Case Study

Case Study on Home Office Overhead Claims

K. C. Iyer 1 and Yogita Manan Bindal 2

Abstract: Time and cost overruns impact the parties to a contract, and often the starting point of disputes and disagreements are associated
with likely damages caused by delays. The most contentious aspect related to projects getting delayed is the quantum of claims. Home office
overheads (HOOHs) also form one of the claim heads where quantum is disputed. This paper focuses on analysis of unabsorbed HOOH
claims through a case study and as awarded in court judgments in India. It evaluates the various ways of calculating such claims and their basis
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using scenario analysis on the case study, highlighting the difference in their quantum. The study also details discussion on the recent case
laws in India for usage, the overhead claims, and the basis for awarding them, including the records capturing factual information relied on by
the court for allowing the compensation. The findings identify challenges in using HOOH formulas with scope variations and taking on new
projects by the contractors. It also highlights that despite reliance on the Eichleay formula by many courts, there are other formulas that
indicate better understanding of scope variation and increase in contractor’s revenue through other projects during the delay period. The
insight will be helpful to contractors and owners to assess HOOH claims better in the view of scope variations and addition of new projects.
DOI: 10.1061/(ASCE)LA.1943-4170.0000288. © 2019 American Society of Civil Engineers.

Introduction
Overhead claims are broadly grouped under field or site overhead
claims and home office overhead (HOOH) claims. The field over-
head claims are less disputed for compensable delays because the
owners can verify the claim records from the daily records submit-
ted to them showing an account of the staff deployed on site. Based
on the daily rate incurred, the compensation claimed is justifiable. It
is the HOOH claims that are contentious because the incurrence
cannot be proven scientifically (SCL 2017).
The HOOH cost is an incidental cost that is incurred by contrac-
tors for running their business, irrespective of the expenditure on
any particular contract. They are not directly incurred on any con-
struction project and are therefore apportioned across projects dur-
ing their bidding stage. They are usually accounted for as a markup
on the direct cost of the construction work (CIOB 2009). Industry-
wide, this markup is a management decision and is decided upon
considering the annual turnover of the contractor as predicted for
the duration of the project (Baldwin and Bordoli 2014). When a
construction project is completed on time and as per the scope
of works defined under the contract, there is no need for increase
in the home office overhead cost. This is different from the case
when the work volume is delayed beyond a planned early construc-
tion schedule. In case of any variations in the job scope, say with
increase in work, the time required to do the work may increase,
and that will likely increase the project overheads as well. Aside
from the project costs, there are other factors that also contribute
significantly to the overhead costs. Chan (2012) analyzed these
1
Professor of Construction Management, Dept. of Civil Engineering,
Indian Institute of Technology Delhi, New Delhi 110016, India. Email:
kciyer@gmail.com
2
Ph.D. Candidate, Dept. of Civil Engineering, Indian Institute of Tech-
nology Delhi, New Delhi 110016, India (corresponding author). Email:
yogita.mananbindal@gmail.com
Note. This manuscript was submitted on January 15, 2018; approved on
October 3, 2018; published online on March 18, 2019. Discussion period
open until August 18, 2019; separate discussions must be submitted for
individual papers. This paper is part of the Journal of Legal Affairs
and Dispute Resolution in Engineering and Construction, © ASCE,
ISSN 1943-4162.
factors from the literature and grouped them under eight broad
heads: contractor’s design requirement, local economic condition
in terms of construction work in market, financial and insurance
costs, complexity of the project, procurement management, layout
of the site (whether regular or irregular and coverage), third-party
influence (safety standards, neighborhood interest), and project
duration. The study also gathered the industry perspective in
Hong Kong that project duration primarily affects the project costs
and other factors such as contractor’s design requirement, procure-
ment arrangement, financial and insurance costs, stakeholders’ in-
terest, and site layout. Based on the industry practice, the contractor
allocates the factors contributing to overheads that are common to
all projects as an estimated percentage to the projects. Accordingly,
the contractor estimates a higher HOOH for a particular project for
the factors that are required exclusively for that project.
The HOOH claim comes from the costs incurred. It can be a
fixed percentage specified within the contract if stated within the
contract. The standard forms of contract used by the government
agencies in India do not allow for any additional payments for the
HOOH cost incurred on account of delay (CPWD 2014).1 While the
legitimacy of the home office overhead claims cannot be denied in
the event of delays attributable to the owner, it is the quantum that is
often under critical review at the dispute stage if the explicit content
of the contract does not allow for it. There is no computation known
for mathematically proving the damages related to overhead and
profit and therefore the trial courts in the United States have ac-
cepted and applied various formulas for its estimation (Manshul
Constr. Corp., v. Dormitory Authority). However, the claimant
is required to show that the unabsorbed HOOH expenses increased
in the period of delay. The absence of a mathematical proof is likely
the reason the standard forms of contract do not allow for additional
payments for the overhead claims. Taam and Singh (2003) pro-
vided clarity on their relative use of the formulas by using an
example and providing extensive legal research defining the appli-
cability in a given case. The example shows variations in the out-
come of the HOOH estimates and they have been attributed to the
varied background and assumptions for the formulas used (Taam
and Singh 2003; Zack 2002). The variation in outcomes from
the estimation methods casts doubt on the contractor’s choice of
a given estimation method. The owners expect the contractors to

