Over the years, I have written many columns on the home office overhead recovery using the Eichleay formula. It continues to be a hotly contested issue. Last year, the Federal Circuit Court of Appeals decided Charles G. Williams Construction Inc. v. Thomas E. White, Secretary of the Army, concluding that a government contractor failed to prove the essential element of its claim for Eichleay damages because its work was disrupted rather than suspended.
Change is an order
The Army awarded a contract to improve and repair a government building to Charles G. Williams Construction Inc. The contract contemplated work in two phases and required the government to vacate areas while under construction. The Armed Services Board of Contract Appeals determined that both the government and Williams were responsible for delays. Examples cited by the board included defective government specifications and deficiencies in Williams’ performance and its subcontractors. The board also found the government failed to vacate the southern portion of the building as required. Substantial delays in Williams’ performance resulted. As a result of the various changes and delays, the government issued a large number of change orders, many of which provided for additional payment.
Williams filed an Eichleay formula claim for 330 days of unabsorbed home office overhead. Williams argued the government significantly interfered with the efficient performance of the work. Such interference, it claimed, amounted to government delay causing it to perform the contract less efficiently or effectively than planned and resulting in delayed completion. The Federal Circuit rejected Williams’ Eichleay claim, upholding the decision of the Board of Contract Appeals. The court explained that in order to recover under the Eichleay formula, the contractor must prove contractual performance was impossible and the contractor was required to remain available to resume performance on short notice. Williams could not prove this because it continued working on the project during the period for which it sought Eichleay damages. In addition, Williams presented no evidence that the government directed Williams to remain on call.
Letter stamped with a “no”
The Federal Circuit had to decide whether Williams was on standby. In order to prove contract work is on standby, a contractor must show that “performance of the work was suspended or significantly interrupted during the period in dispute.” Because the Federal Circuit reviewed this decision on appeal, it relied on the board’s finding on the credibility of the evidence presented. Williams argued, for example, that it proved a standby condition based on a letter its CEO wrote to the contracting officer during performance stating that “Williams and his subcontractors are on standby.” The board considered the letter but gave it little or no weight. On the other hand, an audit report prepared by the government determined Williams’ daily reports showed the site was manned without significant interruption throughout the contract performance. Williams even admitted in oral argument there was no evidence that on any particular day it was unable to perform any contract work.
Most readers are familiar with the application of the Eichleay formula. It is a formula designed to compensate a contractor for unabsorbed overhead costs that accrue when contract completion requires more time than originally anticipated because of a government-caused delay. But delayed performance does not automatically entitle a contractor to recovery of Eichleay damages. Delayed performance, therefore, must result from a standby situation as opposed to disrupted performance. This is true, even if the disruption delays completion of the project.
What does this case tell highway contractors? First, recovery of home office overhead using the Eichleay formula is increasingly difficult. Second, because highway contractors rarely face a pure delay, and most frequently face disruptions, try to recoup home office overhead in charge orders. Third, highway contractors must be able to document disruptions and inefficiencies to recover the field extended performance costs.
