For many years, the recovery of unabsorbed home office overhead was a growth area in the construction claims world. The rationale is that when a project owner suspends work, expressly or constructively, the contractor is unable to bill against the contract at the anticipated rate. This in turn prevents the contract from absorbing its share of fixed home office expenses in the manner reasonably anticipated based on the price, performance period and progress payment provisions of the contract. The so-called “Eichleay formula” has become the accepted method of calculating these damages.
Project owners have long complained that unabsorbed overhead is a phantom form of damages. Home office expenses are fixed and contractors are not precluded from performing other work to help absorb those expenses. Courts have listened, imposing more restrictions on the recovery of unabsorbed overhead. One requirement is the contractor’s inability to perform revenue-producing replacement work during the period of suspension.
The Virginia Supreme Court recently ruled that a contractor was not entitled to unabsorbed home office overhead because it failed to show it had been unable to obtain and perform revenue-producing replacement work. Without such proof, said the Court, the Eichleay formula is nothing more than a mathematical model founded on assumption.
What do you think? Are these phantom damages? Or have courts become so restrictive that contractors can no longer recover for the real revenue impact of suspended work? I invite comments from both the contractor and project owner perspective. I invite your comments below.
Featured in next week's issue of Construction Claims Advisor:
- Duration of High Water Was “Type II” Differing Site Condition
- Contractor Not Entitled to Final Payment without State Agency Approval
- Incorrect E-Mail Address Results in Dismissal of Bid Protest
Bruce Jervis, Editor
Construction Claims Advisor
