No. 35960, 88-3 BCA 20,934, had previously rejected any modification of the Eichleay formula and required the contractor to utilize the formula as set forth in the Eichleay case.
The Court of Appeals for the Federal Circuit recently mandated the use of the Eichleay formula where entitlement to extended overhead is proven. 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.
CONCLUSION
In view of the decisions outlined above, the government cannot successfully argue that the Eichleay formula has been rejected and does not apply to delay situations. Although the application of the formula may have been narrowed somewhat by board decisions, the Eichleay formula should continue to be considered a reliable method of calculating extended home office overhead delay damages, provided one of the tests for showing some damage has been met. The inability to obtain bonding or other work meets these tests.
It should be noted that the applicability of the formula to a particular delay claim can only be determined after an evaluation of the facts of the specific case.