Winter 1997

Delay, Overhead and Eichleay

Increased home office overhead costs are among the most difficult of all delay damages to quantify. Overhead is made up of costs not readily chargeable to any particular project. It consists of general expenses necessary to keep the company running such as office rent, utilities and salaries of administrative personnel. None of these expenses relates directly to any one particular job, but all are necessary components of every job.

Frequently, overhead will be added to a delay claim as a percentage of the claim for increased labor and material costs. But that approach does not accurately reflect increased overhead costs because there is no real connection between overhead and increased direct costs caused by delay. It often results in undervaluing overhead losses.

A better approach is the "Eichleay" method named after an early federal case in which the method was used. The objective of Eichleay is to figure the actual overhead loss caused by a delay in performance. It is an arithmetic approach that allocates a fair proportion of total home office overhead costs to the delayed project, and permits calculation of a per diem overhead rate. Once a per diem overhead rate is established for the delayed project, it is an easy step to establish the total overhead loss.

Eichleay overhead is calculated by dividing contract billings on the delayed project by all company billings during the contract period. That calculation tells you what percentage contract billings on the delayed project are to total company billings for that contract period. The resulting percentage is then multiplied against total company overhead costs during the same contract period. The product of that calculation constitutes the portion of total company overhead that is fairly allocable to the delayed project. This project overhead, divided by the number of days in the contract period, produces the per diem project overhead rate. Multiplying the per diem rate by the number of days the work was delayed produces the overhead claim. As a mathematical formula it works like this:

Eichleay overhead claims have been advanced in two circumstances: first where the project work has been suspended for an indefinite period; and second where the period of performance has been extended beyond scheduled completion. Where there has been suspension, the contractor must demonstrate its overhead was wasted because it was not able to reduce its overhead expenses or take on other work during the period of suspension. Where performance has been extended, the contractor must demonstrate it incurred additional overhead expenses for the delayed project by extended administration of the contract, coupled with an inability to take on other work.

The Eichleay method has been used for many years but is still controversial. Some courts are more willing to accept it than others. Massachusetts has recognized use of Eichleay to establish an overhead claim in an extended performance case. The Court ruled the Eichleay method was one logically calculated to establish a reasonable basis for recovering overhead damages. Central to the Court’s acceptance was its recognition that overhead losses are not subject to precise calculations.

Eichleay is only a method of calculation and does not substitute for the necessity of proving the essential elements of a delay claim which include (a) delay in breach of the contract and (b) increased costs, including home office overhead, caused by that delay. Without such proof, no arithmetic formula for computing overhead costs can succeed. But where the underlying case for delay is made, Eichleay is a useful method for establishing home office overhead losses.

This newsletter is intended to provide general information of interest to the construction industry. It is not intended to provide specific legal advice or to address fact specific issues. For that you should consult your legal counsel. Corwin & Corwin LLP assumes no liability in connection with the use of this newsletter. The Supreme Judicial Court may consider this material advertising.
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