Michael T. Callahan on American Underground Eng'g, Inc. v. City of Syracuse

Michael T. Callahan on American Underground Eng'g, Inc. v. City of Syracuse

In this Analysis, Michael T. Callahan discusses Am. Underground Eng'g, Inc. v. City of Syracuse, 2011 U.S. Dist. LEXIS 117102 (N.D.N.Y Oct. 7, 2011) [enhanced version available to lexis.com subscribers], finding that a contractor presented no proof how its home office overhead was affected by the delay of a construction project. Included in this discussion is a definition of "home office overhead," formulas for its calculation, and a thorough explanation of why home office overhead is so hard to prove and collect. The author writes:

     Applying percentage to costs to determine home office overhead without more does not show how home office overhead is affected by a delay. A 5% home office percentage was applied and awarded in American Underground Engineering, Inc. v. City of Syracuse, 2011 U.S. Dist. LEXIS 117102 (N.D.N.Y. Oct. 7, 2011), but eventually remitted by the U. S. District Court in New York because the contractor presented no proof how its home office overhead was affected by the delayed project. American Underground is important because it shows how difficult collecting additional home office overhead can be; and that the simplicity of a percentage increase does not avoid the need to prove how a delay affects home office overhead.

     I commented earlier in 2011 on another failure to collect home office overhead in Redland Co. v. United States, 97 Fed. Cl. 736, 2011 U.S. Claims LEXIS 518 (Fed. Cl. Apr. 7, 2011) [enhanced version available to lexis.com subscribers]. See Michael T. Callahan on Redland Co. v. United States, 2011 Emerging Issues 6025 (Oct. 2011). Redland concerned the Eichleay formula, one of the formulas more frequently used to calculate home office overhead. In Redland Co., the contractor's claim for unabsorbed home office overhead did not strictly comply with court-imposed restrictions on the Eichleay formula and failed. I pointed out that the Redland Co. decision was important because it limited the circumstances under which a contractor "stood by"-one of the possible reasons why a project's proportion of home office overhead increases-while a project was suspended, making collection of home office overhead damages more difficult under the Eichleay formula.

     Home office overhead is part of the expenses necessary to generate a company's project billings. Home office overhead comprises those overhead expenses that cannot be identified with a particular job, like the president's salary or liability insurance. If home office overhead remains the same and project billings are reduced, home office overhead is said to be under-absorbed, because its proportion to project billings is increased. If sales dollars are increased and the value of home office overhead does not change, home office overhead is said to be over-absorbed, because the proportion to billings decreases.

     ....

     Practice Point: The Eichleay Formula. The Eichleay formula computes the daily amount of actual overhead that the contract would have absorbed and gives the contractor that amount of daily overhead for each day of delay. The formula compares the ratio of contract billings to total company billings for the actual contract period to total home office overhead incurred during contract period; then allocates overhead to the actual days of contract performance. The allocated daily overhead is multiplied by the number of days of delay to determine unabsorbed home office overhead. Barry B. Bramble and Michael T. Callahan, Construction Delay Claims § 12.06[A] (4th Ed. 2010).

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