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 factor in the increased overheads for the given scope in the bids
they submitted. Consequently, HOOH formulas are still being ex-
tensively used by contractors, and have been restrictively allowed
for in various jurisdictions.
The key inputs used for estimation through formulas in the two
studies by Taam and Singh (2003) and Zack (2002) are contractor’s
revenue (original period and actual period), direct cost, labor cost
(original and actual period), contract value, revised contract value,
billings (original and actual period), contractor overhead (original
and actual period), total overhead and profit (planned and actual),
contract duration (scheduled and actual), and owner-caused delay.
The variations of these elements represent various situations faced
by contractors. The inputs are fixed data points in the previous stud-
ies, and the usage of formulas has not been explored by varying the
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values of different scenarios to assess how the HOOH formulas
perform for the varied situations. The contractor’s bid for new proj-
ects estimates the HOOH cost to ensure optimal use of resources
provided it is feasible to take up new projects. The estimate is an
assessment of home office overhead cost considering sustenance
until the end of the project, but market competition and client
relations to gather future work can affect the final costs. The ex-
pected return on HOOH invested varies from project to project.
The existing HOOH formulas are far from reflecting any of these
issues. Therefore, when claims are made using these formulas, both
owner and contractor are left to defend their stand inflexibly.
Unabsorbed Overhead Calculation Formula
One assumption common to all methods is that the delays should be
compensable (owner-caused delay). Ibbs et al. (2015) further pro-
posed a method of calculating HOOH by introducing a process
model with guidelines that identify situations and assumptions
of applying the Eichleay formula and when it is eligible. The study
concluded that it will remain complicated to calculate the home
office allocation and cautioned against the blind use of the Eichleay
formula without looking at the contract terms by providing a flow-
chart of logic as understood in the court judgments. Apart from the
formula-based calculation of overhead claims for owner-caused de-
lays, no scientific ways of calculating the overhead allocation have
been explored. The HOOH formulas available in the literature are
the direct method (Taam and Singh 2003), Hudson method, Emden
method, Eichleay method (Kauffman and Holman 1995), compar-
ative absorption rate method, burden fluctuation method, Carteret
method, Allegheny method, Canadian method, modified Eichleay
method, total direct cost allocation method (Manshul method)
(Hewitt 1991),2 and specific base allocation method. The industry
practitioners are poised with difficulty in the applicability of the
most appropriate one considering their contract terms (Zack 2002).
The study focuses on 13 HOOH formulas: Eichleay, compara-
tive absorption rate method, burden fluctuation method, Carteret
method, Allegheny method, Canadian method, modified Eichleay
method, total direct cost allocation method, specific base alloca-
tion method, direct method, Hudson, Ernstorm, and Emden (Taam
and Singh 2003; Zack 2002). The objective of the research is to
establish the challenges of these HOOH formulas as applied by the
construction industry using scenario analysis on a case study and
define its current legal domain by way of related case laws in India.
Methodology
The literature of research papers on the 13 HOOH formulas used
in the construction industry was reviewed for their application.
The usage of these formulas is elaborated using a case study from
© ASCE 05019001-2
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the industry to study the HOOH claim output produced from the
application of said formulas. The project data used for the case study
show a large delay period on the project with respect to its duration
and little increase in work volume with respect to the contract value.
Projects may follow different combinations on the delay period and
variations adding to the contract value, and therefore scenario analy-
sis of the project data has been considered to bring clarity in the use
of the formulas observing the internal factors of change related to
the project. For the legal research part of the objective, litigated
cases in India have been collated from the legal database, Manupa-
tra, on the issues related to the application of the HOOH formula.
Case Study
For developing an understanding on the outcome from HOOH for-
mulas, a case study is presented using the 13 previously explained
overhead formulas, thus demonstrating and differentiating between
the values obtained. A highway construction project was consid-
ered to evaluate the value of overhead claims for the owner-caused
delay related to land acquisition. The contractor’s records and site
details were studied together to obtain the key input variables re-
quired for estimating HOOH using the 13 formulas. These values
are contractor’s revenue (original period and actual period), direct
cost, labor cost (original and actual period), contract value, revised
contract value, billings (original and actual period), contractor over-
head (original and actual period), total overhead and profit (planned
and actual), contract duration (scheduled and actual), and owner-
caused delay. These are given in Table 1.
The various formulas discussed previously have been applied to
obtain the values as given in Table 2. The table also provides in-
formation on the origin of the formulas and the industry in which it
was first applied in the remarks section. It provides brief informa-
tion on the stark difference in values as observed with the various
entities.
Based on the preceding values obtained from the contractor and
the values compiled in Table 2, Fig. 1 was obtained giving a visual
comparison of the values obtained from the overhead calculation
formulas used. It shows a variation of more than 41 times between
the highest and the lowest values when the formulas are applied at
Table 1. Case study showing contractor’s accounting details
Description Values
Total revenue: original period (INR) 245,500,000
Total revenue: actual period (INR) 381,095,000
Total direct costs (INR) 266,766,500
Total labor cost: actual period (INR) 137,194,200
Original contract value (INR) 68,500,000
Total contract value (before claim) (INR) 77,000,000
Billings: original period (INR) 69,000,000
Billings: actual period (INR) 77,000,000
Billings: delay period (INR) 8,000,000
Labor costs: actual period in delayed contract (INR) 27,720,000
Labor costs: delay period (INR) 2,880,000
Contractor’s overhead: original period (INR) 11,047,500
Contractor’s overhead: actual period (INR) 19,824,966
Total overhead and profit: actual period (INR) 56,211,512
Planned contract duration (days) 365
Actual duration (days) 655
Extended duration (days) 290
Owner-caused delay (days) 235
Planned overhead and profit (% at bid) 15.0
Normal head office overhead (%) 4.5
Actual head office overhead (%) 5.2
Actual head office overhead: delay period (%) 6.47
J. Leg. Aff. Dispute Resolut. Eng. Constr.
 Table 2. Values of overhead claim allocable obtained from various formulas
Serial number Formula Values (INR) Industry Remarks
1 Eichleay method 1,437,131 Construction Time based
2 Burden fluctuation method 2,135,069 Construction Time based
3 Allegheny method 480,943 Supply contract Cost based
4 Canadian method 1,984,623 Construction Time based
5 Comparative absorption rate method 2,675,691 Construction Time based
6 Carteret method 157,864 Manufacturing Cost based
7 Direct method 1,984,623 Construction Time based
8 Total direct cost allocation method 2,808,746 Construction Time based
9 Specific base allocation method (based on Eichleay) 1,437,131 Construction Time based
10 Modified Eichleay method 2,578,962 Construction Time based
11 Hudson method 6,615,411 Construction Time based
12 Ernstrom method 416,168 Manufacturing Labor based; not time
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13 Emden method 6,505,154 Construction Time based and includes loss of profit

