May 1994
New Life For The EICHLEAY Formula Recovering Home Office Overhead in Government - Caused Delay Claims
Government Contract Costs, Pricing & Accounting Report, Vol. 94-3
Recovering damages for home office overhead in government caused delay claims is once again likely following the rebirth of the Eichleay formula. This formula, enunciated in Eichleay Corp., ASBCA 60-2 BCA ¶ 2688, aff'd on reconsideration, 61-1 BCA ¶ 2894, had suffered setbacks recently, but was given new life in Capital Elec. Co. v. U.S., GSBCA 5316, 83-2 BCA ¶ 16548, rev'd, 729 F.2d 743 (Fed Cir. 1984). The revival of the formula includes limitations that construction contractors should consider when making claims for home office overhead. Over thirty years ago the Eichleay formula was created, and for many years contractors routinely received compensation under its logic. In the 1980's, however, courts began to erode the formula. A judge for the GSBCA actually predicted its complete demise. This trend and the prediction were proven wrong in Capital Elec. The doctrine remains, albeit with restrictions. The Eichleay formula is used to calculate damages based upon a ratio of the delayed contract's billings to the value of all work performed during the period of the delayed contract. A contractor receives damages for home office overhead incurred during a delay because the contractor had presumed that the home office resources would be needed.
EICHLEAY'S REBIRTH ... WITH CAVEATS Fortunately for contractors, Judge Lieblich was wrong. Only one year later, the United States Court of Appeals for the Federal Circuit reversed Capital Electric and reinstated the contractor's right to recover home office overhead by using the Eichleay formula.
Under Capital Electric, a contractor could not recover home office overhead damages absent some evidentiary foundation that damages were indeed incurred. The contractor should have been able to satisfy this standard by presenting evidence that the duration of the delay was uncertain, its bonding capacity was limited, its equipment or capital was restricted, or key personnel required for the acquisition or performance of new work were required to be available for the delayed project.
Unfortunately, a significant number of decisions by various boards of contract appeals and the United States Court of Federal Claims (and its predecessor the United States Claims Court) have focused almost exclusively on a contractor's lack of bonding capacity (or its actual attempts to acquire new work), as the relevant standards to be applied. Using this approach, the majority of post-Capital Electric decisions have found the contractor's proof lacking, and have denied contractors' requests for home office overhead costs. As discussed below, three recent decisions of the Federal Circuit have clarified the Capital Electric standards and made it easier to recover Eichleay costs.
Within the past 18 months, the Federal Circuit has issued five decisions addressing the Eichleay formula. Three of these decisions, taken together, provide significant guidance as to what a contractor has to prove to recover home office overhead.
C.B.C. ENTERPRISES
In C.B.C. Enters., Inc., 6 the court of appeals ruled that Eichleay applied only when the contractor suffers "a suspension of work on a contract, when the suspension decreases the stream of direct costs against which to assess a percentage for reimbursement."
In this case, the delay related to performance of compensable change orders. Because these compensable changes did not diminish the contractor's stream of direct costs, the court concluded that a percentage markup on the change order work provided adequate compensation.
The C.B.C. decision focuses upon the "uncertainty arising from suspension, disruption, or delay" as the linchpin of recovery of Eichleay costs. This uncertainty, the court reasoned, prevents the contractor from taking on other work during the delay.
INTERSTATE GENERAL GOVERNMENT CONTRACTORS
In Interstate,7 the court of appeals returned to the themes of suspension of work, uncertainty, and the impact of delays of uncertain duration upon the contractor's stream of direct costs. The court stated:
WICKHAM CONTRACTING CO.
The Wickham decision8
addresses an issue that has been the subject of much discussion in the case law: whether the Eichleay formula is the only appropriate method for calculating unabsorbed home office overhead. The court in Wickham answered this question in categorical terms: "Regarding the Eichleay formula, we hold that it is the only proper method of calculating unabsorbed home office overhead. No other formula may be used."
In Wickham, the contractor, not the government, was challenging the use of Eichleay. The company argued that a variant of Eichleay should apply.
In rejecting Wickham's arguments, the court considered - and rejected - various alternatives to the Eichleay formula, including "jury verdict," "total cost," "simulated work," and modified Eichleay formulas. The court stated that, when a contractor meets the standards set in C.B.C. and Interstate, "the Eichleay formula is the exclusive means" of calculating unabsorbed home office overhead.
A ROADMAP FOR RECOVERY
The recent case law interpreting Eichleay has changed the way that contractors should approach claims for unabsorbed home office overhead.
