As with any business that has fixed as well as variable costs, a contractor must earn enough revenue to cover both before turning a profit. If the job is delayed, the variable costs can often be cut until the delay is over, but fixed costs like salaries of office staff, utilities, rent, office equipment, accounting and payroll services, taxes – what we refer to as “overhead” – cannot be. When a contractor’s work force is idled as a result of delays caused by the owner, that unabsorbed overhead is a compensable element of damages. R. Zoppo Co., Inc. v. City of Dover, 124 N.H. 666, 673-74 (1984) (“An adjustment in unit price should be calculated in relation to the increased costs (if any) Zoppo faced by having its service connection crew idle . . . In assessing the increase in these costs, the master may consider . . . a proportionate amount of Zoppo’s administrative overhead associated with this crew.”).
While there is more than one way to quantify this element of delay damages, one basic methodology comes from Eichleay Corp., a 1960 decision from the Armed Services Board of Contract Appeals which established a formula in recognition of the fact that home office overhead cannot be allocated to a particular contract, but must be spread across all contracts proportionately. What has come to be known as the Eichleay formula is applied on federal contracts, and the United States Court of Appeals for the Federal Circuit has recognized the formula as “the only means approved in our case law for calculating recovery for unabsorbed home office overhead.” Melka Marine, Inc. v. United States, 187 F.3d 1370, 1374-75 (Fed. Cir. 1999). Thus far no New Hampshire case has either adopted or rejected it, although it has been met with some criticism in other states.
The Eichleay formula aims to find an amount allocable to overhead from a particular contract in terms of a daily rate. Here is the three-step calculation:
(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 Number of days of delay = Amount of the claim
This is an arithmetic formula, nothing more. The real sticking point is in identifying the appropriate cases for using it and the required proof of prerequisites to its use. P.J. Dick, Inc. v. Principi, 324 F.3d 1364, 1370 (Fed. Cir. 2003), illustrates the difficulties:
“To show entitlement to these damages, the contractor must first prove there was a government-caused delay to contract performance (as originally planned) that was not concurrent with a delay caused by the contractor or some other reason. The contractor must also show that the original time for performance of the contract was thereby extended, or that he finished the contract on time or early but nonetheless incurred additional, unabsorbed overhead expenses because he had planned to finish even sooner. Once the contractor has proven the above elements, it must then prove that it was required to remain on standby during the delay. If the contractor proves these three elements, it has made a prima facie case of entitlement and a 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. If the government meets its burden of production, however, the contractor bears the burden of persuasion that it was impractical for it to obtain sufficient replacement work.”
The burden is formidable. The contractor must prove that the delay (1) was caused by the government; (2) was not concurrent with any other cause of delay; (3) actually extended the contract performance time (or deprived the contractor of early completion); and (4) was of uncertain duration, requiring the contractor to be “on standby,” thus depriving the contractor of reasonable opportunity to find replacement work during the delay period. Unless the owner has expressly suspended performance, either completely or as to a critical path item, chances are that the extended home office overhead claim will fail, regardless of the formula used.
While there is more than one way to quantify this element of delay damages, one basic methodology comes from Eichleay Corp., a 1960 decision from the Armed Services Board of Contract Appeals which established a formula in recognition of the fact that home office overhead cannot be allocated to a particular contract, but must be spread across all contracts proportionately. What has come to be known as the Eichleay formula is applied on federal contracts, and the United States Court of Appeals for the Federal Circuit has recognized the formula as “the only means approved in our case law for calculating recovery for unabsorbed home office overhead.” Melka Marine, Inc. v. United States, 187 F.3d 1370, 1374-75 (Fed. Cir. 1999). Thus far no New Hampshire case has either adopted or rejected it, although it has been met with some criticism in other states.
The Eichleay formula aims to find an amount allocable to overhead from a particular contract in terms of a daily rate. Here is the three-step calculation:
(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 Number of days of delay = Amount of the claim
This is an arithmetic formula, nothing more. The real sticking point is in identifying the appropriate cases for using it and the required proof of prerequisites to its use. P.J. Dick, Inc. v. Principi, 324 F.3d 1364, 1370 (Fed. Cir. 2003), illustrates the difficulties:
“To show entitlement to these damages, the contractor must first prove there was a government-caused delay to contract performance (as originally planned) that was not concurrent with a delay caused by the contractor or some other reason. The contractor must also show that the original time for performance of the contract was thereby extended, or that he finished the contract on time or early but nonetheless incurred additional, unabsorbed overhead expenses because he had planned to finish even sooner. Once the contractor has proven the above elements, it must then prove that it was required to remain on standby during the delay. If the contractor proves these three elements, it has made a prima facie case of entitlement and a 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. If the government meets its burden of production, however, the contractor bears the burden of persuasion that it was impractical for it to obtain sufficient replacement work.”
The burden is formidable. The contractor must prove that the delay (1) was caused by the government; (2) was not concurrent with any other cause of delay; (3) actually extended the contract performance time (or deprived the contractor of early completion); and (4) was of uncertain duration, requiring the contractor to be “on standby,” thus depriving the contractor of reasonable opportunity to find replacement work during the delay period. Unless the owner has expressly suspended performance, either completely or as to a critical path item, chances are that the extended home office overhead claim will fail, regardless of the formula used.
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