Florida court holds contractor must prove work suspended to recover home office overhead damages for delay
Relying on federal precedent, a Florida appellate court held last month home office overhead calculated using the Eichleay formula cannot be recovered for a project delay when the contractor did not suspend all or most of its work.
Home office overhead is the accounting term used to describe the fixed costs of a contractor's business that cannot be attributed to any particular contract. When a contractor's performance is delayed or disrupted its stream of income decreases while the fixed home office overhead costs continue. The Eichleay formula allocates those costs to each contract during the period of delay based upon each contracts percentage of the contractor's total contract billings.
The Eichleay formula is the only accepted method for calculating home office overhead in federal contract disputes once performance has begun absent a contract provision allowing a different calculation method.
The federal courts condition the use of Eichleay formula on proof of three elements: (1) a government-imposed delay; (2) the government required the contractor to "standby" during the delay; and (3)the contractor was unable to take on additional work while standing by. Proof of the first two elements establishes a prima facie case of entitlement, then the burden of production shifts to the government to show either that it was not impractical for the contractor to obtain replacement work, or that the contractor's inability to obtain or perform such work was not caused by the government's suspension.
The Federal Circuit Court of Appeals raised the bar for recovering Eichleay damages in P.J. Dick Inc. v. Principi, Download file, by requiring the contractor to show effective suspension of much, if not all, of its work to meet its burden of proof.
State courts are not bound by federal precedent and often are less strict about the criteria for its application. For instance in Zurn Constructors, Inc. v. Castaic Lake Water Agency Agency (unpublished), Download file, a California appellate court rejected the defendant's contention that home office costs calculated using the Eichleay formula could not be recovered for delay or disruption absent proof of standby when other evidence was sufficient to show the contractor had been damaged. The court held whether the Eichleay formula reasonably approximated the contractor's cost and damages was a jury issue not a question of law.
In contrast, the Florida appellate court in Broward v Brooks Builders, Inc. strictly followed the federal criteria. The trial court found a contractor's work had been delayed and awarded the contractor damages for home office overhead using the Eichleay formula. The contractor had testified, however, that despite delays and disruptions, "We kept working the best we could. Although, I must say it wasn't in a sufficient manner."
The appellate court held this testimony coupled with substantial monthly invoices demonstrated the contractor was not on standby and that the requirements for recovery of home office overhead damages had not been met as a matter of law.