Tag Archives: home office overhead

RECOVERING UNABSORBED HOME OFFICE OVERHEAD DUE TO DELAY

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In the preceding article, I discussed the use of a retrospective as-built delay analysis in a case before the Civilian Board of Contract Appeals (CBCA).   This case also discussed a damages component in certain delay claims known as unabsorbed home office overhead—a challenging damages component to recover because this deals with indirect costs as opposed to direct costs.

Unabsorbed home office overhead is a damages component when the contractor is on standby, but this is NOT as easy as just claiming standby thereby you are automatically entitled to unabsorbed home office overhead. There are requirements that MUST be met.

To obtain an equitable adjustment for unabsorbed home office overhead as compensation for being on standby, [the contractor] must initially show “[1] a government-caused delay of uncertain duration,” that “[2] the delay extended the original time for performance” or precluded the contractor from finishing earlier than scheduled, and that “[3] the contractor [was] on standby and unable to take on other work during the delay period.

CTA I, LLC v. Department of Veteran Affairs, CBCA 5826, 2022 WL 884710 (CBCA 2022) quoting Nicon, Inc. v. U.S., 331 F.3d 878, 883 (Fed. Cir. 2003).

Regarding the first element of a government-caused delay, the contractor’s workforce is not required to be completely idle during this standby period, but there needs to be an “indefinite ‘interruption or reduction of the contractor’s stream of income from direct costs incurred,’” namely:

It simply requires that [its home office] overhead be unabsorbed because performance of the contract has been suspended or significantly interrupted and that additional contracts are unavailable during the delay when payment for the suspended contract activity would have supported such overhead.

Suspension or delay of contract performance results in interruption or reduction of the contractor’s stream of income from direct costs incurred. Home office overhead costs continue to accrue during such periods, however, regardless of direct contract activity. Consequently, this decrease in direct costs necessary to support the continuing overhead creates unabsorbed overhead, unless home office workers are laid off or given additional work during such suspension or delay periods. Even then, fixed overhead costs usually remain.

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When the period of delay or suspension is uncertain…and the contractor is required by the government to remain ready to resume performance on short notice, the contractor is effectively prohibited from mitigating such overhead costs by making reductions in home office staff or facilities

Interestate General Government Contractors, Inc. v. West, 12 F.3d 1053, 1057-58 (Fed. Cir. 1993)

Moreover:

[I]f the contractor can make out a prima facie case of (1) above, i.e., that the government-imposed delay was uncertain and that the government required the contractor to remain on standby, ready to resume full work immediately, the burden shifts to the government to show either (1) that it was not impractical for the contractor to obtain “replacement work” during the delay, or (2) that the contractor’s inability to obtain such work, or to perform it, was not caused by the government’s suspension.

Melka Marine, Inc. v. U.S., 187 F.3d 1370, 1375 (Fed. Cir. 1999)

The formula to calculate unabsorbed home office overhead is known as the Eichleay formula (after an Armed Services Board of Contract Appeals’ decision).

There are three steps in determining recoverable damages under the Eichleay formula: “(1) find the allocable contract overhead by multiplying the total overhead cost incurred during the contract period by the ratio of billings from the delayed contract to total billings of the contractor during the contract period; (2) find the daily contract overhead rate by dividing the allocable contract overhead by the number of days of contract performance; and (3) determine the amount recoverable by multiplying the number of days of delay by the daily contract overhead rate.”  Melka Marine, Inc. supra, n.3.  This Eichleay formula will require the assistance of an expert to calculate.

In the case before the CBCA, the contractor sought unabsorbed home office overhead for numerous delay periods.  However, only one 178-day delay period truly satisfied an entitlement to unabsorbed home office overhead, and that was a delay attributable to asbestos.  The government directed the contractor to stop work due to the discovery of asbestos and then, subsequently, terminated the contract for convenience.  This asbestos delay stalled the project and was a standby period of an indefinite duration until the government terminated the contract for convenience.  The government did not notify the contractor that the contractor could leave the project and take on other work during this period and simply remobilize without consequences and provided no evidence the contractor could even take on other work during this period.  CTA, supra.

Remember, not every delay period results to an entitlement to unabsorbed home office overhead.  But if the “standby” argument could be met, as discussed above, and an expert is utilized to assist in calculating the Eichleay formula, there is a basis to recover these indirect costs.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

HOME OFFICE OVERHEAD (EICHLEAY) AND GOVERNMENT-CAUSED STANDBY

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JMR Construction Corp. v. United States, 2014 WL 3418445 (Fed.Cl. 2014) is a good federal government contracting case discussing a prime contractor’s challenging burden to support unabsorbed home office overhead damages caused by a government-caused delay.  The United States Court of Federal Claims described unabsorbed home office overhead damages and the required elements (under the Eichleay methodology) for a prime contractor to prove these damages:

 

The term “home office overhead” refers to the general administration costs of running a business, such as accounting and payroll services, general insurance, salaries of upper-level management, heat, electricity, taxes, and depreciation. These are indirect costs, expended for the benefit of the whole business, [and thus] by their nature cannot be attributed or charged to any particular contract.

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Contractors typically recoup these indirect costs by allocating them to individual contracts in proportion to those contracts’ direct costs. But, in the event of a government-caused delay or suspension of work, the stream of direct costs against which to assess a percentage [of home office overhead] is decreased. The resulting shortfall is termed unabsorbed home office overhead.

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The Circuit has held that the so-called Eichleay formula is the sole method through which contractors are able to recover unabsorbed home office overhead. The Eichleay formula requires that contractors satisfy several strict prerequisites. First, the contractor must demonstrate that there was a government-caused delay not excused by a concurrent contractor-caused delay. Second, the contractor must show that it incurred additional overhead expenses, either because the contract’s performance period was extended or because the contractor would have finished prior to the un-extended performance period’s close. Third, the contractor must establish that it was required to remain on standby for the duration of the delay. [Standby does not require the prime contractor to prove that it was completely idle but that its work was significantly slowed such that it was performing minor tasks.]

