Eichleay Damages in Ohio: “Remember that Time is Money”
Ohio Construction Code Journal July 1, 2005
Time delays can profoundly impact and disrupt the construction schedule giving rise to claims involving time extensions and additional costs. In the words of Benjamin Franklin, "Remember That Time is Money." The additional costs can include extended field overhead, labor and material escalations, additional direct costs such as equipment rentals, and extended home office overhead. Extended home office overhead damages are typically sought by a contractor whose work is delayed or suspended through no fault of his own, in an effort to compensate him for the lost revenue that would have otherwise sustained a share of the fixed home office expenses. In the construction context, home office overhead is comprised of the costs that are expended for the benefit of the business as a whole. These costs include salaries of executive or administrative personnel, general insurance, rent, utilities, telephone, depreciation, professional fees, legal and accounting expenses, advertising, and interest on loans. By their nature, these costs cannot be attributed or charged to any particular contract.
These damages are often calculated under the Eichleay formula. The Eichleay formula creates a per diem rate for overhead costs attributable to a single project, multiplying that rate by the number of days of delay to arrive at a total home office overhead award. The formula is calculated as follows:
- (Total billings for the contract at issue/Total billings from all contracts during the original contract period) x (Total overhead during the original contract period) = Overhead Allocable to the Contract.
- (Overhead Allocable to the Contract)/(Original planned length of the contract in days) = Daily Contract Overhead Rate.
- (Daily Contract Overhead Rate) x (Compensable period in days) = Unabsorbed Overhead Damages.
The quantification and calculation of unabsorbed home office overhead has received a great deal of attention in recent years and is recognized in Ohio. The damage does not result from increased costs, but from a decreased revenue stream. Every construction project a contractor undertakes draws benefits from the home office, and each contributes to paying for home office overhead. "Each project in some degree is responsible for the contractor's costs of simply doing business, and each project plays its proportionate part in paying those costs."(footnote 2) "When a delay occurs on a particular construction project, that particular project ceases to carry its weight in regard to running the business, which can result in damages to the contractor."(footnote 3) In this way, the damage suffered from unabsorbed home office overhead is somewhat analogous to a canceled hotel room reservation. Although the cost of operating the hotel is not increased by a canceled reservation, the owner loses expected revenue that would offset the hotel operating expenses. Unless the room is sold, the owner is damaged by the lost revenues.
II. Ohio and Federal Law
In Ohio, federal law serves as the genesis for the Ohio Supreme Court's analysis of the Eichleay formula. The pivotal cases are: Satellite Elec. Co. v. Dalton, 105 F.3d 1418 (Fed. Cir. 1997); West v. All State Boiler, Inc., 146 F.3d 1368 (Fed. Cir. 1998); and Interstate General Gov't. Contractors, Inc. v. West, 12 F.3d 1053 (Fed. Cir. 1993). The summaries are included below.
A. Satellite Elec. Co. v. Dalton
In Satellite, the contractor was awarded a project by the Navy to install a power supply system. Satellite, 105 F.3d at 1420. The government was unable to provide necessary components to the contractor that were, under the contract, the government's obligation to provide: an induction coil and batteries. Id. The government's delay in acquiring the necessary components resulted in the contractor being placed on "stand-by" while the government attempted to acquire the parts, and to be available for immediate return to work when the parts were received. Id. During it's two periods of stand-by, the contractor bid "aggressively" on 49 other projects, but was awarded only two contracts, partially because the contractor's surety placed restrictions on its ability to take on new projects while the Navy project was still pending. Id. The contractor argued that it should be awarded its unabsorbed overhead costs because it was unable to recover those costs during the stand-by, and was similarly unable to get additional work because of the restrictions set by the surety. Id. The government argued that the contractor's aggressive bidding on additional work demonstrated that it was, in fact, able to take on additional work to fill the void left by the stand-by. Id. The government further argued that the contractor's inability to take on additional work as mandated by the surety was not a problem that was within the government's control; and therefore, the government should not be held liable for the contractor's overhead costs. Id.
