Unabsorbed Home Office Overhead: Real Damages or Contractor Windfall?

Bruce Jervis, Editor
Construction Claims Advisor

When a contractor enters into a fixed-price contract, the contractor anticipates a certain cash flow from the contract which will absorb a portion of the contractor’s general and administrative expenses. If the project owner suspends work under the contract, the contractor will not be able to bill at the expected rate and will incur unabsorbed home office overhead. For decades, these damages have been calculated according to the “Eichleay formula.”

In recent years, Eichleay damages have come under attack. Project owners contend they are phantom damages; the contractor would have incurred these fixed home office expenses in any event. Courts have greatly restricted the recovery of Eichleay damages. The prevailing rule today is that they are allowed only when the contractor is forced into a true standby position, unable to perform any meaningful work on the contract. And the indefinite nature of the suspension must prevent the contractor from obtaining replacement work which could absorb a portion of the fixed home office overhead.

I welcome your comments. Do Eichleay damages represent a real cost to the contractor? Or, are they merely an artificial method for inflating claims? Are the new restrictions on recovery appropriate? Or, do they effectively mean the end of Eichleay damages?

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Comments

[John McGrail PE]

Having administered public construction contracts for nearly 30 years,I can attest to the fact that nearly evey claim from a contractor for any situation is inflated. HOOH is no exception. Nevertheless there is in most cases some degree of truth in the asserted amounts and I have been content over the years to agree to some allowance for HOOH in a delay claim. Our former standard construction contract,that was based largely on the FAR,permitted three possible methods of computing HOOH-Eichleay,actuals or 5% of the value of the Base Contract Work remaining incomplete at the point where the contract ran late(the method producing the least amount was the selected method). It was always surprizing to me that each time the issue arose,HOOH was compensated by use of the last method.

[mark essert]

I'm not familiar with the Eichleay formula per se, but as a former General Contractor I can stipulate with certainty that the damages are real, however difficult to calculate. General Contractors are not as flexible in their ability to move from project to project as are most subcontractor's. Each project has it's own team (sometimes unique) and set of protocols which are not necessarily transferrable to another project or that easily eliminated in the event of a temporary suspension.

[Robert J. Silvia]

In today's construction enviroment delays can greatly affect a contractor. Many contractors are taking work to just pay the overhead so any project that is delayed and not billable could have a great affect on the comapny.In many regards the amount of the claim may be dependent on the other work backlog a company has. If the contractor has sufficient backlog to pay the overhead the impact may not be as large. If the contractor has little to no other work the impact could be severe. It could possibly take the company down.

[Jess Hall]

I am currently consulting on two separate Federal projects that are both suspended by the Government. However, both suspensions are for the actual work. The projects are not suspended in their entirety.

With that said, both contractors must keep the administrative and management of the each project functional for fear of loosing key personnel and; each contractor must continue to interact with the government agencies in attempts to remedy the government imposed changes and shortfalls that have caused the suspensions. Since there is no physical work being performed on either project there is no billing to support the home office overhead associated with each project. Moreover, the work suspensions will result in time extensions. Additionally, given the current economy, there is not enough work available to temporarily assign to key personnel. The overhead cannot be absorbed.

We will use Eichleay as the means to recover the unabsorbed home office overhead as it has been accepted in our past claims against the government. The fact of the matter is that each project is a financial burden while awaiting remedies to the problems and each project shares in the overall home office overhead burden for each contractor. As each project will be extended, (most likely day for day) the home office overhead incurred during the work suspensions is a reality and an unplanned cost.

As far as Eichleay being inflated; the costs used for the Eichleay can be audited. Therefore, the contractor must be diligent in applying the costs to Eichleay so as not to discredit the process.

[Melissabrumback]

Like everything in construction and other business relationships, it needs to be a give and take. Overhead costs are real, esp so in today's economy where there may be no other work to fill in. On the other hand, some contractors can and do overinflate or overestimate those costs.

The key to getting a fair number is for the contractor to keep excellent documentation. Both parties also need to consider that ongoing relationships are much more valuable than getting (or withholding) every last penny you can.

Melissa Brumback
http://www.constructionlawNC.com

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