Development of Eichleay Claims

DEVELOPMENT OF EICHLEAY CLAIMS

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Abstract

The most common way applied in the calculation of unabsorbed home office overhead (HOOH) costs as a result of indefinite delay or suspension of work by the government is the Eichleay Formula. Claims arising from such a situation fall in the delay claims category in construction project claims and the Eichleay Formula has been established as the technique of choice for in the determination of the value of such claims for the past half a century. In this paper I have provided a description of HOOH costs compensable when Eichleay Formula is applied due to the delay of work, the development, evolution, and requirements for its use, how to prove an Eichleay claim and calculation of costs using this method. This paper has also highlighted some of the challenges facing the use of this method, its limitations and its use in federal and state laws in the United States to resolve disputes in the construction industry.

Keywords: Eichleay, Compensable, Home Office Overhead (HOOH) costs, Claim

DEVELOPMENT OF EICHLEAY CLAIMS

Delay in construction projects is not a rare occurrence. Delay could be as a result of action or negligence of the owner, design or construction management, the contractor’s fault, subcontracting, supply, or delivery; or due to any other external factors for example weather, war or acts of terrorism, acts of labor unions and so forth. Delay can be caused by an endless number of potential sources. Once a delay has occurred its cause is identified the extent of the delay technically evaluated. If the contractor and the owner focus on resolution, an agreement on the extent of the delay and possible recovery can be reached. Until the resumption of the contract, the costs a contractor will progressively incur monetary terms are unstoppable if a delay occurs. If the delay was owner caused and an agreement was not reached, the question becomes that of the cost per day of compensable delay. Because the project duration has increased but the revenue associated with it has not, revenue equal to the same amount is stretched more. As a result, when the contractor submits a claim for delay caused by factors out of their control and will they claim compensation for unabsorbed (HOOH) costs. HOOH, in general, refers to those costs the contractor has incurred to support other continuing projects.

McGeehin and Strouss,1996 defined HOOH as “the general and administrative expense (G&A) a contractor incur to finance other projects that generate revenue. By characteristics, it is not possible for these costs directly to a particular project. It has in its composition different costs incurred indirectly, most commonly called “overhead pool” …” These costs include revenue that is used to pay or “absorb” rent, licenses and fees, executive and administrative staff salaries, data processing, accounting, and payroll services, utilities, telephone, fax and computers general insurance, office supplies, etc. Contractors have the freedom to calculate these costs in whatever manner they choose because there are few regulations to that cause. One of the issues causing discontent on projects is compensation a contractor may seek for unabsorbed home office overhead costs (Transportation Research Board,2003). However, if the owner of the project is a department in the Government of the United States, or if a contractor has been  directly contracted by the Government of the United States and  has sought compensation for Home Office Overhead costs, it’s a requirement then they must employ the Eichleay Formula to calculate the value HOOH costs that remain unabsorbed (Wickham Contracting Companys. Inc... v. Fischer,1994)

Development of the Eichleay Formula

History

Before McCord v., the United States in 1940, except with clear permission in the contract, it was not possible for a contractor to seek compensation for costs incurred due to delay by the government. Due to a delay as a result of government actions, the Court of Claims in Fred R. Comb Co. v. The United States in 1945 ruled that liability to the contractor for HOOH incurred due to the delay was a liability of the government. The government was also found in breach of contract and lost the right to argue that it would not compensate the contractor. This case was the foundation on which the Eichleay formula was based on. The Eichleay Formula, however, traces its origin to a ruling in 1960 in the case of Eichleay in Corporation v. the United States. by the Armed Services Board of Contract Appeals. The Eichleay Corporation during its appeal suggested a method for calculating the costs they had incurred using a formula. The Board decided that the formula was a way to calculate the damages reasonably (Trauner, 1990).

How the Eichleay Formula works.

The Eichleay Formula is a way of determining with equity the value of HOOH that remains unabsorbed to ensure a contractor receives fair compensation for a delay caused by the government. (Sunshine Construction & Engineering, Inc. v. the U. S, 2005)

“There is no exact method to determine the number of home office expenses to be allocated to any particular contract or part of a contract. It is not necessary to prove a specific amount of home office expenses, but only to determine a fair allocation for the purpose of compensating a contractor for delay by the government. … The Eichleay formula calculates allocable overhead costs as the ratio of billings of the subject contract to total firm billings during the contract period, multiplied by the total overhead incurred, divided by the actual days of performance, times the number of days the contractor was delayed. The basic formula is outlined as an allocation of the total recorded main office costs to the contract as a ratio of contract billings to total billings for the time of contract execution. The determination as a result of the allocation of a contract is distributed to a daily rate, which as a multiple of the delayed days gives the value of the claim.” (Oak Environmental Consultants, Inc. v. U.S, 2007)

Stated simply, it’s a three-step formula

Step 1: Overhead allocable - This step determines the monetary value of unabsorbed overhead which can be allocated to the project.

 = HOOH Allocable to Contract[pic 1]

Step 2: HOOH Rate – This step determines the rate at which HOOH costs will be allocated daily.

= Daily Contract HOOH Rate[pic 2]

Step 3: Unabsorbed HOOH – Here, the number of days delayed entitled to compensation is multiplied by the HOOH rate daily.

Daily HOOH Rate x Days of Compensable Delay = HOOH Recoverable