According to the Court, under the Eichleay formula, a contractor can recover its unabsorbed overhead costs if three elements are satisfied: "(1.) a government-imposed delay occurred; (2) the government required the contractor to 'stand by' during the delay; and (3) while 'standing by,' the contractor was unable to take on additional work." Id . at 1421. The Court indicated that "[w]hen a contractor can show that the government required a contractor to remain on 'standby' and the government imposed delay was 'uncertain,' the contractor has established a prima facie case of entitlement to Eichleay formula damages." Id. The Court further provided, however, that once the first two elements were satisfied, "[t]he burden then shifts to the government to present rebuttal evidence or argument showing that the contractor did not suffer or should not have suffered any loss because it was able to either reduce its overhead or take on other work during the delay." Id.
In Satellite, the government sought to show that the contractor's inability to take on additional work did not result from the government-imposed standby because the contractor bid on 49 other jobs during the standby and the contractor's President testified that "we probably could have taken on other work if we had been able to find such." Id. Furthermore, there was evidence that only 3.3% of the job remained to be completed during the standby periods. Id. In evaluating this issue, the Court held that the contractor could have taken on additional work; however — to a large degree, due to limitations imposed by the surety — the contractor failed to do so. Id. Because the unabsorbed overhead costs incurred by the contractor were not a consequence of the government-imposed standby, the Court refused Eichleay damages to the contractor.
B. West v. All State Boiler, Inc.
In All State Boiler, the Department of Veterans Affairs hired a contractor to replace three boilers in a hospital. All State, 146 F.3d at 1370. During removal of the previous boilers, the contractor discovered asbestos. Id. The V.A. solicited bids for the asbestos abatement work, but the contractor did not bid on the job. Id. During abatement, the V.A. suspended all work on the boiler replacement work. Id. The contract was ultimately suspended for a period of 58 days, and the work was completed 22 days after the amended deadline. Id. When the contractor submitted a claim for its extra overhead costs associated with the suspension, the V.A. rejected the claims. Id.
Initially, before the Veteran's Affairs Board of Contract Appeals, the V.A. made the argument that, to recover Eichleay damages, the contractor needed to demonstrate that it was impossible to take on additional work, not just that it was impractical. Id. at 1371-72. The contractor argued that the proper test was whether it was impractical, not impossible to take on additional work. Id. at 1371. Further, the contractor objected to the assertion that Eichleay damages should be awarded only for the time attributable to the amended deadline for the project — not the time of the entire suspension. Id. at 1371.
On appeal, in determining whether a contractor must have been wholly unable to take on replacement work, or whether a contractor who found it impractical to do so was still eligible to recover Eichleay (footnote 4) damages, the Court explained that impossibility and impracticality must be evaluated in conjunction with an analysis of whether the "delays are sudden, sporadic and of uncertain duration [and that it may be] impractical for the contractor to take on additional work." Id. at 675. Additionally, the Court addressed the second prong of the Eichleay test. (footnote 5) The Court held that previous case law suggests that the government cannot rebut a prima facie showing of entitlement to recovery under Eichleay simply by showing that the contractor continued its normal operations, including continuing to bid on and perform 'additional' contracts." West, 146 F.3d at 1376. Most importantly, the Court explained that the result urged by the government would be unfair in that it would "require a contractor to cease all normal, on-going operations during a government-caused suspension on one contract in order to guarantee its recovery of unabsorbed overhead costs." Id.
Next, the Court addressed the issue of whether a contractor could recover its unabsorbed overhead costs during the time of the suspension and the extended period of the contract, or only for the extended period of the contract. The Court held that "it becomes clear that a contractor is only injured with respect to its indirect costs when the performance period of a contract is extended as a result of a government-caused suspension and not because of the suspension per se." Id. at 1378. The Court explained:
Once the contract performance period extends beyond the initial deadline, indirect costs continue to accrue but the contractor has neither allocated them to the newly-extended contract nor is able to bid a new contract to absorb the next portion of these continuing costs. It is thus the period of performance required of the contractor beyond the anticipated end-date for which the contractor does not receive its indirect costs, for by continuing the work on the delayed contract, the contractor is unable to begin work on the next new contract to which it would have allocated indirect costs for the next period.
