This is a two part blog concerning the Eichleay formula.
This is the second part of a two part post concerning the Eichleay formula. Contractors, when confronted with delays, disruptions, and/or suspension of contract performance have for many years looked to the Eichleay formula, which is the best known and most widely used method of computing unabsorbed overhead. Although the Washington case of Golf Landscaping v. Century Co.[i] has yet to be overruled, there have been significant developments in federal case precedent which raise questions as to the future applicability of the Eichleay formula as a method of computing unabsorbed overhead in construction claims.
1. P.J. Dick, Inc. v. Principi [ii]
P.J. Dick requires the Contractor to prove three things in order to demonstrate that it is “on stand-by” as a result of a government-caused delay: (1) the delay as “of indefinite duration;” (2) during the delay, the Contractor was required to be ready to resume work “at full speed as well as immediately;” and (3) “much, if not all, of the work” was suspended. 324 F.3d 1364 (Fed. Cir. 2003).
(a) The Basic Rule
To recover Eichleay damages, the Contractor must prove: (1) there was a government-caused delay to contract performance; (2) the original time for performance of the contract was thereby extended; and (3) Contractor was required to remain on standby during the delay. If the Contractor proves these three elements, the Contractor established a prima facie case of entitlement, and the burden of proof shifts to the government to show that it was not impractical for the Contractor to take on replacement work and thereby mitigate its damages. [iii] If the government meets its burden of proof, the Contractor then bears the burden of persuasion that it was impractical for it to obtain sufficient replacement work. This third element, the “standby” requirement, has led to rampant confusion and puzzlement as to how to prove Eichleay recovery.
(b) The Standby Requirement
If the contracting officer issues a written order that suspends all work on the contract for an uncertain duration and requires the Contractor to remain ready to resume work immediately or on short notice, the Contractor need not offer further proof of standby. [iv]
In cases where the contracting officer does not issue such a written order (which is most of the time), the Contractor must then prove standby by indirect evidence. The Contractor must show the following three elements of the standby rule when no such order is issued:
- The Contractor must show that the government-caused delay was not only substantial but was of an indefinite duration (for example, where the government suspends all work on the contract but tells the Contractor work will begin again at a date certain, the Contractor cannot be on standby).
- The Contractor must show that during the delay, it was required to be ready to resume work on the contract at full speed as well as immediately.
- The Contractor must show effective suspension of much if not all of the work on the contract.
P.J. Dick seems to make it clear that there is little chance for a Contractor to recover unabsorbed overhead under this standby rule. The elements of the rule are simply too severe. It is unlikely that a contracting officer will issue a written suspension order containing a requirement that the Contractor be ready to immediately resume full-scale work with no re-mobilization. Without such an order, the standby test is almost impossible to satisfy.
Many commentators have criticized the Eichleay formula as a means of computing damages for an absorbed overhead. It seems the Court’s standby rule has buried Eichleay. Now, instead of relying on the Eichleay formula to prove unabsorbed overhead, recovery may still be had by conventional accounting analysis.
2. Redland Co. – Eichleay’s Death Knell?
A recent decision, Redland Co. v. U.S., 97 Fed. Cl. 736 (2011), 53 GC p. 190, illustrates the difficulty of meeting the standby requirement.
Shortly after the Air Force awarded Redland a construction contract, it issued a suspension of work order on the same day as it issued the notice to proceed. When the suspension was lifted four years later, the contractor completed the work and claimed unabsorbed overhead for that period of time. The court ruled that the contractor was not entitled to unabsorbed overhead because it had not started performance at the time the suspension order was issued, citing Nicon, Inc. v. US., 331 F.3d 878 (Fed. Cir. 2003). However, it went on to analyze whether the contractor had met the P.J. Dick “on standby” requirements. The Court found that the delay was of indefinite duration and that it affected all of the work. However, it found no evidence of an order to be ready to resume work immediately.
The Contractor urged that, although the suspension order was silent as to any requirement that it be prepared to resume work immediately, that silence should be interpreted as imposing such a requirement. The court concluded that under the P.J. Dick formulation, the order to resume work immediately could only be found in the suspension order if there was express language to that effect.
Finding no such language, the court analyzed whether there was indirect evidence that the contractor had been ready to resume work immediately. It found no such evidence, stating:
[B]eing “ready to resume work at full speed as well as immediately” is a strict requirement, one that is separate from the requirement that the delay or suspension be of uncertain duration. [P.J. Dick, 324 F.3d at 1371] For instance, if a contractor is given a reasonable amount of time to gather together its equipment and personnel after a suspension is lifted, the contractor is not on standby. Id. Nor is a contractor on standby if the government requires “immediate resumption of the work, but only with a reduced work force [that allows] the contractor to gradually increase its work force.” Id. Rather, in order to be on standby, “the contractor must be required to keep at least some of its workers and necessary equipment at the site, even if idle, ready to resume work on the contract (i.e., doing nothing or working on something elsewhere that allows them to get back to the contract site on short notice).” Id.
Plaintiff does not even allege that it had workers or equipment present at the work site during the period of suspension. Rather, plaintiff merely asserts that “[t]he record evidence demonstrates that Redland was a local contractor that could keep equipment and forces close-by, and did in fact re-commence on short notice.” Id. Nevertheless, the evidence does not support plaintiff’s assertion.
Although plaintiff was a local contractor, there is no evidence that it had equipment or personnel at any location either waiting idly for work to begin at [the site] or doing work that could be immediately stopped. When asked to detail what resources plaintiff had available during the period of suspension, plaintiffs vice president could not identify any specific resources, but merely offered that plaintiff would have used either in-house equipment or rental equipment. Thus, rather than keeping resources idle and ready to commence work at [the site] immediately, plaintiff evidently relied, at least in part, on its ability to rent equipment in order to begin work when the suspension was lifted. These are signs of a fully employed construction company that would increase its resources to perform additional work, not one that was waiting on standby with its existing resources constantly at the ready.
This analysis shows how difficult it is to meet the “ready to resume work immediately” requirement.
3. Ralph C. Nash’s Comment:[v]
The Redland decision is a clear illustration of the impact of the P.J. Dick formulation. A Contracting Officer can place a contractor on standby by inserting the magic language in a suspension order but there is little reason to believe that this will occur very often. Rather, P.J. Dick teaches COs how to avoid paying unabsorbed home office expenses. This is fine for large contractors that probably never suffered any such damages in the first place. But, as noted in Nash & Cibinic’s Report,[vi] it is very unfair to small contractors that have suffered real damage if they have no more bonding capacity. We suspect Redland was not seriously injured because the facts seem to indicate that it continued to do business during the four-year delay. But a small company in that situation probably would have been destroyed. In short, the P.J. Dick formulation is not only totally disconnected from reality but it is also grossly unfair to small contractors[vii].
[i] 39 Wn. App. 895, 696 P.2d 590 (1984).
[ii] 324 F.3d 1364 (Fed. Cir. 2003).
[iii] See Marine Inc. v. U.S., 187 F.3d 1370, 1376 (Fed. Cir. 1999).
[iv] See Interstate Gen. Gov’t Contractors, Inc. v. West, 12 F.3d 1053, 1055 (Fed. Cir. 1993).
[v] R. Nash is a well respected author of numerous authoritative reference books on the subject of federal procurement.
[vi] 17 N&CR p. 33
[vii] 25 No. 10 N&CR p. 51.