Fig. 1. Visual comparison of the overhead values allocated.

random. A closer observation of the assumptions and factors of the
formula will narrow down the list to a select few and this is dealt
with in subsequent sections. Mainly, the difference arises from
the fact that the calculations considered either cost- or time-related
information for computing the values. A 1.6% closeness was ob-
served for Hudson and Emden because both calculate the overhead
loss along with the loss of profit for the delay period. Of the two,
Hudson gives a higher value because it factors in a normal home
office rate versus the percentage computed from the ratio of actual
overhead costs to the actual revenue for the delay period.
The difference in the HOOH values of the comparative absorp-
tion rate, total direct cost allocation, and modified Eichleay method
are within a range of 10% for the given case. The Eichleay method
gives nearly half of the value obtained from the modified Eichleay
method. While the modified Eichleay method gives an adjustment
over the Eichleay formula by providing information on the actual
costs incurred that will be preferred over the planned overhead rate,
the comparative absorption rate also takes the actual overhead per-
centage for its calculation of overhead allocable for the delayed
project. The total direct cost allocation takes direct costs ratio
for the work done on this contract versus all other contracts by
the firms (excludes the current project) and uses this ratio to com-
pute the overheads for the delay period. It has an advantage of re-
moving the home office overheads earned through scope change by
deducting the extension of time (EOT) from the owner-caused de-
lay for the time factor in its denominator, provided the increased
scope does not contribute to further delay. This method agrees well
if the contractor does not change the distribution of its direct costs
and its markup for overhead and profit for all the projects. In case
the contractor bids on a different markup for a project that later gets
delayed, the assessment of which markup should be applicable will
be a point of contention.
The third isolated range of value is for the burden fluctuation
method. It attributes the unabsorbed overhead as the fluctuated
rate of the remaining revenue of the contractor, after deducting
the actual billing, which contained the normal overhead rate. The
Canadian method and the direct method (Taam and Singh 2003)
have different approaches but the same formulas, and therefore
have the same values as seen in Fig. 1. Ernstorm and Carteret are
used in the manufacturing industry and both are therefore not
relevant for a construction project considered for the study. The
Allegheny formula is used in case of supply contracts within the
construction industry and therefore is not relevant for discussion
in relation to the case of a construction contract related to a high-
way construction project detailed in the study.
The preceding methods are only attempting to use approximate
methods to estimate the unabsorbed overhead. The existing proc-
esses do not differentiate between an overhead-intensive task and a
labor- and material-intensive task. The project data were utilized to
take into consideration two key scenarios relating to the scope
variation: those with variations impacting the project delay caused
by the owner, and those without impacting the owner-caused delay