Although application of the Eichleay formula still is not "automatic," these cases provide contractors a roadmap that can lead to the recovery of Eichleay costs.
What caused the delay? At the onset, a contractor should focus upon the nature of the delay. To recover Eichleay damages, a contractor generally must show that its performance was delayed by a "suspension, disruption or delay of contract performance."
The Federal Circuit's use of the phrase "suspension, disruption or delay" may cause confusion. Obviously, change order work can result in delay or disruption; can a contractor recover Eichleay costs in these instances?
The courts have yet to address this issue in conjunction with the rationale of C.B.C., Interstate, and Wickham. However, these cases do not use the terms "suspension, disruption, and delay" in a vacuum. The court links these concepts to the linchpin of an Eichleay claim: the reduction in the stream of direct costs.
Thus, Eichleay damages should not be categorically denied simply because "disruption or delay" resulted from mixed causes, such as change orders and suspensions of work. Eichleay recovery may still be appropriate in these cases, if the reduction in the stream of direct costs is such that application of a fixed percentage of direct costs does not result in adequate recovery.
How serious was the suspension of work? None of the recent cases directly addresses whether a partial suspension of work - where some base contract work continues to be performed - can result in recovery of Eichleay costs. However, both C.B.C. and Wickham suggest that a complete suspension is not required.
Nonetheless, the recovery of Eichleay costs is not automatic for every suspension of work, no matter how minor. In partial suspensions, the contractor should focus upon the impact of the suspension upon its stream of direct costs. If the contractor can show that the government caused a "decrease in the direct costs necessary to support [its] continuing overhead,"9Eichleay should apply.
What about other work? Finally, the contractor must show that the suspension, disruption, or delay prevented it from taking on other work. In the Federal Circuit's view, the inability to take on other jobs arises in two ways.
First, suspensions or delays that are "sudden, sporadic, and of an uncertain duration"10 require that the contractor remain ready to resume performance at any time. Using the court's terminology, the contractor remains on "standby," unable to take on other work. This results in an interruption of its anticipated stream of direct costs and recovery of Eichleay damages. Second, a contractor can show that limitations on its bonding capacity prevented it from taking on additional work during the suspension or delay. Such limitations prevent the contractor from maintaining the anticipated stream of direct costs that is central to an Eichleay claim.
CONCLUSION
Despite the Federal Circuit's recent efforts to clarify when the Eichleay formula applies, contractors should expect the government to continue to resist application of the formula as a means of calculating unabsorbed home office overhead. Nonetheless, the recent case law provides contractors with a framework that, when properly applied, can lead to the recovery of Eichleay damages.
This article originally appeared in the Constructor.
NOTES
1 ASBCA No. 5183, 60-2 BCA ¶ 26-88, aff'd on reconsid., 61-1 BCA ¶ 2894.
2 Berley Industr. Inc v. City of New York, 45 N.Y.2d 683, 385 N.E. 2d 281 (1978).
3 Guy James Construction Co. v. The Trinity Industries Inc., 644 F.2d 255 (5th Cir. 1981).
4 GSBCA Nos. 5316-17, 83-2 BCA ¶ 16,548.
5 Id. at 83,318-19.
6 987 F.2d 669 (Fed. Cir. 1992).
7 12 F.3d 1053 (Fed. Cir. 1993).
8 12 F.3d 1574 (Fed. Cir. 1994).
9 12 F.3d at ______________ (emphasis added).
10 C.B.C., 978 F.2d at 675.
Recent case law demonstrates that while the Eichleay formula is alive, it is not automatic. The contractor must establish that a "suspension, disruption, or delay" decreased the stream of direct costs. The contractor must also show that it was unable from taking on other work as a result of the government delay. This may be shown by the uncertainty of the delay(s), or by bonding limitations. With these factors in mind, contractors should pursue Eichleay damages in appropriate cases.Note: A summarized version of this article appeared in Constructor, May 1994.
Mention "Eichleay costs" to a construction contractor and you will likely hear one of two things: (1) "I'm entitled to them whenever I experience a government-caused delay"; or (2) "They're almost impossible to get today." Neither statement is entirely correct. In fact, three very recent decisions of the U.S. Court of Appeals for the Federal Circuit (the controlling appellate court for government contracts matters) have put new life into this venerable doctrine, and made it more likely that a contractor experiencing a government-caused delay will recover its Eichleay costs.
