How the Eichleay Formula Can Be Used to Recover Overhead Costs
Using the formula might help you on claiming home office overhead
The Eichleay Formula is one of the most used calculations when computing home office extended overhead damages in construction delay claims. Construction delay claims regarding extended overhead are among the most complicated claims and almost always require the services of an expert to both determine damages and how those costs can be recovered. Home office overhead costs include salaries of management staff, clerical staff, utilities, supplies, dues, training, and insurances, to name a few. Since it is so difficult to separate the costs associated with a particular project, then these costs need to be properly identify by assigning a percentage of the total amount of these costs.
Why Does the Eichleay Formula Is Being Used
Normally, Eichleay formula is used when the project has been completed, and costs are available and accountable. The Eichleay formula was established following a decision of the Armed Services Board of Contract Appeals in Eichleay Corporation, ASBCA No. 5183, 60-2 BCA 2688 (1960), used to calculate home office overhead. In 1984, the Federal Circuit held that the Eichleay formula was the most appropriate method of allocating home office overhead.
Steps to Calculate Extended Overhead Through the Use of the Formula
Using the Eichleay formula requires three steps for the calculation process:
For these calculations you must multiply the total home office overhead cost by the ration between project billing and general company billings.
Is obtained form the rate between allocable overhead (step 1) between the days of contract performance including delay days.
Getting to this point is easy. Just multiply the total amount obtained from step #2 by the delay days. That total will be the total claim amount that you will be asking for.
- Find the Contract Allocable Overhead - To find the contract allocable overhead, start by multiplying the total overhead cost identify during the total contract period by the proportion of billings from the delayed contract to total billings of the firm during the contract period.
- Daily Contract Overhead Rate - To calculate the daily contract overhead ratio, divide contract overhead by the contract performance time (by days)
- Home Office Overhead - To get the final amount, multiply the daily overhead rate by the amount of delay days caused by the project owner.
How the Project Owner Can Challenge the Use of the Eichleay Formula
There are certain instances that a project owner can challenge the contractor when the formula is being used. Here are some of the most common arguments a contractor needs to be ready to be challenged:
- The formula is considered an estimate and its accuracy can be questioned.
- Contractors can shift their overhead costs to other projects concurrent with the contract being challenged.
- The contractor must prove that delays decreased the stream of direct costs.
- The contractor must show that it was unable from taking on other work
- You must provide further evidence that the actual office overhead costs are real, by using audited financial statements, information that many small contractors can’t afford.
- Some objects included in home office overhead, as entertainment and ads, can be questioned.
- Sometimes the contractor must prove that the bonding capacity has been limited.
- Resources such as equipment and labor were only available and are still in the 'limbo' just because the project has been delayed.
- Some of the contracts might have set a fixed fee for the contract profit.
- Some courts may not recognize Eichleay formula for calculating extended overhead.
- When project has been substantially completed, it is hard to justify claims from office extended overhead. The reason for this is that it can be argued that expenses have already been paid to the contractor.
Common Office Overhead Costs
Some of the costs that can be included during this claim process are classified as indirect or direct costs. It is important to understand and how to recognize these costs to include them in the claim accurately. Here is a list of the most incurred office overhead costs:
- Salaries and fringe benefits of management, clerks and security personnel. Be sure to include accountants, executives, and in some instances outsourced employees.
- All rented equipment such as copiers, phones, fax and other equipment.
- Internet, alarm systems, and any other monthly or recurrent cost.
- Insurances and bonds.
- Marketing, advertising, and travel costs.
- Legal fees and human resources staff.
- Temporary and permanent office structures.
- Project management and/or engineering team costs
- Leases and land acquisition fees/contracts
- Job specific rentals: equipment, labor, trailers, security, utilities and vehicles.