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In order to establish standby, contractors must demonstrate three things. First, the contractor must show that the government caused delay was not only substantial but was of an indefinite duration. Second, the contractor must demonstrate that, during the delay, it was required to return to work at full speed and immediately [once the suspension period is over.  If the prime contractor is given a reasonable period of time to remobilize after the suspension is lifted, it will not be able to satisfy this requirement]. Third, the contractor must show a suspension of most if not all of the contract work. If the contracting officer has issued a written stop work order proving these elements the contractor can utilize that order to provide direct evidence of standby. Otherwise, these elements can be proven through indirect evidence.

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If the contractor can make a prima facie showing of the standby elements, the burden of production shifts to the government to show either that it was not impractical for the contractor to obtain replacement work during the delay, or that the contractor’s inability to obtain or perform replacement work was caused by a factor other than the government’s delay.

JMR Construction, supra, at *5-7 (internal quotations and citations omitted); see also P.J. Dick, Inc. v. Principi, 324 F.3d 1364 (Fed.Cir. 2003) (finding that contractor could not support claim for unabsorbed home office overhead as it could not support it was on standby).

 

The Federal Circuit Court of Appeals summarized these requirements by the following questions:

 

In short, a court evaluating a contractor’s claim for Eichleay damages should ask the following questions: (1) was there a government-caused delay that was not concurrent with another delay caused by some other source; (2) did the contractor demonstrate that it incurred additional overhead…; (3) did the government CO [contracting officer] issue a suspension or other order expressly putting the contractor on standby; (4) if not, can the contractor prove there was a delay of indefinite duration during which it could not bill substantial amounts of work on the contract and at the end of which it was required to be able to return to work on the contract at full speed and immediately; (5) can the government satisfy its burden of production showing that it was not impractical for the contractor to take on replacement work (i.e., a new contract) and thereby mitigate its damages; and (6) if the government meets its burden of production, can the contractor satisfy its burden of persuasion that it was impractical for it to obtain sufficient replacement work. Only where the above exacting requirements can be satisfied will a contractor be entitled to Eichleay damages.

P.J. Dick, Inc. v. Principi, 324 F.3d 1364, 1373 (Fed.Cir. 2003).

 

In JMR Construction, the prime contractor was hired to build an aircraft maintenance facility.  The prime contractor sued the government pursuant to the Contract Disputes Act for government-caused delays. The period of delay the prime contractor was seeking to recover damages for was January 16, 2009 (day after the government occupied the facility) through September 4, 2009 (completion).

 

 

The government took occupancy of the facility on January 15, 2009.  The prime contractor continued to perform work after this date, although its workforce slowed down.   On February 3, 2009, the prime contractor demobilized its jobsite trailer and was finishing the balance of its work including the manufacturing and installation of a permanent power converter and the installation of ceiling lights in one of the rooms.  Temporary stopgap measures had been implemented to address these electrical issues that likely allowed the government to utilize the facility.

 

The government moved for summary judgment as to the prime contractor’s entitlement to unabsorbed home office overhead damages. The Court broke the prime contractor’s unabsorbed home office overhead claim into two discrete periods: (1) January 16, 2009 (day after the government took occupancy) to February 3, 2009 (when the contractor demobilized jobsite trailer) and (2) February 4, 2009 to September 4, 2009 (period when the permanent power and room lighting were being installed).  Because the contracting officer never issued a standby notice, the prime contractor had the burden to prove by indirect evidence the factors (referenced above) supporting its entitlement to unabsorbed home office overhead.

 

First Period: 1/16/09-2/3/09

 

The Court did not grant summary judgment during this period because there was a disputed issue of fact as to materiality of the work the prime contractor was performing during this time period.  The prime contractor contended the work it was performing was minor whereas the government contended the work was material. If the work is deemed material (or more than just minor tasks) the prime contractor’s unabsorbed home office overhead claim will fail since it was never on standby or suspended.  If it was minor, the prime contractor would still need to prove the elements of standby. Although the Court declined to grant summary judgment based on this disputed factual issue, it seems from the Court’s ruling during the second time period (below) that the prime contractor will have difficulty proving the elements of standby.

 

Second Period: 2/4/09-9/4/09

 

The Court granted summary judgment on the prime contractor’s claim for unabsorbed home office overhead during this period because the prime contractor could NOT prove the elements of standby. In particular, the prime contractor could not prove it was required to resume work at full speed and immediately once the “suspension period” was over.  The prime contractor did not appear to maintain any personnel or equipment on site during this period that eliminated any argument that it was required to return to work with any degree of urgency once the suspension was lifted.  The prime contractor also utilized a subcontractor to perform the incomplete electrical work, and the use of subcontractors can limit a prime contractor’s ability to prove standby since it was only monitoring the work and not actually required to return to work at all.  And last, temporary stopgap measures were implemented relating to the lighting that negated the time sensitivity of the remaining work meaning there was no urgency for the contractor to resume work immediately.

 

Eichleay-formulaFinally, even assuming the prime contractor could support its entitlement to unabsorbed home office overhead, the Court did not go into any discussion regarding the Eichleay formula–the specific formula utilized to determine the allocable unabsorbed home office overhead associated with a government-caused delay.  The objective of the Eichleay formula is to obtain a daily rate for the home office overhead allocated to the specific contract and multiply the daily rate by the number of delay days to determine the contractor’s unabsorbed home office overhead caused by the government’s delay.

 

 

 

 

 

 

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.