RECOVERING UNABSORBED HOME OFFICE OVERHEAD DUE TO DELAY

In the preceding article, I discussed the use of a retrospective as-built delay analysis in a case before the Civilian Board of Contract Appeals (CBCA).   This case also discussed a damages component in certain delay claims known as unabsorbed home office overhead—a challenging damages component to recover because this deals with indirect costs as opposed to direct costs.

Unabsorbed home office overhead is a damages component when the contractor is on standby, but this is NOT as easy as just claiming standby thereby you are automatically entitled to unabsorbed home office overhead. There are requirements that MUST be met.

To obtain an equitable adjustment for unabsorbed home office overhead as compensation for being on standby, [the contractor] must initially show “[1] a government-caused delay of uncertain duration,” that “[2] the delay extended the original time for performance” or precluded the contractor from finishing earlier than scheduled, and that “[3] the contractor [was] on standby and unable to take on other work during the delay period.

CTA I, LLC v. Department of Veteran Affairs, CBCA 5826, 2022 WL 884710 (CBCA 2022) quoting Nicon, Inc. v. U.S., 331 F.3d 878, 883 (Fed. Cir. 2003).

Regarding the first element of a government-caused delay, the contractor’s workforce is not required to be completely idle during this standby period, but there needs to be an “indefinite ‘interruption or reduction of the contractor’s stream of income from direct costs incurred,’” namely:

It simply requires that [its home office] overhead be 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.

Suspension or delay of contract performance results in interruption or reduction of the contractor’s stream of income from direct costs incurred. Home office overhead costs continue to accrue during such periods, however, regardless of direct contract activity. Consequently, this decrease in direct costs necessary to support the continuing overhead creates unabsorbed overhead, unless home office workers are laid off or given additional work during such suspension or delay periods. Even then, fixed overhead costs usually remain.

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When the period of delay or suspension 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 mitigating such overhead costs by making reductions in home office staff or facilities

Interestate General Government Contractors, Inc. v. West, 12 F.3d 1053, 1057-58 (Fed. Cir. 1993)

Moreover:

[I]f the contractor can make out a prima facie case of (1) above, i.e., that the government-imposed delay was uncertain and that the government required the contractor to remain on standby, ready to resume full work immediately, the burden shifts to the government to show 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.

Melka Marine, Inc. v. U.S., 187 F.3d 1370, 1375 (Fed. Cir. 1999)

The formula to calculate unabsorbed home office overhead is known as the Eichleay formula (after an Armed Services Board of Contract Appeals’ decision).

There are three steps in determining recoverable damages under the Eichleay formula: “(1) find the allocable contract overhead by multiplying the total overhead cost incurred during the contract period by the ratio of billings from the delayed contract to total billings of the contractor during the contract period; (2) find the daily contract overhead rate by dividing the allocable contract overhead by the number of days of contract performance; and (3) determine the amount recoverable by multiplying the number of days of delay by the daily contract overhead rate.”  Melka Marine, Inc. supra, n.3.  This Eichleay formula will require the assistance of an expert to calculate.

In the case before the CBCA, the contractor sought unabsorbed home office overhead for numerous delay periods.  However, only one 178-day delay period truly satisfied an entitlement to unabsorbed home office overhead, and that was a delay attributable to asbestos.  The government directed the contractor to stop work due to the discovery of asbestos and then, subsequently, terminated the contract for convenience.  This asbestos delay stalled the project and was a standby period of an indefinite duration until the government terminated the contract for convenience.  The government did not notify the contractor that the contractor could leave the project and take on other work during this period and simply remobilize without consequences and provided no evidence the contractor could even take on other work during this period.  CTA, supra.

Remember, not every delay period results to an entitlement to unabsorbed home office overhead.  But if the “standby” argument could be met, as discussed above, and an expert is utilized to assist in calculating the Eichleay formula, there is a basis to recover these indirect costs.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

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