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The "Standby" Requirement For Use Of Eichleay

Wednesday, March 03, 2004 12:21 pm

The "Standby" Requirement For Use Of Eichleay

A contractor's right to recover unabsorbed home office overhead has always been controversial. It is an area of construction law that has been evolving over the past three decades. For a period of time, the right to unabsorbed overhead was gaining in recognition and contractors were finding recovery more feasible. Unfortunately for contractors, that trend was reversed in the spring of 2003 by two restrictive opinions issued by the U.S. Court of Appeals for the Federal Circuit.

Before addressing these opinions, a brief review is in order. When a contractor commits to a fixed-price construction contract, the contractor reasonably anticipates a certain cash-flow from that contract. The contract price, the progress payment provisions, and the scheduled performance period establish the rate at which funds will be disbursed. The contractor expects those funds to absorb a portion of the contractor's fixed home office overhead during the contractual performance period.

If the project owner causes work on the contract to be suspended, the contractor will be unable to submit requisitions and receive progress payments at the anticipated rate. There will be fewer funds available to the contractor to cover fixed home office expenses. This is the unabsorbed or underabsorbed home office overhead which is measured according to the "Eichleay formula."

The Eichleay formula divides the contract billings by the total billings for the contract period. This fraction is multiplied by the total overhead for the original contract period to arrive at the overhead allocable to the contract in question. Allocable ov [...]

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