Guidance On Recovery Of Unabsorbed Home Office Overhead And Idle Equipment Costs
Office Overhead
An Ohio Court of Appeals has issued a recent decision involving application of the Eichleay formula on an Ohio Department of Transportation contract. The Eichleay formula uses a contractor’s billing records to calculate unabsorbed home office overhead.Typically, a contractor on a public works project will apply a markup on its estimate and allocate to that contract a pro rata share of the contractor’s home office overhead expenses that are expected to be incurred during the anticipated contract performance period. The performance period of any given project can be critically delayed and consequently extended, thus affecting the contract’s revenue monies. Funds from the affected contract will not be contemporaneously available to the contractor to offset that contract’s share of the home office overhead. Other funds will have to be generated to defray that contract share of those home office overhead expenses. The Eichleay formula is designed to reimburse the contractor for the portion of the affected contract share of the home office overhead which was unabsorbed by that contract and is required to be absorbed by other revenues from other contracts.
The Ohio Court of Appeals reaffirms its previous ruling that the mere existence of a construction delay does not entitle the contractor to damages. The contractor must establish that the delay caused some portion of its home office overhead.
In its ruling, the Court followed a federal circuit court ruling and noted a distinction between the suspension period, the timeframe during which the work on a contract is delayed or suspended, and the extension period, the extra time beyond the original project deadline during which the contractor works to complete the project as a result of being under suspension. Specifically, the Court of Appeals adopted the opinion of the Federal Circuit Court of Appeals in Allstate Boiler. In Allstate, the Court re-examined the test that the contractor must satisfy to recover unabsorbed overhead expenses that result from a government cost suspension in contract performance. Allstate dealt with the issue of whether overhead expenses become unabsorbed during the suspension period or the extension period of the contract’s performance period. It was the Court’s decision in Allstate that the Eichleay formula was meant to apply during the extension period. In the words of the Court, "it is the delay at the end of the performance resulting from that suspension that results in unabsorbed overhead expenses which a contractor may recover under Eichleay." The Court reiterates their prior position holding that if the contractor can show it was on standby during the suspension period, it can then establish a prima facie case for the existence of unabsorbed overhead during the extension period. This means that the contractor must show it was on standby during the suspension period and that at any time during the suspension period the contractor could have been ordered to return to work. The importance of damages during the "extension" instead of the "suspension" period was demonstrated in this case. The owner, ODOT, contended the general contractor had only one portion of its work suspended but could continue to work on other parts of the project. The Court in rejecting that contention stated that ODOT incorrectly assumed that unabsorbed overhead occurs during the suspension period. In fact, the unabsorbed overhead damages accrue during the extension period. This is, indirect costs continue to accrue but the contractor has neither allocated them to the extended contract, nor is able to begin a new contract to absorb the next portion of those continuing costs.
The Department of Transportation next argued that the contractor suffered no delay in the overall progress of its work and, therefore, was not on standby. For this, the Court simply noted that ODOT had already given a time extension to the contractor, which recognized the delay.
The next contention dealt with the contractor continuing its practice of bidding on construction jobs during the pendency of this contract, and expanding the overall volume of the work. Hence, ODOT argued that the work lost during the suspension period was replaced. To this point, the Court deviated from its earlier decisions on replacement work. It stated, adopting a federal court decision:
It would be inconsistent with the purpose behind an Eichleay recovery to require a contractor to cease all normal ongoing operations during a government cause suspension on one contract in order to guarantee its recovery of unabsorbed overhead costs. ODOT’s next position was that there was a five-month winter shutdown from December 1, through April 30. This was set forth in the Specifications and was a time that ODOT did not expect its contractors to work. ODOT stated that when it gave the contractor a twelve-month time extension, it had calculated four months shutdown to the seven-month suspension period to arrive at that extension. Therefore, ODOT argued the contractor only incurred delays for seven months rather than twelve. Again, the Court noted that ODOT mistakenly focuses on the length of the suspension, rather than the length of the extension period. The compensable period is based upon the length of that extension period, not the length of the suspension period.
ODOT further contended that since there were two million dollars worth of change orders, and that the overhead was marked up at five percent, the Court was required to deduct that five percent charge in the change order pricing. The Court agreed with that contention. The Court agreed that to the extent change orders compensated the contractor directly for such additional work, that would have to be subtracted from the overhead claim. The troubling aspect of this portion of the ruling is that the Court seems to have lost focus on its own analysis between suspension periods and extension periods. A change order will necessarily affect the contract, but it need not be a time extension. However, when the contract is placed into the extension period because of the various delays, then a new segment of overhead is put into place.
Idle Equipment Costs
While the Court of Appeals acknowledged that recovery could be obtained for idle equipment, it found no evidence of idle equipment in this case. According to the Court, the contractor presented no evidence to establish a link between the bridge delay and the pieces of heavy equipment that the contractor established were idle. According to the Court, the testimony merely provided that certain pieces of equipment were on the job site during the extension period. There was no evidence that this was due to causes such as a scheduling choice by Complete General.Complete General Construction v. Ohio Department of Transportation, 10th District Court of Appeals, May, 2000.
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