All heavy/highway contractors have experienced delays that have extended a project’s duration.
Aside from the direct costs associated with a delay, contractors often seek time-related costs for acceleration, escalation, project overhead and home-office overhead.
With the exception of specially drafted provisions adopted by a few highway departments in the U.S. that have devised special home-office overhead formulas, the predominant approach to quantifying home-office overhead damages is through the Eichleay Formula, which arose from a decision by the Armed Services Board of Contract Appeals, Appeal of Eichleay Corp., ASBCA No. 5183, 60-2 BCA ¶ 2688, 1960 WL 538 (1960). (Eichleay has been approved for this use by the majority of federal and state courts.)
The two biggest mistakes I see contractors make when asserting home-office overhead claims are (1) failing to prove that a delay resulted in unabsorbed or under-absorbed home-office overhead costs; and (2) failing to prove the three requisite requirements for application of Eichleay. A recent case in Louisiana involved a court addressing the latter.
Gilchrist Constr. Co., LLC v. Dept. of Transp and Dev., State of Louisiana, 2015 WL 1020860 (La. App. 1 Cir. April 7, 2015) involved a contract for widening I-10 east of Lake Charles, La. The prime contractor successfully completed the project ahead of time and was paid the full contract price, as amended through change orders, plus an early completion bonus. Nevertheless, the prime filed a claim seeking in excess of $5 million for “construction delay costs” as a result of significant increases in the estimated quantity of embankment and other “acts and omissions” by the Louisiana Department of Transportation and Development (DOTD). The prime’s damages included increased costs for daily project overhead, acceleration, freight, bond and home-office overhead. At the conclusion of a six-day trial, the trial court ruled for the prime contractor and awarded it $4,195,127 in damages. The DOTD appealed.
Among the many issues on appeal was the trial court’s award of home-office overhead damages, which the DOTD contended was improper under Eichleay because there was no complete stoppage of work on the project. In support, the DOTD cited language in JMR Constr. Corp. v. U.S., 11 Fed. Cl. 436 (2014), which was decided by the U.S. Court of Federal Claims and articulated the prerequisites for recovery as follows:
First, the contractor must demonstrate that there was a government-caused delay not excused by a concurrent contractor-caused delay. Second, the contractor must show that it incurred additional overhead expenses, either because the contract’s performance period was extended or because the contractor would have finished prior to the un-extended performance period’s close. Third, the contractor must establish that it was required to remain ‘on standby’ for the duration of the delay.
With respect to the third requirement, the Court further explained that “[i]n order to establish standby, contractors must demonstrate three things. First, the contractor must show that the government-caused delay was not only substantial but was of an indefinite duration. Second, the contractor must demonstrate that, during the delay, it was required to return to work at full speed and immediately. Third, the contractor must show a suspension of most if not all of the contract work.”
The Louisiana Court of Appeals for the First Circuit interpreted the third requirement enunciated in JMR Constr. literally, and held that because there was no actual work stoppage, the prime could not recover home-office overhead damages. It thus vacated the trial court’s award of home-office overhead damages.
In my opinion, the court probably got it right . . .
but for the wrong reason. Unabsorbed or under-absorbed overhead occurs when the period of contract performance is extended and there is insufficient additional revenue earned during the extended period to adequately fund the project’s contribution towards the contractor’s home-office overhead. Whether work was actually suspended is not the determining factor. Indeed, if a contractor can prove that extra work for which it received additional compensation extended a project’s duration, a claim for unabsorbed or under-absorbed home-office overhead costs is still warranted if the contribution to home-office overhead on that extra work is out of line with the length of extended project duration. R&B