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 Table 3. Scenario analysis for change in scope of work without impacting owner-caused delay
Unabsorbed HOOH values (INR)
Scope No change Scope Scope Scope increase
Serial number Formula decrease 10% in scope increase 12.4% increase 25% to negate EOT
1 Eichleay 1,198,930 1,307,653 1,437,131 1,562,741 1,922,059
2 Modified Eichleay 2,151,504 2,346,610 2,578,962 2,804,370 3,449,175
3 Burden fluctuation 2,798,993 2,495,955 2,135,069 1,784,967 783,461
4 Canadian 1,984,623 1,984,623 1,984,623 1,984,623 1,984,623
5 Allegheny 630,497 562,235 480,943 402,079 176,481
6 Specific base allocation 1,198,930 1,307,653 1,437,131 1,562,741 1,922,059
7 Comparative absorption rate 3,366,441 3,058,191 2,675,691 2,287,566 1,073,567
8 Carteret 179,323 171,248 157,864 141,107 73,363
9 Direct method 1,984,623 1,984,623 1,984,623 1,984,623 1,984,623
10 Total direct cost allocation 2,248,821 2,498,690 2,808,746 3,123,362 4,107,435
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11 Hudson 6,615,411 6,615,411 6,615,411 6,615,411 6,615,411

12 Ernstrom 347,189 378,674 416,168 452,543 556,595
13 Emden 6,505,154 6,505,154 6,505,154 6,505,154 6,505,154

on the project. In each of the two scenarios, scope variation was
studied further to observe the value of unabsorbed HOOH, with
four subscenarios: The first one considered scope decrease (10%);
the second considered no change in scope; next, we considered a
scope change by 12.4% (because 12.4% is the given case study)
and 25% (25% scope increase); and finally, to substantially leave
no unabsorbed HOOH. The last subscenario, which leaves no un-
absorbed HOOH, refers to the situation in which the unabsorbed
HOOH because of owner-caused delay is absorbed entirely by
the HOOH markup with the increase in scope. This subscenario is
said to have enough scope increase to leave no unabsorbed HOOH.
For the change in scope, the values of contractor revenue, total di-
rect cost, total labor cost (actual period), changed contract value,
billing (original, delay, and actual period), labor cost (actual and
delayed period in the contract), total overhead and profit (actual
period), and home office overhead in percentage during the actual
and delay period were also changed relatively in the same propor-
tion. Other factors remained constant. The scenario consisting of no
change order or variation was also considered to compare it with
scenarios having change orders and variations.
For the scenario in which the owner-caused delay does not
change as a result of the scope variation, it was observed that only
burden fluctuation method, Allegheny method, comparative ab-
sorption rate method, and Carteret method formulas factor compen-
satory effect of the scope increase on the unabsorbed overheads
during the delayed period, while the rest show either no change
in the changed scenarios or an increase in HOOH allocation as
the scope increased on the project. Table 3 gives the details. These
results were different from the scope variations considered when
they impacted the owner-caused delay. For scope variations offset-
ting the impact on HOOH by reducing the owner-caused delay, the
HOOH values obtained by the formulas show an expected trend.
Table 4 gives the decrease in HOOH values as the scope increases.
In the given case, there was an increase in scope, which was com-
municated by the owner. It was also observed that those formulas
that factor in the overhead charged, based on amount of work, do
not consider the time factor, and those considering the time factor
do not consider the increased work volume during the delay period.
Assessing the last scenario when the scope change is enough to
compensate the increased HOOH for the delayed period, only
