The Eichleay formula, first articulated in Eichleay Corp., ASBCA No. 5183, 60-2 BCA 2688 (1960), is intended as a mechanism for computing the compensation a contractor can recover for unabsorbed overhead due to a government-caused suspension or delay.

In order to prove entitlement to Eichleay damages, a contractor must first prove there was a government-caused delay to contract performance that was not concurrent with a delay caused by the contractor. See Sauer Inc. v. Danzing, 224 F.3d 1340, 1347-48 (Fed. Cir. 2000). The contractor’s proof of delay must also show that the original time for contract performance was extended, or that he finished the contract on time or early but nonetheless incurred additional, unabsorbed overhead expenses because he had planned to finish even sooner. See Interstate Gen. Gov’t Contractors, Inc. v. West, 12 F.3d 1053, 1058-59 (Fed. Cir. 1993). Finally, the contractor must prove that it was required to “standby” during a government-caused delay of indefinite duration. Once the contractor has proven these elements, the burden shifts to the government to show that it was not impractical for the contractor to take on “replacement work.” See Melka Marine, Inc. v. United States, 187 F.3d 1370 (Fed. Cir. 1999).

Critical Elements in Proving Eichleay Claims:
Standby and Replacement Work

Standby

In P.J. Dick Inc. v. Principi, 324 F.3d 1364 (Fed. Cir. 2003), the Federal Circuit Court of Appeals set forth three requirements for determining whether a contractor has been required to standby.

First, “the contractor must show effective suspension of much, if not all, of the work on the contract.” Id. at 1371-72 (holding that contractor was not on standby where evidence showed it “was able to progress other parts of the work during the time period it alleges it was suspended,” and noting that “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”). Accordingly, “if work on the contract continues uninterrupted, albeit in a different order than originally planned, the contractor is not on standby.” Melka Marine, 187 F.3d at 1376 (holding that contractor was not on standby where it performed repair work while it was suspended from performing dredging and breakwater work).

Second, the contractor must show that the suspension was of an indefinite duration. P.J. Dick, 324 F.3d at 1371. “For example, where the government suspends all work on the contract, but tells the contractor work will begin again on a date certain, the contractor cannot be on standby.” Id. See also Melka Marine, 187 F.3d at 1376 (holding that contractor was not on standby during period in which it knew it would not be called on to perform work until a date certain).

Third, the contractor must show that during the delay, it was required to be ready to resume work on the contract immediately or on short notice. P.J. Dick, 324 F.3d at 1371. Thus, “where the government gives the contractor a reasonable amount of time to remobilize its work force once the suspension is lifted, the contractor cannot be on standby.” Id. See also Mech-Con Corp. v. West, 61 F.3d 883, 887 (Fed. Cir. 1995) (holding that the contractor could not be on standby where the government gave the contractor three months to remobilize its work force on the site).

Replacement Work

Once the contractor has proven the elements set forth above, it has established a prima facie case that it is entitled to Eichleay damages. The burden then shifts to the government to present rebuttal evidence or argument showing that it was not impractical for the contractor to take on replacement work or that the contractor’s inability to obtain replacement work was due to circumstances not related to the government-caused delay. See, e.g., The Redland Co., Inc. v. United States, 97 Fed. Cl. 736, 747 (Fed. Cl. 2011); Melka Marine, 187 F. 3d at 1376. If the government meets this burden, “the contractor bears the burden of persuasion that it was impractical for it to obtain sufficient replacement work.” Redland Co., 97 Fed. Cl. at 747.

In determining whether the government has met its burden, “[t]he critical factor … is not whether the contractor was able to obtain or continue work on other or additional projects but rather its 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, Inc., 146 F.3d 1368, 1377 (Fed. Cir. 1998). “The Government may not show merely that the plaintiff took on any work during the period of delay; rather it must show that plaintiff took on replacement work that produced sufficient support of overhead costs to absorb all the overhead costs that the government contract would have, if the work had not been suspended.” The Redland Co., 97 Fed. Cl. at 747 (citing Melka Marine, 187 F. 3d at 1378).

Case law provides little in the way of clear guidance regarding when it is or is not impractical to take on replacement work. The Federal Circuit Court of Appeals has noted, however, “that in very few cases where the contractor can demonstrate it was on standby during the suspension will the government be able to demonstrate that it was not impractical for the contractor to take on replacement work.” See, e.g., Mech-Con Corp. v. West, 61 F.3d 883, 886 (Fed. Cir. 1995) (“we have also recognized the impracticability of a contractor obtaining replacement work or reducing home office overhead when it must standby during an uncertain period of government-imposed delay); Wickham Contracting Co. v. Fischer, 12 F. 3d 1574, 1577-78 (Fed. Cir. 1994) (“[w]hen the period of delay is uncertain and the contractor is required by the government to remain ready to resume performance on short notice … the contractor is effectively prohibited from … taking on additional work.”). But see West v. All State Boiler, Inc., 146 F.3d 1368, 1380-81 (Fed. Cir. 1998) (“difficult economic conditions that exist independent of the government’s actions with respect to delay in performance may prevent a contractor from obtaining replacement work.”); Satellite Elec. Co. v. Dalton, 105 F.3d 1418 (Fed. Cir. 1997) (contractor’s inability to obtain other work was due in part to limitations on its security bond and a difficult competitive situation which were not due to government delay).

