In the construction industry, it is typically in everyone’s best financial interest for a project to be completed as quickly as possible. Unavoidable delays still occur though, and they can put a major crimp on revenue streams. In some situations, those delays can effectively put a contractor in standby mode, waiting to finish the current project while unable to bring in revenue from others. When those delays have finally ended, all the parties involved need a method to identify specific overhead costs if a claim or lawsuit is filed.
How Delays Impact Office Overhead Costs
Besides the costs of materials and labor, contractors have to bring in enough revenue to keep the lights on between projects. These more generalized expenses are still incurred on a monthly basis regardless of the length of any given project.
Employees obviously still need their checks regardless of whether the project owner has provided any payment. The costs of operation for the company’s home office have to be paid even if the project ends up delayed for an extended period. This sort of home office overhead impacted by delays can specifically include:
- Insurance
- Legal fees
- Marketing costs
- Salaries and benefits for office employees like clerical staff or managers
- Utilities and other office space costs
Since revenue earned on a project is used to absorb these costs, you may seek to recover damages for those administrative expenses that are “unabsorbed” when a delay outside your control prolongs the project.
Calculating Allocable Overhead With the Eichleay Formula
Both the contractor and project owner need a method of arriving at an exact price tag for those costs if a claim is filed over delay losses. That’s where the Eichleay formula comes in, and it is currently the only recognized tool for calculating unabsorbed home office overhead in delay cases. The formula uses these three steps:
- Determine the overhead that is allocable to the contract. This is found by dividing the contract billings by the total billings for the contract period. That number is then multiplied by the total overhead for the contract period.
- Find the daily contract overhead. To reach this number, divide the allocable overhead determined in the last step by the days of performance, including the delay days.
- Arrive at the amount available to claim. For this third step, multiply the daily contract overhead by the number of days delayed to find the amount available to claim.
Knowing the formula is only half the battle, however, as there are a number of limitations to keep in mind. For starters, the Eichleay Formula is really only useful at the end of the project, because it requires knowing the total number of delay days. The formula also doesn’t have any bearing on direct costs for labor or materials, and crucially is only available in contracts where the delay was caused by a government entity acting as the project owner.
You must also show the delay prevented your business from undertaking any other projects that could bring in revenue to help cover these overhead costs. It’s important to note the formula is based on the notion of a fixed home office overhead cost, and ignores the possibility of price fluctuations over time. That means changes to your staffing or office costs may interfere with the formula’s usefulness.
Using the formula effectively can also involve a significant time and paperwork investment, as the project owner may require audited financial data to ensure your overhead costs are accurate. Consulting an attorney as early as possible in the process is key to ensuring the formula is used to its maximum benefit.
Consult a Louisiana Extended Duration Attorney if a Project is Behind Schedule
The bottom line is that you need an attorney to assist in determining if the Eichleay Formula applies to your situation or if other means of recovering damages should be pursued. Schedule an appointment with our experienced construction litigation team today to learn more about what specific steps to take towards protecting yourself legally while safeguarding your profits.
