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Unabsorbed Home Office Overhead – Making a Prima Facie Case for Entitlement to Recovery Under Eichleay
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August 28, 2006
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Thelen Reid Brown Raysman & Steiner LLP
The Armed Services Board of Contract Appeals recently discussed the showings necessary for a contractor to make out a prima facie case of entitlement to recovery under the Eichleay formula. Kato Corp., ASBCA No. 51462 (May 18, 2006).
A contractor incurs unabsorbed home office overhead cost when: it experiences a substantial government-caused delay of indefinite duration suspending much, if not all, of its contract work and disrupting its contract income stream; it must remain ready to resume contract work immediately; and it is unable to secure comparable "replacement" work during the impacted period. Under such circumstances, a contractor may be entitled to recovery.
The purpose of awarding unabsorbed home office overhead is to compensate a contractor for its indirect costs (such as accounting-payroll, general insurance and senior management salaries), which are not attributable to any one contract and are incurred even if there is inactivity on a construction project, when those costs are not "absorbed" by a contractor's income stream because of interruption or suspension of that income stream by delay in, or suspension of, contract performance.
In 1960, ASBCA adopted a formula for estimating home office overhead that may be unabsorbed. Eichleay Corp., ASBCA No. 5183, 60-2 BCA ¶2688 at 13,574, aff'd on recon. 61-1 BCA ¶2894. In Kato, ASBCA stated: "It is now well established that, when the government suspends or delays work upon a contract for an indefinite period, the [Eichleay] formula will be utilized to calculate the amount a contractor can recover." ASBCA then examined the showings necessary for a contractor to make out a prima facie case of entitlement to recovery under the Eichleay formula:
To make a prima facie case of entitlement to recovery under the Eichleay formula, a contractor must make three showings. [citations omitted] It must first show there was a government-caused delay to its planned contract performance "not concurrent with a delay caused by the contractor or [for] some other reason." [citations omitted] Next, it must show that its original contract performance time was thus extended or, alternatively, that it completed its performance on time or early but incurred additional, unabsorbed overhead cost because it planned to finish even earlier. [citations omitted] Finally, it must show it was required to remain on "standby" during the delay. [citations omitted].
In Kato, the contractor spent an additional 94 days performing certain contract work but received additional compensation for only 27 of those days under prior bilateral contract modifications. The contractor asserted it was entitled to unabsorbed overhead compensation for the remaining 67 days due to "myriad interferences with and hindrances slowing its progress" in completing the subject work. However, the contractor specifically identified only three contract changes as examples of such "myriad" interferences: an obstruction for a new storm drain, an obstruction for a new sewer manhole, and an existing water line that was in a different location than depicted in the specifications.
Despite these changes, ASBCA found that Kato could not make a prima facie case for entitlement to recovery under the Eichleay formula. First, Kato failed to demonstrate that there was a government-caused delay not concurrent with a delay caused by the contractor or for some other reason because Kato failed to provide an analysis of how the changed items individually, or in concert, acted to delay its overall completion of the contract work.
When a contract contains a "Changes" clause, as here, a contractor is not justified in believing that it will be able to proceed from start to finish of its contract work without interruption. [citations omitted] The mere fact that three changes occurred in [the subject] work or that there were a number of other changes in Kato's work is meaningless. [citations omitted].
ASBCA found that in order to establish a claim of government-caused delay, a contractor must demonstrate there was a delay "proximately caused" by the government which "harmed" it and the "extent" of that delay. "Such a demonstration requires a contractor to prove the delay alleged occurred on the contract work's 'critical path,' i.e., affected overall completion." (emphasis added) (citations omitted).
ASBCA found that the contractor had not shown the changes were on the critical path for completion of its work and delayed overall contract completion despite testimony from its general manager to the contrary. ASBCA found the testimony could not be credited, based on testimony from the contractor's superintendent and its daily reports, which demonstrated that when the contractor encountered a problem performing an item of contract work on its schedule, it frequently was able to perform other contract work pending resolution of that problem without delaying overall contract completion.
Moreover, even if the contractor had shown that the changes were on the critical path and delayed contract completion, the contractor had not shown that any such delay was not concurrent with delay for which the contractor was responsible. ASBCA cited, as an example, one of Kato's subcontractors going out of business. The contractor's daily reports indicated several weeks were required to locate another subcontractor to perform the work. ASBCA found that there was a delay of several weeks in performance of contract work for which the contractor appeared responsible.
Second, ASBCA found that the contractor had not shown that its original contract-performance time was extended by a specific number of days as a result of government-caused delay or, alternately, that it completed its performance on time or early but incurred additional, unabsorbed overhead cost because it planned to finish even earlier. It was undisputed that the contractor finished the subject work before the revised completion date. Accordingly, the contractor asserted it had completed its performance on time or early but had incurred additional, unabsorbed overhead cost because it planned to finish even earlier. ASBCA wrote:
When a contractor seeks to recover unabsorbed overhead based upon alleged delay to an "early completion," it must show additionally: (a) it intended to finish early; (b) it was capable of finishing early; and (c) it would have finished early but for the government's actions. [citations omitted]
In finding that the contractor had failed to make these additional showings, ASBCA emphasized the fact that the contractor had failed to submit a bid, estimate or any other documentation generated before contract award showing that it intended to complete the work early. The only documentary evidence cited were some bar charts submitted to the government that were not marked as approved and the latter of which was returned with a notation by the government specifying the contractual completion date. In addition, Kato's contract required contracting officer approval before commencing work. ASBCA noted:
How Kato therefore intended to complete its "overall" contract work early and thereby benefit from an early completion of Phase A work has not been explained and is not clear from the record. As discussed above, the purpose of awarding unabsorbed overhead under the Eichleay formula is to compensate a contractor for indirect costs not absorbed due to a disruption of the contractor's income stream during an indefinite period the contractor must remain ready to resume contract work immediately. Here, Kato knew, no matter when it completed its Phase A work, it would have to resume contract work on a later specified date to perform a subsequent phase of its contract.
Finally, ASBCA found that the contractor had not shown it was required to remain on "standby" during the alleged delay. ASBCA wrote:
In order to demonstrate it was on "standby," Kato must show effective suspension of much, if not all, of the work on the contract. As the U.S. Court of Appeals explained, "every case where this court has held a contractor to be placed on standby has involved a complete suspension or delay of all the work or at most continued performance of only insubstantial work on the contract." [citations omitted]
ASBCA found that for the period in which the contractor alleged it was delayed, it continuously performed significant contract work, both inside and outside of the buildings it was renovating as part of the subject work. The Board again noted that the contractor's superintendent had testified that when the contractor was not able to work as it had planned, it always had other contract work it could perform so it "didn't shut down the job or anything like that." Accordingly, ASBCA found that the contractor was not on standby at any time during the period of the alleged delays. ASBCA concluded:
In sum, Kato has not made any of the showings necessary to establish a prima facie case of entitlement to recovery under the Eichleay formula. It has not established: there was a government-caused delay to its planned contract performance 'not concurrent with a delay caused by the contractor or for some other reason;' its contract performance time was thus extended or, alternately, it completed performance on time or early but incurred additional, unabsorbed overhead cost because had it planned to finish even earlier; or it was required to remain on 'standby' during the alleged delay. Accordingly, Kato is not entitled to an award of unabsorbed overhead under the Eichleay formula.
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©2006 Thelen Reid Brown Raysman & Steiner LLP
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