Id. at 1379.
Therefore, because it would be unfair to require a contractor to cease all additional work in order to secure recovery of its unabsorbed overhead costs, the Court interpreted its prior decisions as reading that a contractor only needs to show that taking on additional work would have been impractical, not impossible. Furthermore, since the Court found that a competent contractor should adequately distribute its overhead costs on a project based on the completion date, the contractor who is injured by a government ordered stand-by should only be able to recover its overhead costs during the period by which the contract was extended on account of the delay.
C. Interstate General Government Contractors, Inc. v. West
In Interstate General Government Contractors, the contractor received a contract to upgrade and repair the H.V.A.C systems in an Army barracks. Interstate General, 12 F.3d at 1055. The terms of the contract provided that the contractor must begin performance within ten days of receiving the notice to proceed, and complete the work within 472 days of the notice to proceed. Id. Before the government issued the notice to proceed, a bid protest was filed, and work was postponed. Id. More than four months later, the protest was resolved and the notice to proceed was received. Id. The contractor actually completed the work in 323 days, thus finishing early with respect to the original deadlines, despite the delay. Id. Upon completion, the contractor filed a claim with the contract officer for $24,749.11, a sum alleged to be the unabsorbed home office overhead that was the result of the government delay. Id. at 1056. The Board of Contract Appeals ("B.C.A.") denied the contractor's claim, finding that since the contractor was able to re-assign its workers to other projects during the delay, and laid off those workers who could not be reassigned, it had suffered no unabsorbed overhead expenses. Id. The contractor appealed the decision of the board.
On appeal, the Court held that the proper standard by which a court should determine whether a contractor has suffered unabsorbed overhead expense does not turn on whether a contractor's workforce is idle, but whether "overhead [is] unabsorbed because performance of the contract has been suspended or significantly interrupted and that additional contracts are unavailable during the delay when payment for the suspended contract activity would have supported such overhead." Id. The Court explained that consideration of whether the workforce was idle is not the crux of Eichleay damage. Rather, the issue is whether or not the government's delay caused an interruption to the contractor's revenue stream while overhead expenses continued to accrue. Id. The Court also noted that, even if the improper standard was used, the contractor was not able to recover Eichleay damages, since it had not suffered any interruption to its revenue stream. Id. at 1058.
The Court pointed out that the contractor was able to complete the barracks renovation according to the original schedule, despite losing a substantial amount of time to the delay. Id. "Where a contractor is able to meet the original contract deadline or, as here, to finish early despite a government-caused delay, the originally bargained for time period for absorbing home office overhead through contractor performance payments has not been extended." Id. at 1058. "[A] contractor must prove that the bargained for ratio of performance revenue to fixed overhead costs during the stipulated performance period, not just the delay period." Id. at 1058-59. "This can only be established if such a contractor shows that from the outset of the contract it: (1) intended to complete early; (2) had the capability to do so; and (3) actually would have completed early, but for the government's actions." Id. at 1059. The Court found this evidence was lacking. Accordingly, finding that the contractor failed to sustain its burden in showing that it intended to complete the work early, that it was capable of completing the work early, and that it would have done so but for the government's delay, the Court ruled that the contractor was not able to recover its unabsorbed overhead expenses under Eichleay.
In summary, in order to recover unabsorbed home office overhead, a contractor must satisfy two prerequisites. West v. All State Boiler, 146 F.3d 1368, 1373 (Fed. Cir. 1994). First, the contractor must be on "standby." West v. All State Boiler, 146 F.3d at 1373, citing Interstate Gen. Gov't. Contractors v. West, 12 F.3d 1053, 1056 (Fed. Cir. 1993). Second, the contractor must be unable to take on other work while on standby. See West v. All State Boiler, 146 F.3d at 1373; Satellite Elec. Co. v. Dalton, 105 F.3d at 1421; Interstate Gen. Gov't. Contractors v. West, 12 F.3d at 1056. "Standby" is present whenever a contractor's revenue stream is diminished by the delay, and does not require a complete shut down of the project. Interstate Gen. Gov't. Contractors v. West, 12 F.3d at 1057. Whenever the period of delay is uncertain, the "standby" test is satisfied. Interstate Gen. Gov't. Contractors v. West, 12 F.3d at 1058-1059. If a contractor proves these elements, it makes its prima facie case for recovery under Eichleay. West v. All State Boiler, 146 F.3d at 1373.