Eichleay method, modified Eichleay method, specific base alloca-
tion method, Canadian method, direct method, total direct cost al-
location method, Hudson method, and Emden method show zero
values for the HOOH; the rest do not. The result indicates that these
formulas are performing the intended purpose of showing zero un-
absorbed overhead when all the increased scope of work compen-
sates the lost HOOH in its markup and the owner-caused delay is
consumed entirely. The same values when seen for increased scope
of work with maintained owner-caused delay days result in the
highest value for unabsorbed HOOH for the last subscenario.
The result pegs an important point while applying Eichleay and
modified Eichleay for scope increase or decrease: the owner-caused
delay days must be reduced or increased, respectively, to account
for the HOOH absorption as a result of scope variation.
Legal Case Research Study
Increasingly, the disputes between parties to construction contracts
are being resolved at the arbitration level in India, and the case laws
related to the overhead claims provide a reasoned direction for the
applicability of the formulas. Application of formulas for calculat-
ing a reasonable estimate of loss of profit and recovery of fixed
overhead costs as incurred has been prevalent in many jurisdictions
including the United States, United Kingdom, and Australia, and yet
the award of compensation so calculated is subject to assessment on
a case-by-case basis. The overhead formulas were searched for in
the litigated cases database on Manupatra, and 15 cases were found
citing the use of Emden, Eichleay, and Hudson. The cases chosen
were arbitrated previously, and there were arbitration petitions in
courts. Of the 15 cases studied for overhead claims, compensation
was allowed for in seven cases solely based on records furnished
by the plaintiff to the arbitration tribunal and later the court. In
the remaining eight cases, the arbitrator’s award was set aside for
allowing HOOH and loss of profit claims without any records fur-
nished by the claimant. The judgments rely on project records and
how the records figure within the calculation of the formula used.
Requirement of Project Records
The Supreme Court of India recognized the use of Emden,
Eichleay, and Hudson formulas for the first time in the case of
McDermott International Inc., vs. Burn Standard Co. Ltd. and
Ors. The records relied on were the books of account (to establish
loss of profit as per the actual profit details) and other ancillary
documents maintained by the plaintiff. In the given case, the
Eichleay formula was also described to calculate only the unab-
sorbed overhead when the contractor fails to show the books of
account for the loss of profit. The courts sought the project records

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 Table 4. Scenario analysis for change in scope of work impacting owner-caused delay
Unabsorbed HOOH values (INR)
Scope No change Scope Scope Scope increase
Serial number Formula decrease 10% in scope increase 12.4% increase 25% to negate EOT
1 Eichleay 1,079,037 1,307,653 1,160,346 955,932 —
2 Modified Eichleay 1,936,353 2,346,610 2,082,265 1,715,439 —
3 Burden fluctuation 2,798,993 2,495,955 2,135,069 1,784,967 783,461
4 Canadian 1,786,161 1,984,623 1,602,393 1,213,998 —
5 Allegheny 630,497 562,235 480,943 402,079 176,481
6 Specific base allocation 1,079,037 1,307,653 1,160,346 955,932 —
7 Comparative absorption rate 3,366,441 3,058,191 2,675,691 2,287,566 1,073,567
8 Carteret 179,323 171,248 157,864 141,107 73,363
9 Direct method 1,786,161 1,984,623 1,602,393 1,213,998 —
10 Total direct cost allocation 1,916,695 2,498,690 2,047,185 1,569,561 —
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11 Hudson 5,953,870 6,615,411 5,341,311 4,046,661 —

