LAW: The Contractor's Side

Courts utilize Eichleay formula

Article December 28, 2000
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Last month I discussed the background of the “Eichleay” formula, which contractors have used to recover home office overhead in delay cases. This month I will discuss the two most recent federal cases analyzing the Eichleay formula. In doing so, it is important to bear in mind that the purpose of the Eichleay formula is to compensate a contractor for its continuing home office overhead for a period of delay, during which it is unable to recoup the overhead by contract work, changes or a new contract. Historically, the courts and boards of contract appeals have viewed “pure delays” differently than extended performance caused by changes. In the latter case, the courts and boards have concluded the “markup” included in the equitable adjustment adequately compensated the contractor for extended home office overhead.

In Satellite Elec. Co. v. Dalton, 105 F.3d 1418 (Fed. Cir. 1997), the government was able to rebut the contractor’s prima facie case that it was unable to take on other work by showing: (1) at the time of the delay, less than 4%of the contract remained to be performed; (2) Satellite bid on numerous other projects while on stand-by and was awarded two of them; and (3) Satellite’s bonding capacity had been reduced through their own actions. These facts all taken together, led the court to conclude that Satellite’s inability to obtain replacement work was through no fault of the government and Satellite was therefore not entitled to Eichleay damages for extended home office overhead.

Case addresses key issues

In the recent case of West v. All State Boiler, Inc., 146 F3d 1368, the court was asked to address two of the major issues of a recovery under the Eichleay formula: (1) whether the contractor must show that it would have been impractical or impossible to take on replacement work during the delay; and (2) if the contractor can recover damages for the entire period of delay, or only for that portion of the delay that causes the time of performance to exceed the original scheduled completion date. In deciding these issues the court re-examined and attempted to clarify the legal test a contractor must satisfy in order to use the Eichleay formula to calculate damages. The court’s analysis may be helpful for contractors in future cases.

While the court refused to modify the requirement that the contractor demonstrate that it was impossible to obtain replacement work, it did affirm that a contractor can present a prima facie case by showing it was on standby for an uncertain period of time. The court stated that “it would be inconsistent with the purpose behind Eichleay recovery to require a contractor to cease all normal, ongoing operations during a government-caused suspension on one contract in order to guarantee its recovery of unabsorbed overhead costs.”

However, the court stated that a contractor has suffered no damage and is not entitled to recovery under the Eichleay formula if it is able to reallocate its overhead to a “replacement” contract, that the contractor would not ordinarily perform. The court would not require a contractor to stop bidding other work and apparently would not consider work obtained from the contractor’s normal bidding operations as replacement work.

During a period of an uncertain standby, it is obviously impractical to expect a contractor to obtain replacement work through the bidding process, because it must have resources available to return to work after the delay. The court reasoned that the government can avoid the problem by either giving the contractor a set date on which to resume work or by allowing a sufficient period of time for re-mobilization. This would avoid the uncertain nature of the standby and give the contractor a chance to reallocate its resources to mitigate the damage.

The other major issue presented to the court was whether the contractor’s damages should be based on the entire length of the suspension or only on the amount of time the overall job was extended. The court referred to the actual delay as the “suspension” period and the length of time the overall contract was extended as the “extension” period. These time periods are not always the same. In the case, the suspension period was 58 days but the extension to the contract was only 22 days. The contractor would have finished 36 days early except for the government’s delay. The court limited the contractor’s recovery of unabsorbed overhead to the 22 days, reasoning a contractor would allocate an amount of overhead based on the expected time for completion of the project.

Conclusion

The Eichleay cases are very confusing. In an effort to simplify the matter, I believe that in order to recover unabsorbed indirect overhead calculated with the Eichleay formula, a contractor must be prepared to show:

• The project was extended beyond the original expected date of completion;

• The government caused the delay which resulted in the extension;

• The period or length of the delay was uncertain; and

• The contractor was unable to obtain replacement contracts because of the government caused delay.

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