Recent Developments:
Availability and Exclusivity of Eichleay Damages

In two recent cases, Nicon, Inc. v. United States, 331 F.3d 878 (Fed. Cir. 2003) and Redland Co., 97 Fed Cl. 736, courts have confirmed additional limitations on the recovery of unabsorbed overhead: (1) Eichleay damages are available only in situations where contract performance has begun, and (2) Eichleay damages are the exclusive means for calculating unabsorbed overhead in situations where contract performance has begun.

Nicon, Inc. v. United States

In Nicon, 331 F.3d 878, the Government never issued a notice to proceed and, 288 days after contract award, terminated the contract for convenience. After the termination, the contractor submitted a termination settlement proposal to the Government. In the proposal, the contractor sought unabsorbed home office overhead for the time period between award of the contract and termination. As an allocation method, the contractor used a modified version of the Eichleay formula to calculate its unabsorbed home office overhead damages. Id.

In rejecting the contractor’s claim, the Federal Circuit Court of Appeals held that “use of the [Eichleay] formula is limited to situations in which contract performance has begun and has been suspended by the government, causing the performance to take longer than originally anticipated.” Id. at 884 (emphasis added). The Court explained that “the Eichleay formula was created and intended for a factual situation in which a contractor’s performance has begun and then been delayed or suspended for an uncertain duration because of government fault …. The formula must be strictly applied and may not be modified to make it apply to situations in which there is no performance on the contract.” Id. at 887. The Court further held that “the Eichleay formula … is the exclusive formula for the calculation of damages for unabsorbed overhead due to a period of government-caused delay in situations in which contract performance has begun.” Id. The Court also held, however, that “when contract performance has not begun, but all of the other strict requirements for entitlement to home office overhead are met [i.e. government-caused delay or suspension, extended performance, standby, and impracticality of taking on replacement work] there is no bar to the award of home office overhead in a termination for convenience settlement, provided [another] reasonable method of allocation is available on the particular facts of the case.” Id. (emphasis added). Accordingly, because contract performance had not yet begun, the Court in Nicon remanded for determination as to whether the contractor was entitled to home office overhead damages under some method other than Eichleay.

The Redland Co., Inc. v. United States

Recently, in Redland, 97 Fed Cl. 736, the Court of Federal Claims confirmed that Eichleay damages are available only where contract performance has begun. In Redland, the contractor received a notice to proceed, but immediately thereafter, and prior to commencing work, was ordered to suspend work on the project until further notice. Four years later, the Government lifted the suspension and the contractor began, and ultimately completed, work on the project. The contractor subsequently brought a claim for unabsorbed home office overhead during the four-year suspension. Id.

In rejecting the contractor’s claim, the Court held that “because plaintiff had not started performance prior to the issuance of the suspension order … it cannot recover Eichleay damages.” Id. The Court also suggested that the contractor would not be entitled to recover unabsorbed home office overhead using some other method of calculation, because Nicon’s holding with respect to the use of alternate allocation methods in situations where contract performance has not yet begun was “strictly limited to situations in which a contract is ultimately terminated for convenience.” Id. at 748. The Redland court determined that it need not decide this issue, however, because the contractor could not meet the strict prerequisites for the recovery of unabsorbed home overhead costs. Specifically, the Court held that the contractor could not establish that it was on standby during the period of delay. Id. at 750-51.

Commentary

In order to recover Eichleay damages, the contractor must first prove that there was a government-caused delay to contract performance. The contractor must also show that the original time for performance of the contract was thereby extended, or that he finished the contract on time or early but nonetheless incurred additional, unabsorbed overhead expenses because he had planned to finish even sooner. Once the contractor has proven these elements, it must then prove that it was required to remain on standby during the government-caused delay. If it does so, it has made a prima facie case of entitlement and the burden shifts to the government to show that it was not impractical for the contractor to take on replacement work.

The recent decisions in Nicon and Redland confirm that Eichleay damages are available only in situations where contract performance has begun and, that Eichleay damages are the exclusive means for calculating unabsorbed overhead in situations where contract performance has begun. The Nicon decision, however, leaves open the possibility of recovering home office overhead under other allocations methods where contract performance has not yet begun.

It is imperative for government contractors to be aware of the damages that may be recovered for home office overhead, as well as the strict requirements for recovering such damages. Moore & Lee, LLP has represented government contractors in numerous cases involving the recovery of home office overhead and we have an understanding of the unique requirements for proving these claims. Please contact us if you would like any additional information.