By Bruce Jervis
The “Eichleay Formula” Still Lives
When a contractor seeks recovery of unabsorbed home office overhead incurred because of a project owner’s suspension of work, the contractor uses the “Eichleay formula.” This calculates the amount of a contractor’s ongoing general and administrative expenses a suspended fixed-price contract would have absorbed on a daily basis if performed according to the original schedule. The contractor is then compensated for unabsorbed expenses incurred when it was unable to perform or bill work.
Project owners criticize unabsorbed overhead as phantom damages; home office expenses are ongoing and do not increase as a result of a suspension. In the federal contracting arena, recovery was curtailed by a series of rulings, more than a decade ago, by the U.S. Court of Appeals for the Federal Circuit.
Recovery is now allowed only when a suspension of work of uncertain duration forces a contractor to stand by awaiting immediate resumption of work, precluding the contractor from taking on replacement work. This is a stern standard. Some commentators have declared Eichleay no longer effective. Yet recovery continues.
One federal contractor recently recovered for 109 days of suspension of uncertain duration at a daily rate of $1,047 in unabsorbed home office overhead. The fact that the contractor could perform insubstantial contract work during the suspension did not prevent the contractor from being in a standby position. And, other contracts with a combined value of roughly $250,000 did not replace the $3.6 million suspended contract.
What is your opinion of Eichleay damages, real or phantom? And, given the current standard for recovery, how often will these claims be viable? Your opinion is welcomed.
