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Court Confirms Limits On Eichleay: Project Must Have Begun

Monday, August 01, 2011 02:59 am


Contractors use the Eichleay formula to calculate so-called "unabsorbed" overhead when project work is stopped. These damages are not direct costs but the cost of home office overhead--such as the costs of being unable to reassign supervision and manpower--that the contractor has lost part of its ability to absorb because of the suspended project. The delays that generate an Eichleay claim must be suspension-of-work delays. But what happens when the suspension happens before the notice to proceed? In that case, the United States Court of Federal Claims recently confirmed, Eichleay does not apply.

Indirect costs are calculated from direct ones

The contractor in The Redland Co. v. United States, 2011 Ct. Fed. Cl. No. 08-606C (Apr. 7, 2011) claimed it was entitled to compensation for a four-year suspension of work on a U.S. Department of the Air Force project to pave an aircraft parking area. The contractor sought compensation for the work suspension based on "ubabsorbed home office overhead" despite the fact that the suspension preceded the project start.

Home office overhead is an indirect cost, one "expended for the benefit of the whole business," and cannot be attributed to a particular contract. Nicon, Inc. v. United States, 331 F.3d 878, 882 (Fed. Cir. 2003) (quoting Altmayer v. Johnson, 79 F.3d 1129, 1132 (Fed. Cir. 1996)). To recover such an indirect cost, a contractor must therefore allocate a share of the cost to each of its contracts based on the amount of direct costs incurred under each contract. This is the Eichleay formula. See Ralph C. Nash & John Cibinic, "Unabsorbed Overhead and the 'Eichleay'

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