This is a two part blog concerning the Eichleay formula.
Controversies relating to delays, disruptions, and suspensions of contract performance involve two major elements: entitlement and quantum. To recover increased costs beyond what was contemplated, the Contractor must establish (1) that the delays were indeed attributable to the Owner (entitlement), and (2) the amount of additional costs caused by the delays (quantum).
Additional costs arising from delays frequently include direct material, direct labor, other direct costs, and, one of the most complex items, overhead. When a project is delayed, the amount of the Contractor’s overhead is allocated disproportionately to the delayed project.
1. Golf Landscaping
Undoubtedly, the best known and most widely used method of computing unabsorbed overhead is the Eichleay formula, as set forth in Eichleay Corp.,[i] a 1960 Board of Contract Appeals decision.
In Golf Landscaping v. Century Co.,[ii] the Washington Court of Appeals held that overhead expenses may be a legitimate component of delay damages and allowed the subcontractor recovery under the Eichleay formula.[iii]
Despite many commentators hailing the Golf decision as Washington’s stamp of approval of the Eichleay formula, there are a number of significant inquiries which must be made before the Eichleay formula can be utilized for computating unabsorbed overhead. Specifically, the Golf case involved a subcontractor’s claim for unabsorbed overhead, which by definition is based on the alleged continuation of fixed expenses through the delay period.
In a claim for unabsorbed overhead, the relevant inquiry is whether the delay prevented the Contractor from obtaining contracts during the delay period, which would have “absorbed” the ongoing home office overhead expense.
The Contractor in Golf, which opposed the Eichleay claim, never questioned if Golf’s overhead expenses were unabsorbed by other contracts. The Contractor in Golf instead attacked the subcontractor’s accuracy in computing the amount of damages. Unless the Contractor could show that the delay prevented it from obtaining contracts during the overhead period, the Eichleay formula could not be used as a method of calculating unabsorbed overhead.
For example, in an unpublished opinion, Strand Hunt Const., Inc. v. Lake Washington School Dist., 134 Wn. App. 1053 (2006), the Court denied Eichleay damages, holding that such damages were inappropriate “as long as the contractor is able to continue performing the contract, although not in the same way or as efficiently or effectively as it had anticipated it could do so.” The Court reasoned that, as long as performance was not halted entirely, the Contractor could still allocate a portion of its overhead costs to that contract. The Court further went on to quote approvingly of federal cases which described the Eichleay formula as “an extraordinary remedy.” The Eichleay formula is a federal concept, thus the Washington court will look to federal law when questions concerning the application of the Eichleay formula arise.
2. Federal Precedent
Many questions concerning the Eichleay formula have not been answered in Washington case precedent, thus, federal case law provides guidance for applying the Eichleay formula when dealing with an unabsorbed overhead claim.
(a) Wickham Contracting Co. v. Denis J. Fisher [iv]
In Wickham Contracting, the Contractor argued that, since approximately 80% of its home office activity was devoted to the delayed project, the Eichleay calculation was unfair. The Eichleay formula resulted in only 34% of the Contractor’s overhead expense being allocated to the delayed project. The Contractor insisted that the Eichleay formula should be used only when overhead costs cannot be otherwise accurately determined. The Court disagreed and unequivocally stated that the Eichleay formula is “the only proper method” for calculating unabsorbed overhead when a Contractor otherwise satisfies the Eichleay requirements. These requirements are (1)a government-caused suspension of or delay in contract performance, (2)a sufficient degree of uncertainty regarding the period of delay, coupled with a requirement by the government to remain ready to resume performance on short notice (the “standby test”), and (3)the unavailability of additional work during the period of delay or suspension that would have supported the overhead otherwise allocable to the delay contract. Thus, if a Contractor is able to show that any period of government-caused suspension or delay was sufficiently uncertain in duration, that the Contractor was required to resume performance immediately upon its completion, and that the Contractor did not take on new work to “fill the gap” caused by the suspension or delay, it would satisfy the Eichleay requirements as framed in the Wickham decision.
Second, the Wickham opinion focuses on the concept of “unabsorbed” home office overhead as opposed to “extended” home office overhead, the latter of which has been the term most often used in construction contract cases. This difference in terminology is more than semantics. Some commentators have argued that it is inappropriate to use the term “unabsorbed” overhead in the construction context because of the ability of a construction contractor – unlike a manufacturing contractor – to obtain new work without the restriction of a limited plant capacity.
(b) Mech-Con Corp. v. West [v]
The Federal Circuit in Mech-Con reaffirmed the three elements necessary to establish Eichleay, but shifted the burden of the third element to the government. Thus, if the Contractor establishes a prima facie case for Eichleay relief by proving a government-caused delay and “standby,” at that point the government can rebut the prima facie case by showing that the Contractor was able to take on additional work during the delay period.
Despite the shift in the burden of proof, the burden remains on the Contractor to prove all elements, including that it was unable to obtain other work. In Satellite Elec. Co. v. Dalton,[vi] the Federal Circuit ruled that the government failed to rebut the Contractor’s prima facie case by showing that it began bidding on other projects at the end of the delay period, but succeeded in rebutting the prima facie case where the Contractor aggressively bid on other projects throughout the delay period. The Satellite case can be read to hold that if a Contractor bids on, receives, and/or is capable of obtaining additional work during the delay period, it is not entitled to use the Eichleay formula.
In our next post, we will discuss the P.J. Dick, Inc. case and its impact on the Eichleay formula, as well as recent developments which question the use of the Eichleay formula in future cases.
[i] ASBCA No. 5183, 60-2 BCA § 2,688 (1960); 61-1 BCA § 2,894 (1960).
[ii] 39 Wn. App. 895, 696 P.2d 590 (1984).
[iii] Computation of Unabsorbed Overhead / Eichleay Formula
Definition of Unabsorbed Overhead:
Delayed Contract Billings x Total Home Office Overhead = Allocable Home Office Overhead
Contractor’s Total Billings
Allocable Home Office Overhead = Daily Overhead Rate
Days Required to Perform the Delayed Contract for the Delayed Contract
Daily Overhead Rate x Number of Days of Delay = Overhead Damages
[iv] No. 93-1146 (Fed. Cir., January 6, 1994).
[v] 61 F.3d 883 (Fed. Cir. 1995).
[vi] 105 F.3d 1418 (Fed. Cir. 1997).