12 Ernstrom 347,189 378,674 416,168 452,543 556,595
13 Emden 5,854,639 6,505,154 5,252,289 3,979,217 —

as furnished by the contractor and the project owner to establish
the facts of the case. In the case of Associate Builders, v. Delhi
Development Authority, the court relied on the Man-Day Account-
ing System register as proof of delay caused by the owner to allow
for the damages related to prolongation. The most recent cases of
records furnished by claimants are Chairman/Secretary, v. Naran-
pura Mazdoor Kamdar Sahkari Mandli Ltd., in which the claimant
proved damages by providing project related correspondences, and
National Highways Authority of India, v. Ssangyong Engineering,
which relied on contemporaneous records such as muster rolls
and payment received from staff as verified incurrence of expenses
toward overheads.
Estimation Based on Values from Project Records
Reviewing the judgment of McDermott v. Burns Standard, the
court noted that since the assessment is of damages, the estimates
of compensation would be more realistic if its factors took values of
actual costs of overheads instead of the overhead percentages con-
sidered at the bid stage. Despite explaining Hudson, Emden, and
Eichleay, the judgment relied on Emden to calculate cumulative
loss of profit and overheads incurred after reviewing the book
of accounts. The mere extension of case law by arbitrators, as es-
tablished by McDermott v. Burns Standard without delving into the
facts of the case to infer damages from records, was considered an
impugned award and therefore was set aside by the courts. As noted
in cases of M/S.J.N. Construction, v. M/S. Shah Jagshi Jethabhai,
and M/S. Shah Jagshi Jethabhai, v. J.N. Construction, the courts
went to the extent of highlighting the need for arbitrators to follow
the basic principles of the Code of Civil Procedure (CPC)3 and the
Indian Evidence Act, 1872, observing that the facts of the cases
were not consummating to the final award. Such deficiencies on
the part of an arbitrator have been referred to within the ambit
of patent illegality,4 i.e., in conflict with public policy of India
in the case of Essar Procurement Services Ltd., v. Paramount Con-
structions.5 This is also consistent with the judgments regarding the
loss of profit claim, requiring proof of damage, which the claimant
could not furnish and as a result the claim stood unverified and was
rejected. Similarly, in the case of Chief Secretary v. Kothari and
Associates,6 the court ordered the award based on the Hudson for-
mula after reviewing the book of accounts of the respondent as evi-
dence. The court relied on the standard formula given in Hudson’s
Building Contract (Duncan-Wallace 1995) and Sections 55 and 73
of the Indian Contract Act, 1872, for the recovery of overheads and
loss of profit. There is a lack of clarity on the use of these formulas
and their applicability among the industry professionals who submit
the claim and those who reject the claim and even the arbitrators.
Despite the existence of formulas, the contractors also use per-
centage estimates as quoted in the case of Essar Procurement
Services Ltd., v. Paramount Constructions. The court noted from
the arbitration award that the Central Water and Power Commission
of the Ministry of Irrigation and Power considered 10% overhead
and 10% profit after the survey made by the committee on several
such works. It concluded that 10% overhead would be adequate to
cover expenditure on supervisory establishment, home office
expenses, and travel expenses, among other costs.7 The cost of al-
locating overheads based on such fixed percentages does not hold
ground in the case of petty contractors, where the expense is in-
curred on site alone, as noted in the case of Associate Builders,
v. Delhi Development Authority. Even though the case allowed
for Emden, it cautions the use of the formula without assessing
the overhead records maintained by the contractor and submitting
proof of the expenses incurred on overhead staff.
Discussion
The preceding formulas have been obtained from various perspec-
tives of the contractor and are mainly either time based or cost
based (work volume). The two broad themes is that these formulas
depend on whether the calculation considers the delay period or
not. If the formula is borrowed from the manufacturing industry,
it clearly does not consider the time delay factor and therefore it
is not justifiable to be used, i.e., Ernstorm, Carteret, and Allegheny.
The Eichleay formula is flawed in its evaluation since any factor
borrowed for calculation in the delay period should not include the
delay period for evaluation since it is not the normal period. In such
circumstances, the modified Eichleay will be more realistic. The
challenge with the contractor is to also identify the normal period
on other projects to truly assess the overhead allocation factors
(ratios).
The Emden formula also considers the loss of profit so it needs
to be considered separately along with the Hudson formula. The
use of Hudson is not encouraged since the calculation is computed
from the bid stage value that has a component of HOOH in it. The
bid percentage of profit is multiplied to contract value, which al-
ready contains the overhead and profit. This leads to double count-
ing and therefore it not used to suggest any claim value. Even
though Hudson provides a value circumventing the values from
other formulas, the reasoning is flawed at multiple levels. The delay

© ASCE 05019001-5 J. Leg. Aff. Dispute Resolut. Eng. Constr.