Establishing the right to recover home office overhead. More than 30 years ago in Eichleay Corp.1, the Armed Services Board of Contract Appeals resolved a dispute over the proper method of computing the amount of home office overhead costs attributable to unreasonable government delays in issuing change orders to a construction contract. The contractor proposed an approach based on the computation of a daily overhead dollar amount attributable to the contract that experienced the delay. The Board adopted the contractor's approach, finding that it was a realistic method of allocating home office overhead expenses.
Following the ASBCA's decision in Eichleay, judges in more than 100 cases routinely granted recovery to federal government contractors for some portion of their home office overhead costs attributable to government-caused delays based on the application (either indirectly or with slight modifications) of the Eichleay formula. A federal government construction contractor's right to recover Eichleay costs was thought to be so well-established that most contractors viewed it as "automatic" once they proved a government-caused delay.
EROSION OF THE EICHLEAY FORMULA
Non-government contract forums were the first to reject the use of the Eichleay formula; courts in New York2and Texas3 both refused to apply it in construction delay cases.
Relying in part on these decisions, in the early 1980s the boards of contract appeals and the U.S. Claims Court also began to reject the use of the Eichleay formula. The low watermark for Eichleay was the General Services Board of Contract Appeals decision in Capital Electric Co.,4 where in a concurring opinion Judge Lieblich stated:
We can be confident, after publication of this opinion, that the Government will never again go along with any payment to a contractor for "extended overhead" nor will it ever again agree to the application of the Eichleay formula to any overhead calculation in a construction case. Whether distinguished or overruled, those prior decisions will be dead letters hereafter.5For all intents and purposes, it appeared that Eichleay costs were a thing of the past.
EICHLEAY'S REBIRTH ... WITH CAVEATS Fortunately for contractors, Judge Lieblich was wrong. Only one year later, the United States Court of Appeals for the Federal Circuit reversed Capital Electric and reinstated the contractor's right to recover home office overhead by using the Eichleay formula.
Under Capital Electric, a contractor could not recover home office overhead damages absent some evidentiary foundation that damages were indeed incurred. The contractor should have been able to satisfy this standard by presenting evidence that the duration of the delay was uncertain, its bonding capacity was limited, its equipment or capital was restricted, or key personnel required for the acquisition or performance of new work were required to be available for the delayed project.
Unfortunately, a significant number of decisions by various boards of contract appeals and the United States Court of Federal Claims (and its predecessor the United States Claims Court) have focused almost exclusively on a contractor's lack of bonding capacity (or its actual attempts to acquire new work), as the relevant standards to be applied. Using this approach, the majority of post-Capital Electric decisions have found the contractor's proof lacking, and have denied contractors' requests for home office overhead costs. As discussed below, three recent decisions of the Federal Circuit have clarified the Capital Electric standards and made it easier to recover Eichleay costs.
Within the past 18 months, the Federal Circuit has issued five decisions addressing the Eichleay formula. Three of these decisions, taken together, provide significant guidance as to what a contractor has to prove to recover home office overhead.
C.B.C. ENTERPRISES
In C.B.C. Enters., Inc., 6 the court of appeals ruled that Eichleay applied only when the contractor suffers "a suspension of work on a contract, when the suspension decreases the stream of direct costs against which to assess a percentage for reimbursement."
In this case, the delay related to performance of compensable change orders. Because these compensable changes did not diminish the contractor's stream of direct costs, the court concluded that a percentage markup on the change order work provided adequate compensation.
The C.B.C. decision focuses upon the "uncertainty arising from suspension, disruption, or delay" as the linchpin of recovery of Eichleay costs. This uncertainty, the court reasoned, prevents the contractor from taking on other work during the delay.
INTERSTATE GENERAL GOVERNMENT CONTRACTORS
In Interstate,7 the court of appeals returned to the themes of suspension of work, uncertainty, and the impact of delays of uncertain duration upon the contractor's stream of direct costs. The court stated:
Suspension or delay of contract performance results in interruption or reduction of the contractor's stream of income from direct costs incurred. Home office overhead costs continue to accrue during such periods . . . . Consequently, this decrease in direct costs necessary to support the continuing overhead creates unabsorbed overhead, unless home office [expenses are reduced].It is significant that the court focused on the concept of unabsorbed overhead, a term more frequently discussed in the context of manufacturing contracts. In Interstate, the court noted that home office expenses are allocated to individual contracts based upon an anticipated stream of direct costs. When that direct cost stream is reduced, the contract is not able to absorb the anticipated amount of home office overhead. Finally, the court in Interstate emphasized that a contractor cannot take on other work or reduce home office staff or facilities "[w]hen the period of delay or suspension is uncertain . . . and the contractor is required to remain ready to resume performance on short notice." The result is unabsorbed home office overhead.
