Stephen M. Rymal, P.E., Esq.
Most of those working in the construction contract claims business are familiar with 1960 decision by the Armed Services Board of Contract Appeals (ASBCA) in the Eichleay Corporation Case which recognized a contractor’s right to recover unabsorbed home office overhead for owner caused delays and work stoppages. The Eichleay formula is as follows:
Total Billings for the Actual Contract Period
|X||Total Overhead||=||Overhead Allocable to the Contract|
Actual Number of Days of Contract Performance
|=||Overhead Allocable to Contract per day|
|Daily Overhead Rate||X||Number of Days of Owner Caused Delay||=||Home Office Overhead Recoverable|
There are also two (2) variations of the Eichleay formula. The first one substitutes the “Original Contract Period” for the “Actual Contract Period” and the second one substitutes the “Original Contract Period plus the Extended Period” both in the first equation to establish the “Overhead Allocable to the Contract.”
However, there are other formulas in use of which practitioners should be aware. One example is the Manshul formula applied by the courts in New York State. The Manshul formula is as follows:
|Cost of Work Performed During Delay Period||X||Contract Cost %
Cost + Mark Up %
|=||Direct Cost Incurred During Delay Period|
|Direct Cost Incurred During Delay Period||X||Home Office
Overhead % per Bid
|=||Home Office Overhead Recoverable|
This formula has also been called the “Direct Cost Allocation Method.”
The difference between the two methodologies is simply that the Eichleay formula develops a daily overhead rate which is then multiplied by the total number of owner caused delay days, while the Manshul formula uses the as – bid home office overhead rate multiplied by the actual cost of work performed during the delay period to determine the overhead recoverable. As you may expect, the Manshul formula typically produces a far more conservative recovery than the Eichleay formula, particularly since the actual amount of work performed during the delay may be far more limited than originally planned. Of course, during a full suspension of work due to owner caused delay, most construction contracts contain very specific language and clauses to determine which costs are recoverable including home office overhead.
The point of this article is (1) that you should not assume that Eichleay will be uniformly accepted in all jurisdictions and (2) that it may be advantageous for the owner to research and specify the method for calculating recoverable unabsorbed home office overhead that will apply to the contract rather than allowing the contractor to make its own selection.
If you are interested in discussing these two different methods for calculating unabsorbed home office overhead as well as others used here and abroad contact us at MDCSystems®.