Call us: 305.350.5300

Florida Construction Law News

19APR 2012

Contractor’s Home Office Overhead Likely Unrecoverable

by CSK Construction Group

When public construction projects are delayed by the government, contractors are often unable to bid on additional jobs and perform other work during the delay period. As a result, contractors often seek damages from the government for extended home office overhead during this delay, commonly referred to as Eichleay damages. However, courts have continually limited contractors’ ability to recover these costs by imposing burdensome requirements, which has essentially made these damages unrecoverable.

Florida courts often follow the decisions of the United States Court of Federal Claims as persuasive authority, given its jurisdiction over claims against the government. In Redland Company v. United States, the United States Court of Federal Claims determined that a contractor was not entitled to home office overhead damages for project delays caused prior to the commencement of construction. The court also clarified the strict requirement that a contractor prove it was on “standby” during the delay period, which means that the contractor was ready to resume work immediately and at full speed throughout the delay. In order to resume work immediately and at full speed, the contractor must keep at least some of its workers and necessary equipment at the site ready to resume the work on the contract, even if the equipment is idle and the delay is for an indefinite period of time. Additionally, any subcontractors on the job must also be immediately available to resume the work. Given the fact that the contractor does not know when it may resume work, these requirements are very burdensome and risky for a contractor to undertake, especially if the delay period may be significant. Accordingly, if the government stops or suspends a construction contract, contractors must be aware of these requirements and the ability to recover Eichleay damages in order to analyze its risks and determine how to allocate their workforce.

For a more extensive analysis of this decision, continue reading.

Extended Home Office Overhead Damages and the Eichleay Formula

Extended home office overhead is an indirect cost expended for the benefit of the whole business, and not attributable to a particular contract. Nicon, Inc. v. United States, 331 F.3d 878, 882 (Fed. Cir. 2003).  A contractor recovers such indirect costs by allocating a share of the cost to each of its contracts, proportionally, to the amount of direct costs incurred under that contract.  This is known as the Eichleay Formula. Id.

These costs become unabsorbed costs when the government suspends performance of a construction project and the contractor ceases to incur direct costs, preventing it from immediately recovering the proportional share of home office overhead originally allocated to the suspended project.  Courts have allowed claims for compensation of these unabsorbed costs if the contractor meets certain strict prerequisites for the application of the formula.

To recover extended home office overhead damages, the contractor must prove (a) there was a government-caused delay or suspension of uncertain duration; (b) the delay extended the original time for performance of the contract, or that the contractor finished on time but incurred additional, unabsorbed overhead expenses because it had planned to finish even sooner; and (c) the owner required the contractor to remain on “standby” during the period of suspension, waiting to begin work immediately or on short notice.

In the event of a delay in construction, contractors frequently seek damages for extended home office overhead.  However, recent cases have substantially limited a contractor’s ability to obtain these damages.  In The Redland Company, Inc. v. United States of America, 2011 Ct. Fed. Cl. No. 08-606C, the United States Court of Federal Claims held that a contractor could not recover extended home office overhead damages for project delays on government projects prior to the commencement of construction and clarified the difficulty contractors face in proving they were on “standby.”  Federal Claims Court decisions are significant, as a substantial amount of cases construing the EichleayFormula are issued by that Court and thus, these opinions, while not binding in Florida, are often used as a persuasive source of authority.

In Redland, the contractor was provided with a Notice to Proceed with construction, but the work was subsequently suspended, which prevented the contractor from beginning work for almost four years.  The work was suspended until “further notice” and the contractor ultimately resumed work within two days of the second Notice to Proceed.  After completion of the construction, the contractor sought damages for extended home office overhead during the four-year period of suspension, which the court denied.

Project Must Commence for Entitlement to Eichleay Damages

The Federal Court of Claims determined that the contractor was not entitled to recover its extended home office overhead for this period because the delay was caused prior to the actual commencement of construction.  The court followed the holding in Nicon, stating that Eichleay damages are only available when performance has begun.  Accordingly, despite the issuance of the Notice to Proceed, the court found that the parties had agreed that the commencement of construction was a separate event and the contractor had not commenced any work, so there was no entitlement to Eichleay damages.

Contractor Must be on Standby for Entitlement to Eichleay Damages

The court also determined that the contractor did not adequately prove it was on “standby” during the alleged period of delay because the government-issued suspension order was silent as to whether the contractor was ready to resume work immediately or on short notice.  The court reaffirmed that in order to demonstrate “standby,” the contractor must show that: (a) the period of suspension was not only substantial but was of an indefinite duration; (b) the contractor was required to be ready to resume work on the contract at full speed as well as immediately; and (c) there was effective suspension of much, if not all, of the work on the contract.

The requirement to be ready to resume work immediately and at full speed is a strict requirement.  The court noted that the contractor is not on “standby” if it is given a reasonable time to gather its equipment and personnel or if it is required to immediately resume work, but with a reduced work force.  Rather, in order to be on “standby,” the contractor must be required to keep at least some of its workers and necessary equipment at the site, even if idle, and ready to resume work on the contract.  Additionally, if any of the work is subcontracted, the subcontractors must also be immediately available to resume work at full speed. The court ultimately found that the contractor could not be considered on “standby,” as it did not have any workers on site and it was unclear whether the necessary subcontractors were immediately available.

This case reinforces the strict requirements necessary to recover Eichleay damages.  In the event the owner suspends or delays any work that has already commenced, Redland requires that the contractor keep at least some of its labor and equipment on the jobsite for the entire period of the indefinite delay.  Moreover, if subcontractors are performing work, the contractor must also require these subcontractors to remain on site and available to recommence work at full force upon lifting of the delay.  This appears to be a daunting and risky proposition for contractors, which is at odds with the general duties to mitigate one’s damages and avoid economic waste, especially because the suspension period must be uncertain. Here, the contractor would have been required to keep its labor and equipment on site for four years in order to recover its damages for lost overhead; a highly unlikely and unreasonable scenario.

Posted By CSK Construction Group

Cole, Scott & Kissane, P.A. represents major construction interests in cost-effective investigation, defense and disposition of commercial and residential building construction-related risks and civil claims. CSK routinely handles issues involving personal injury, property damage, project delay, contractual indemnity, defects, engineering aspects and OSHA penalty proceedings, both directly and through their insurers. Additionally, CSK represents litigants in surety disputes that often arise during the course of both public and private construction projects. Building a successful project requires cooperation and teamwork among architects, engineers, contractors, subcontractors and many others. We also understand the industry from finance, development and design through implementation, construction and close-out.