WICKHAM CONTRACTING CO.
The Wickham decision8
addresses an issue that has been the subject of much discussion in the case law: whether the Eichleay formula is the only appropriate method for calculating unabsorbed home office overhead. The court in Wickham answered this question in categorical terms: "Regarding the Eichleay formula, we hold that it is the only proper method of calculating unabsorbed home office overhead. No other formula may be used."In Wickham, the contractor, not the government, was challenging the use of Eichleay. The company argued that a variant of Eichleay should apply.
In rejecting Wickham's arguments, the court considered - and rejected - various alternatives to the Eichleay formula, including "jury verdict," "total cost," "simulated work," and modified Eichleay formulas. The court stated that, when a contractor meets the standards set in C.B.C. and Interstate, "the Eichleay formula is the exclusive means" of calculating unabsorbed home office overhead.
A ROADMAP FOR RECOVERY
The recent case law interpreting Eichleay has changed the way that contractors should approach claims for unabsorbed home office overhead.
Although application of the Eichleay formula still is not "automatic," these cases provide contractors a roadmap that can lead to the recovery of Eichleay costs.
What caused the delay? At the onset, a contractor should focus upon the nature of the delay. To recover Eichleay damages, a contractor generally must show that its performance was delayed by a "suspension, disruption or delay of contract performance."
The Federal Circuit's use of the phrase "suspension, disruption or delay" may cause confusion. Obviously, change order work can result in delay or disruption; can a contractor recover Eichleay costs in these instances?
The courts have yet to address this issue in conjunction with the rationale of C.B.C., Interstate, and Wickham. However, these cases do not use the terms "suspension, disruption, and delay" in a vacuum. The court links these concepts to the linchpin of an Eichleay claim: the reduction in the stream of direct costs.
Thus, Eichleay damages should not be categorically denied simply because "disruption or delay" resulted from mixed causes, such as change orders and suspensions of work. Eichleay recovery may still be appropriate in these cases, if the reduction in the stream of direct costs is such that application of a fixed percentage of direct costs does not result in adequate recovery.
How serious was the suspension of work? None of the recent cases directly addresses whether a partial suspension of work - where some base contract work continues to be performed - can result in recovery of Eichleay costs. However, both C.B.C. and Wickham suggest that a complete suspension is not required.
Nonetheless, the recovery of Eichleay costs is not automatic for every suspension of work, no matter how minor. In partial suspensions, the contractor should focus upon the impact of the suspension upon its stream of direct costs. If the contractor can show that the government caused a "decrease in the direct costs necessary to support [its] continuing overhead,"9
Eichleay should apply.What about other work? Finally, the contractor must show that the suspension, disruption, or delay prevented it from taking on other work. In the Federal Circuit's view, the inability to take on other jobs arises in two ways.
First, suspensions or delays that are "sudden, sporadic, and of an uncertain duration"10 require that the contractor remain ready to resume performance at any time. Using the court's terminology, the contractor remains on "standby," unable to take on other work. This results in an interruption of its anticipated stream of direct costs and recovery of Eichleay damages. Second, a contractor can show that limitations on its bonding capacity prevented it from taking on additional work during the suspension or delay. Such limitations prevent the contractor from maintaining the anticipated stream of direct costs that is central to an Eichleay claim.
CONCLUSION
Despite the Federal Circuit's recent efforts to clarify when the Eichleay formula applies, contractors should expect the government to continue to resist application of the formula as a means of calculating unabsorbed home office overhead. Nonetheless, the recent case law provides contractors with a framework that, when properly applied, can lead to the recovery of Eichleay damages.
This article originally appeared in the Constructor.
NOTES
1 ASBCA No. 5183, 60-2 BCA ¶ 26-88, aff'd on reconsid., 61-1 BCA ¶ 2894.
2 Berley Industr. Inc v. City of New York, 45 N.Y.2d 683, 385 N.E. 2d 281 (1978).
3 Guy James Construction Co. v. The Trinity Industries Inc., 644 F.2d 255 (5th Cir. 1981).
4 GSBCA Nos. 5316-17, 83-2 BCA ¶ 16,548.
5 Id. at 83,318-19.
6 987 F.2d 669 (Fed. Cir. 1992).
7 12 F.3d 1053 (Fed. Cir. 1993).
8 12 F.3d 1574 (Fed. Cir. 1994).
9 12 F.3d at ______________ (emphasis added).
10 C.B.C., 978 F.2d at 675.
