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CONSTRUCTION CLAIMS – HOME OFFICE OVERHEAD CLAIMS

(Steve Holloway first published this article in 1999)

When was the last time you submitted or reviewed a construction delay claim that -DID NOT- include a subsidiary claim for unabsorbed home office overhead costs based on the Eichleay Formula?

Many contractors believe that they are always entitled to claim for these costs when they experience compensable delay. (See Eichleay Corp., ASBCA No. 5183, 60-2 BCA (CCH) P2688 (1960). Many owners believe that these claims are a thing of the past. (See Capital Electric v. United States, 729 F.2d 743, 746-47 (Fed. Cir. 1984). Based on recent Federal Circuit decisions, neither of these views is correct.

HOME OFFICE OVERHEAD CLAIMS

Contractor claims for unabsorbed home office overhead seek to recover the general and administrative (G&A) costs associated with an unanticipated owner-caused suspension of construction work. G&A costs such as rent and utilities are associated with the construction business as a whole, not with a particular project. The contractor continues to incur these expenses despite the suspension or extension of a particular project.

On fixed-price contracts, G&A costs are included in the contractor’s bid price. Should the work on the project be suspended, and unless the contractor obtains replacement work, revenues may be insufficient to “absorb” the contractor’s continuing G&A expenses. The contractor may then have to access other financial resources to cover these expenses.

TWO PRONG TEST

Since 1994, Federal Courts have repeatedly held that the Eichleay Formula is the only means for calculating the amount of recoverable, or unabsorbed, home office overhead expenses incurred because of government-caused suspension. See Wickham Contracting Co. v. Fischer, 12 F.3d 1574, 1580-81 (Fed. Cir. 1994).

However, the federal circuit has attached two prerequisites to the application of the Eichleay Formula in the recovery of unabsorbed home office overhead costs:

(1) The contractor must have been placed on standby, and
(2) The contractor must have been unable to take on replacement work.

See Interstate Gen. Gov’t Contractors, Inc. v. West, 12 F.3d 1053, 1056 (Fed. Cir. 1993).

THE FIRST PRONG: THE STANDBY TEST

Federal courts have recently ruled that a contractor is on “standby” when work on a project is suspended for a period of uncertain duration and the contractor can at any time be required to return to work immediately. The “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. See Daly Constr. Inc. v. Garrett, 5 F.3d 520, 522 (Fed. Cir. 1993), and Mech-Con Corp v. West, 61 F.3d 883, 887 (Fed. Cir. 1995).

THE SECOND PRONG: IMPRACTICALITY OF OBTAINING REPLACEMENT WORK

In Mech-Con Corp v. West, 61 F.3d 883, 887 (Fed. Cir. 1995), the court reexamined the showing a contractor must make to receive compensation for its unabsorbed indirect costs under the Eichleay formula. The court explained that the contractor could establish a prima facie case for recovery by demonstrating that the government required the contractor to remain on standby and the government imposed delay was uncertain. By making this showing, the contractor has thus implicitly demonstrated that the additional overhead was not and could not be absorbed.

The court held that this prima facie case can be rebutted with evidence or argument showing that the contractor did not suffer or should not have suffered any loss because it able to either reduce its overhead or take on replacement work during the delay.

When Mech Con, Altmayer v. Johnson, 79 F.3d 1129 (Fed. Cir. 1996) and Satellite Electric Co. v. Dalton, 105 F.3d 1418 (Fed. Cir. 1997) are read together, the government can rebut the contractor’s prima facie case for entitlement to Eichleay formula damages by showing it was not “impractical” for the contractor to obtain replacement work. The critical factor is the contractor’s ability to obtain replacement work to absorb the expenses that would otherwise be unabsorbed solely as a result of a government suspension to one contract.

THE RELATIONSHIP BETWEEN IMPRACTICALITY OF OBTAINING WORK AND STANDBY

The courts have recognized that the “linchpin to entitlement under Eichleay is the uncertainty of contract duration occasioned by government (compensable) delay or disruption.” See Altmayer v. Johnson, 79 F.3d 1129, 1133 (Fed. Cir. 1996). If the contractor cannot predict the duration of the suspension, it also cannot predict the similarly uncertain extension of time necessary to perform the contract beyond the original completion date.

On the other hand, where the government suspends work on the contract for a predetermined period, the contractor is then not on standby during the suspension and is free to shift its resources to other contracts such that no overhead expenses go unabsorbed.

In West v. All State Boiler, Inc., 146 F.3d 1368 (Fed. Cir, 1998), the court noted that in very few cases where the contractor can demonstrate it was on standby during the suspension will the government be able to demonstrate that it was not impractical for the contractor to take on replacement work. However, the court suggested that there will be circumstances in which the government will be able to show that: (1) the contractor did or could have obtained replacement work, (2) the contractor’s failure to do so was unrelated to the government’s delay or (3) the contractor was able to avoid injury by reducing home office overhead expenses.

THE CLARIFIED LEGAL TEST FOR RECOVERY UNDER THE EICHLEAY FORMULA

In West v. All State Boiler, Inc., 146 F.3d 1368 (Fed. Cir, 1998), the court concluded that home office expenses are only unabsorbed, and thus only compensable, to the extent they accrue during the extension period because a contractor must continue work on that contract to make up for standing by throughout an unexpected suspension caused by the government. The court ruled that a contractor can make a prima facie case for recovery of indirect costs under Eichleay by showing that it was required to standby during a suspension of work caused by the government, and that the duration of the suspension, and consequently, the additional time necessary to complete performance, was uncertain. The burden then falls to the government to show that it was not impractical for the contractor to take on replacement work and thus avoid the loss. The court ruled that the relevant time frame for replacement work analysis begins at the start of the suspension period and continues to the end of the extension period.

CONCLUSION

Our reading of the cases cited in this article indicates that contractors should satisfy two prerequisites before applying the Eichleay Formula in the recovery of unabsorbed home office overhead expenses:

(1) The contractor must have been placed on standby, and
(2) The contractor must have been unable to take on replacement work during the suspension or standby period.

What has been your experience in delay claims? How often have contractors experienced situations that satisfy these prerequisites, versus situations where the contractor continues to work during a period of delay?

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