J. Leg. Aff. Dispute Resolut. Eng. Constr., 2019, 11(3): 05019001

 and disruption protocol, issued by the Society of Construction Law
(SCL), also suggests checking for any anomaly by using two to
three formulas (SCL 2017). While Hudson is not encouraged
for its use due to double counting, the values obtained for Emden
are also closer to those for Hudson in the given case study. The
court judgments in India allowed the use of the Emden formula
in the case of McDermott International when awarding the over-
head claim along with loss of profit. The claimant, McDermott
International, had claimed for both unabsorbed HOOH and loss
of profit. Another challenge is the case of quoting low profit mar-
gins, or worse still, underbidding, during the bid stage in competi-
tive markets. Construction projects span for years, and the low
margin may not necessarily remain the same for future projects
as the market situations improve. Low margins have been known
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to negatively affect the risk contingencies available to the contrac-
tor (Crowley and Hancher 1995) and tend to raise hidden costs,
reducing transparency. Unless the owners are actively mitigating
the risks associated with underbidding, contractors are more likely
to underbid and win project bids (Honek et al. 2012).
The Hudson formula uses the profit and overhead margins
as quoted in the contract agreement, but those rates are not
representative of actual damages, which is opposite of the flaws
in Eichleay. There can be two perspectives to look at this. The first
one is that the parties have an agreement on the rates and figures
initially, or use the same overhead and profit margins as estimated
by the contractor at the time of signing the contract by way of using
the estimation formula. This approach is focused on calculating the
damages as per the agreed terms of the contract. The second per-
spective is of damages as per actual incurred expenses. From this
perspective, the actual revenue is assumed to be earned without
delay on other projects, and also that the estimates are not increased
by increase in overheads. For the second perspective, one assumes
that the variables related to the HOOH costs incurred do not
change. While it may be true of small contractors having less over-
head expenses, for large contractors having considerable overhead
expenses with various regional offices and home offices, these var-
iables may be more dynamic and therefore more likely to be left
unabsorbed because of delayed projects.
Excluding the value obtained from Eichleay and those lower,
since they are referring to industries other construction, and Emden
and Hudson since they include profit element too, as shown in
Fig. 1, the rest of the formulas range from INR 2,675,691 to
INR 1,984,623. That is the roughly how varied the values are when
switching from one formula to another for this case.
Conclusion
The study concludes that the HOOH values obtained using formu-
las are reasonable only when calculated using input values reflec-
tive of actual events. For scope increase without affecting the
number of owner-caused delay days, only a few formulas re-
sponded with a decline in HOOH allocation to the project; for
others the HOOH values increased. Burden fluctuation, Allegheny,
comparative absorption rate, and Carteret formulas factored the
compensatory effect of the scope increase on the unabsorbed over-
heads during the delayed period. These formulas did not depend on
the total number of delay days by the owner. Eichleay, modified
Eichleay, specific base allocation, and direct cost allocation, on the
other hand, show a more reasonable variation when the owner-
caused delay days are changed, reflecting the reduced delays
days caused by scope changes. The direct cost allocation method,
modified Eichleay method, Eichleay, and specific base allocation
formulas show a change in line with scope increase only when the
© ASCE 05019001-6
J. Leg. Aff. Dispute Resolut. Eng. Constr., 2019, 11(3): 05019001
owner-caused delay days are also reduced in proportion. These
formulas are time based and therefore the input values of time
(owner-caused delay days) should factor the compensatory effect
on HOOH allocation with an increase in scope of work.
The legal research of judgments revealed that the facts from the
actual events were verified using project records. It concluded that
relevant records related to books of accounts and site correspond-
ences, and the daily and regular progress reports were important to
conclusively decide upon the factual matters related to a dispute.
The blanket use of Emden and Hudson for the calculation of loss of
profit and HOOH should be restricted unless the contractor can pro-
vide the record of profit from the three accounting years of the con-
tractor for a more credulous claim. On the other hand, to establish
damage compensation for HOOH alone, other formulas can be used
with sufficient proof on having incurred damages due to correction
being applied for considering scope changes if any. Alternatively,
the factors used as input values should be verified with the contrac-
tor’s accounting records. The arbitration awards as referred to in the
litigated cases have also deduced and highlighted the incompetency
of arbitrators in the usages of the various HOOH formulas.
The study also suggests that appropriate intentions of the parties
must be included in express terms in the contract, such as the re-
cords they consider relevant for verifying the incurrence when com-
