Tcl - Government-caused Delays and Eichleay Damages - March 2007 - Construction Law

• Publication year: 2007
• Pages: 17

36 Colo.Law. 17 Colorado Lawyer 2007.

2007, March, Pg. 17. TCL - Government-Caused Delays and Eichleay Damages - March 2007 - Construction Law

The Colorado Lawyer
March 2007
Vol. 36, No. 3 [Page 17]

Articles
Construction Law
Government-Caused Delays and Eichleay Damages
by Jon Dwain McLaughlin

This column is sponsored by the CBA Construction Law Section.

Article Editor:

James W. Bain of Benjamin, Bain & Howard, L.L.C Greenwood Village - (303) 290-6600,jamesbain@bbhlegal.com

About the Author:

Jon Dwain McLaughlin will graduate from the University of Illinois College of Law in May 2007, and is preparing to sit for the Colorado Bar in July 2007 - JonDwainMcLaughlin@gmail.com, (312) 622-2750. He would like to thank James Bain for the significant assistance provided in preparing this article for publication.

This article discusses unabsorbed overhead expenses or Eichleay damages, and how attorneys and contractors should proceed in seeking such damages.

Few things are as frustrating for a government contractor as being forced to sit and wait, because of a government-caused delay, while overhead costs are accruing. The imposition of damages for compensable delay stems from the mutual obligation implied in every contract that neither party will do anything to prevent performance by the other party or commit any act that will hinder or delay performance.(fn1) The government must refrain from "unreasonably delay[ing] the contractor or unreasonably fail[ing] to cooperate,"(fn2) and "must do whatever is necessary to enable the contractor to perform."(fn3) The government's bad faith is not required for a breach of these duties to occur.(fn4)

This article defines Eichleay damages and discusses the threshold requirements in claiming such damages. Also, a brief explanation concerning the calculation of Eichleay damage will be given

Eichleay Damages Defined

"Home office overhead" costs are expenditures made to benefit the whole business that often accrue over time periods that are not congruent with individual contracts.(fn5) They are indirect expenses that are not incurred due to any particular contract and are made necessary by the business as a whole.(fn6) Thus, these unabsorbed home office overhead costs would be incurred even in the absence of any particular project.(fn7)

Home office overhead costs, to the point that such costs are reasonably foreseeable and correctly allocated, are recoverable in breach of construction contract cases.(fn8) The Eichleay(fn9) formula "is used to determine a government contractor's damages" with respect to "unabsorbed home office overhead when the government delays work on the contract indefinitely but requires the contractor to remain available to resume work immediately on the government's instruction."(fn10) Federal courts have recognized the Eichleay formula as "the exclusive formula" to be used to calculate damages for unabsorbed overhead due to government-caused delay.(fn11) In Eichleay, the parties had settled on the direct costs of the government's delays, but disputed each other's method for calculating the portion of home office expenses that should be attributed to the contracts in question. The method that the Armed Services Board chose to determine the amount of home office costs against the government has remained intact for more than forty-five years.

In discussing Eichleay damages, the Orlosky court provides this background:

Generally, a contractor recovers these indirect costs by allocating a proportionate share to each of its contracts. However, when the government causes a delay or suspension of performance, this "decreases the stream of direct costs against which to assess a percentage rate for reimbursement." In such a situation, a portion of the home office overhead is "unabsorbed."(fn12)

Generally, practitioners should use the Eichleay formula for determining administrative costs, officer salaries, rent, payroll, taxes, insurance, depreciation, dues, office expenses, utilities, cleaning, travel, and telephone expenses.(fn13)

Recovering Eichleay Damages

To recover damages under Eichleay, a plaintiff must first show that: (1) a government-caused delay of inestimable length occurred; (2) the delay increased the original time for performance; and (3) the contractor was on standby and unable to take on other work during the period of delay.(fn14)

Government-Caused Delay of Inestimable Length

A contractor seeking to recover Eichleay damages must prove that there was a government-caused delay to contract performance that was not concurrent with a delay caused by the contractor or attributable to any other source.(fn15) In Orlosky, the plaintiff successfully showed that the government caused four nonconcurrent...