Once the prima facie case is established, the burden shifts "to the government to present rebuttal evidence or argument that the contractor did not suffer or should not have suffered any loss because it was able to either reduce its overhead or take on other work during the delay." Mech-Con Corp. v. West, 61 F.3d 883, 886 (Fed. Cir. 1995). To rebut the prima facie case, the government must show more than that the contractor continued its normal construction operations. The "ability to take on, or continue to perform, other work in its normal course of business is irrelevant to the contractor's right to recover unabsorbed overhead expenses …." West v. All State Boiler, 146 F.3d at 1377. The Court explained:
The critical factor, then is not whether the contractor was able to obtain or continue to work on other additional projects but rather it's ability to obtain a replacement contract to absorb the indirect costs that would otherwise be unabsorbed solely as a result of a government suspension on one contract.
West v. All State Boiler, 146 F.3d at 1377.
III. Ohio Law.
Ohio courts have accepted unabsorbed home office overhead as a legitimate component of delay damages. Conti Corp. v. Ohio Dep't of Amin. Servs., Ohio App. 3d 462 (1993). The Ohio Supreme Court enunciated the legal standards and tests for Eichleay damages through an analysis of federal case law in Complete Gen. Constr. Co. v. Ohio Dept. of Transportation, 94 Ohio St.3d 54, 760 N.E.2d 364 (2002), in a case involving a roadway project for the construction of a portion of I-670, just north of Columbus. Design errors involving several key bridges delayed the project, resulting in ODOT's issuance of a one-year time extension. Due to the nature of the delay, neither ODOT nor the contractor could predict how long the work would continue. As a result of this and logistical factors, the contractor could not shift its revenue generating assets to other projects. Accordingly, the Court of Claims awarded Complete General damages based on the Eichleay formula for a period of 365 days.
The Ohio Supreme Court concurred and held that a contractor must satisfy two elements for an extended home office overhead recovery under the Eichleay formula:
- The owner delayed or suspended work for an indefinite duration; and
- The delay or suspension made it impractical or impossible to find replacement work during the impacted period.
On this issue, the Ohio Supreme Court indicated:
In establishing a prima facie case, then, a contractor demonstrates that it has committed a portion of its overhead costs to a particular project and that not only has the project's suspension left those costs unabsorbed, but that the character of the government-caused delay is such that it is impractical for the contractor to obtain other work to fill the gap. Once the contractor commits resources to a project the resources remain committed whether the project moves forward or not. The contractor is all geared up with nowhere to go.
The government can rebut the contractor's prima facie case for unabsorbed overhead damages by demonstrating either "(1) that it was not impractical for the contractor to obtain 'replacement work' during the delay, or (2) that the contractor's inability to obtain such work, or to perform it, was not caused by the government's suspension." Id. On this issue, the Court explained: "The Eichleay formula goes nowhere without causation. A contractor may recover only if there is an owner-caused construction delay. Moreover, the "standby" character of the delay must also be caused by the owner, and must prevent the contractor from finding replacement projects to cover the overhead." Id. Finally, the Court held:
The fact that a delay that creates an uncertain extension period causes damages for a contractor is axiomatic. The outlay of overhead on a delayed project increases as the time allotted for the project is extended. Eichleay starts with the proposition that all of a contractor's projects share in a contractor's home office overhead. It only follows that the suspension of a particular project creates a gap in the coverage of overhead costs. The fact that damages are caused by an owner's breach is self-evident--the very nature of the formula requires that overhead costs are not replaced by another job.