pensation claims are being sought (rather than leaving it to the
arbitrator or adjudicator to explore and guess at the time of dispute
resolution). If such terms are not already included in the standard
form of the contract, this should be included at the precontract
negotiation stage. The study indicates limited analysis on which
formula is more appropriate for what scenario or the scale of con-
tractor since such a variation in values is difficult to justify reason-
ably. While these methods are all approximate estimations of the
actual losses incurred, a system incorporating the time and cost
factors as highlighted in the paper for overhead expense is neces-
sary for a more objective assessment. A definitive way of looking
through this claim is to work along the contractor’s actual events on
all projects to infer what constitutes a cost to the contractor and how
much of it has been offset. The expense incurred must be strength-
ened with verifiable accounting and project records as reaffirmed
from the legal research.
References
List of Cases
Ahluwalia Contract (India) Limited, v. The Union of India, FAO (OS)
(COMM) 143/2017.
Associate Builders, v. Delhi Development Authority, 2014(4)ARBLR
307(SC).
Chairman/Secretary, v. Naranpura Mazdoor Kamdar Sahkari Mandli Ltd.,
2015GLH.
Chief Secretary, v. Kothari and Associates, 2003GLH(3)613.
Edifice Developers and Project Engineers Ltd., v. M/s. Essar Projects
(India) Ltd., 2013(2)ABR244.
Essar Procurement Services, Ltd., v. Paramount Constructions, 2016 (11)
Bom.
Kailash Nath and Associates, v. DDA 2015 (4) SCC 136.
Maharashtra State Electricity Distribution Company Limited, v. Vijai
Electricals Limited, 2015(3)ARBLR336(Bom).
Manshul Constr. Corp., v. Dormitory Authority, 436 N.Y.S.2d 724(App.
Div. 1981).
McDermott International Inc., v. Burn Standard Co. Ltd. and Ors., 2006(2)
ARBLR498(SC).
M/S. Shah Jagshi Jethabhai, v. J.N. Construction 2012 (3) Bom. C.R. 546.
National Highways Authority of India, v. Oriental Pathways (Nagpur) Pvt.
Ltd., 2016(3)ARBLR448(Delhi).
J. Leg. Aff. Dispute Resolut. Eng. Constr.
 National Highways Authority of India, v. Ssangyong Engineering and
Construction Co. Ltd.
ONGC, v. Saw Pipes, 2003 (2) Arb.LR 5 (SC).
State of West Bengal, v. Bharat Vanijya Eastern Pvt. Ltd.
List of Statutes
Arbitration and Conciliation Act 1996, as amended by the Arbitration and
Conciliation (Amendment) Act 2015.
Indian Contract Act, 1872.
Indian Evidence Act, 1872.
Endnotes
1 Works Cited
General conditions of the contract clauses of the Central Public Works
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Department specify the changes to be paid for variations in terms of
labor price escalation, material price escalation, and fuel price escala-
tion, without providing any payment under unabsorbed home office
overhead, or field office overhead, which are incurred during compen-
sable delays.
2
The formula is also known as the Manshul method.
3
The Code of Civil Procedure, 1908 (Act No. 5 of 1908), through Sections
30 (a) and (b) empowers the court to order discovery and determination
of issues as necessary in all matters, except those bound by limitations
and conditions as prescribed.
4
The doctrine of patent illegality was devised by the Supreme Court of
India in the case of ONGC, v. Saw Pipes.
5
The cases chosen were arbitrated previously and they are arbitration
petitions in court under various sections of the Arbitration and Concili-
ation Act 1996. The court in these cases looks at patent illegality in
terms given in the Arbitration Act. Recent amendment of the Arbitration
Act on the lines of the United National Commission on International
Trade Law (UNCITRAL) suggests the courts not interference with
the fact finding of the arbitrator’s award.
6
The case of Chief Secretary, v. Kothari and Associates was an arbitration
petition filed by the owner and therefore the respondent was the original
plaintiff at the arbitration stage. The court established breach of con-
tract by the owner since they delayed the site handover for work.
The feasible days to work was reduced considerably, causing 78 days
of delay. Sections 55 and 73 of the Indian Contract Act, 1872, deliberate
on liability of performance during a fixed time (contract regards time as
being of the essence), and the consequential damages suffered in case of
breach. The book of account maintained by Kothari and Associates in
the regular course of business was furnished as evidence for proof of
damages incurred. Proof of damage is an essential element to the award
was also reinforced in litigation repeatedly. The Kailash Nath and
Associates, v. DDA judgment of the Supreme Court recently also reaf-
firmed that the claim for damages is not meant to be a windfall gain and
only to the extent of compensating the plaintiff for the damages
incurred.
7
This was reported by the ministry in its Rate and Cost Committee report.
Despite such a report stating 10%, the arbitrator in this case considered
5% of the contract value as a reasonable award considering the facts of
© ASCE 05019001-7
J. Leg. Aff. Dispute Resolut. Eng. Constr., 2019, 11(3): 05019001
the case, for a period of 9 months. For the second lapse the arbitrator
considered claim at the rate of 1% of the contract value as overhead
costs incurred. This consideration of reduced fixed percentages when
there was no record submitted by the plaintiff for proving the extent
of damages resulted in the award being set aside.
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