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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