By Bruce Jervis
Unabsorbed home office overhead has long been a controversial form of delay damages. The rationale is that if work on a contract is suspended, the contractor is unable to bill against that contract and the contract does not carry, or absorb, its proportionate share of the fixed home office expenses. Project owners complain that these are phantom damages used to inflate delay claims. The ongoing home office expenses would have been incurred in any event.
Courts have curtailed recovery of unabsorbed overhead in recent decades, imposing numerous requirements. The project owner must be responsible for the suspension of work. The total contract performance period must be extended as a result of the suspension. The contractor must be forced to “stand by,” ready to resume work on short notice, thereby precluding the contractor from using those resources on other projects.
A federal court recently confirmed that contractors are allowed to recover unabsorbed home office overhead, as an element of a termination for convenience settlement, on projects in which contract performance never commenced. The contractor was stymied, however, because it had never mobilized in the field and was unable to show it had been in a standby position.
What do you think? Are unabsorbed home office overhead damages a recovery of costs that would have been incurred anyway, phantom damages used to inflate delay claims? Or, do these damages, if subjected to stringent prerequisites to recovery, compensate contractors for real losses? Your opinion is welcomed.