In Ohio, the "fundamental economic issue in this debate has been whether, and to what extent, the contractor could not obtain replacement work during the delay period." (footnote 6) "Factors that have contributed to the successful recovery of damages under this approach have been proof that the delay was uncertain, the contractor was forced to stand by during the delay, and the contractor could not take on additional work during the delay." (footnote 7) "Factors that have undermined contractors' efforts for recovery have included proof that the contractor was able to successfully bid on work during the delay period, that it had additional bonding capacity, or that the inability to get replacement work was due to macroeconomic conditions and not the delay to the contract." (footnote 8)
Further clarification of these issues by Ohio and Federal courts may prove necessary. In seeking to resolve these issues, owners and contractors should consult P.J. Dick, Inc. v. Principi, 324 F.3d 1364 (Fed. Cir. 2003), where the Court set forth six questions a court must address in order to determine whether Eichleay damages should be awarded:
- Was there a government-caused delay that was not concurrent with another delay caused by some other source?
- Did the contractor demonstrate that it incurred additional overhead? To demonstrate this, a contractor must show that the original time frame for completion was extended or that there was a nonconcurrent, government-caused delay resulting in a late finish or that the contract was completed on time, but the contractor had planned to finish earlier.
- Did the government contracting officer expressly put the contractor on standby?
- If no express standby was ordered, could the contractor prove a de facto stand-by? This means, in essence, that there was an indefinite delay during which time the contractor could not bill substantial amounts of work to the contract and the contractor was required to be ready to return to work immediately after the delay terminated?
- Can the government produce evidence that it was practical for the contractor to take on replacement work?
- If the government can show that the contractor could have taken on additional work, can the contractor persuade the court that assuming additional work would have been impractical?
Furthermore, the Court announced a three-part test that courts should use to determine whether a contractor was sufficiently placed on "stand-by" so as to allow Eichleay damages to be awarded. The test requires that:
- The delay was of an indefinite duration and was substantial. The court specifically provided that in situations where the government suspends work, but tells the contractor in advance when work is to resume, the contractor will not be found to have been on stand-by during the delay.
- During the delay, the contractor was required to remain ready to return to work immediately and at full-strength. This excludes those situations in which the government indicates to the contractor that there will be a definite preparation period before the contractor will be expected to operate "full force" on the project. Because the contractor is given a time frame during which work may be completed on the project, but the contractor is not expected to return to work 100%, the contractor may allocate resources to other projects during the delay.
- Work on the project was substantially suspended. This requirement eliminates those situations in which the government requires a contractor to hold on performance of a particular piece of the contract, but allows work to continue on the great majority of the contract.
Id. Undoubtedly, both state and federal courts will continue to seek the proper balance for analyzing Eichleay claims.
1 / Sean Culley, a summer associate at Kegler, Brown, Hill & Ritter, will graduate from Capital University Law School in 2006.
2 / See Complete General Const. Co. v. Ohio Dept. of Transportation, 94 Ohio St.3d 54, 760 N.E.2d 364 (2002).
3 / Id. citing Kauffman & Holman, "The Eichleay Formula: A Resilient Means for Recovering Unabsorbed Overhead" 24 Pub.Contr.L.J. 319, 320-321 (1995).
4 / The government argued that the past opinions of the court with respect to Eichleay damages included a requirement that the plaintiff demonstrate that it was impossible to take on additional work, not just that it was impractical to do so. The government cited to C.B.C. Enterprises v. United States, 978 F.2d 699 (Fed. Cir. 1992); Community Heating & Plumbing Co. v. Kelso, 987 F.2d 1575 (Fed. Cir. 1993). In each case, the government argued that the plain language of the cases indicated that the inability to take on additional work was absolute, and that a showing of impracticality was insufficient to allow the court to award Eichleay damages.
5 / The Court referred to its opinion in Satellite Electric Co. v. Dalton; Mech-Con Corp. v. West; 61 F.3d 883 (Fed. Cir. 1995); and Altmayer v. Johnson, 79 F.3d 1129 (Fed. Cir. 1996).
6 / Cushman & Myers, Construction Law Handbook (Aspen Publishers 1999) Volume II at 1237.
7 / Id.
8 / Id.