The COVID-19 pandemic caused government authorities to shut down (in part or entirely) many construction projects. Once the projects were allowed to resume production, many contractors have sought to recover the costs caused by the government-ordered shutdown. Many of these compensation requests involve claims for extended duration costs.
When a project is delayed, the amount of the contractor’s overhead is allocated disproportionately to the delayed project (during the delay, the overhead contribution that the delayed project revenues would otherwise defray home office overhead stop and the overhead is thus “unabsorbed.” The best known and widely-used method of computing on absorbed overhead is the Eichleay Formula set forth in a 1960 Board of Contract Appeals decision.[1]
The Washington Court of Appeals in Golf Landscaping v. Century Co[2]. held that overhead expenses may be a legitimate component of delay damages and allowed a subcontractor to recover under the Eichleay Formula.[3] To recover Eichleay damages, the contractor must prove (1) there was a government-caused delay to the contract performance; (2) the original time for performance of the contract was thereby extended; and (3) the contractor was required to remain on standby during the delay. If the contractor proves these three elements, the contractor establishes a case of entitlement. The third element, the “standby” requirement has proven difficult for contractors. “[T]he “standby” test focuses not on the idleness of the contractor’s workforce…, but on the suspension of work on the contract.”[4] During a period of uncertain delay the contractor cannot mitigate its home office overhead costs because it is required to remain ready to perform. The suspension or delay of the contract performance results in an interruption or reduction of the contractor’s stream of income from the direct costs incurred.
In the recent case of RLS Construction Group, LLC v. Dept. of Veteran Affairs,[5] the contractor was delayed on a Veterans hospital project which involved the construction of a new entrance. The VA conceded for the purposes of a summary judgment motion that the contractor could meet the first two legal requirements for the recovery of home office overhead but asserted that the contractor could not show it was on standby. Though the job was in part shut down, the VA argued the contractor continued to work on the project, although at a slow pace. The VA also demonstrated that the contractor received contract payments during the period of time and could obtain other work; the VA cited to the contractor’s financial statement which showed that the contractor completed 11 other projects and had six ongoing projects. Thus, the VA argued the contractor could not show that it was on “standby.” The court did not accept the VA’s argument, holding “[t]he entitlement to home office overhead does not depend on whether [a contractor’s] work force was idle. Instead, it depends on whether there was a suspension or delay of an indefinite duration.” Thus, the contractor prevailed in summary judgment and may at trial of this matter submit evidence that even though the contractor continued working on the project, there was nevertheless unabsorbed overhead for which the contractor is entitled to recovery. This is a marked change from earlier precedent which seemed to imply if the project was not completely shut down, the Eichleay Formula cannot be used.
Comment: Many questions concerning the Eichleay Formula have not been answered in Washington case precedent, therefore, federal case law provides guidance for applying the Eichleay formula when dealing with an unabsorbed overhead claim. What this means for similar delay cases in the future, including COVID-19 suspension or delay cases, is that even though the project may not be shut down entirely, if the contractor suffers a period of uncertain delay and cannot mitigate its home office overhead, because its required to remain ready to perform, the contractor should be entitled to recover its unabsorbed overhead using the Eichleay Formula.
Note: This case involved a summary judgment ruling, not a verdict. We are monitoring this case’s development and if it unfolds as we expect it likely will, we will update this blog in the future.
[1] Ahlers Cressman & Sleight Blog dated 1/12/2021 Eichleay Formula Revisited (Part 1): Computation of Unabsorbed Overhead Using the Eichleay Formula.
[2] 39 Wn.App. 895, 696 P2d 590 (1984).
[3] See fn. 1.
[4] Interstate General, 12 F3d 1053, 1057 (Fed. Cir. 1993).
[5] 20-1 BCA ¶ 37566 (Civilian B.C.A.).