Unabsorbed Overhead and the Eichleay Formula

Thomas M. C. Taam1 and Amarjit Singh, M.ASCE2

Abstract: One of the less understood elements in construction damage claims is the home office expense that is incurred when a project
is delayed. In compensable delay cases, there is no doubt that home office overhead is a legitimate expense of the contractor. However,
the methodology for the calculation of the expense incurred has been widely debated as well as the circumstances under which the
methodology should be applied. The Eichleay formula was born in 1960, and has come a long way over the past 40 years in its use and
application. Court and board decisions have shaped the prerequisite criteria for its application and made it what it is today. This paper
provides the background concept of compensable damage due to project delay, the effects of delay on home office overhead, the Eichleay
formula evolution, precedence for prerequisite criteria for the formulas’ application, and other formulas and methods that have evolved
and been used. A ‘‘Direct Method’’ is proposed by the authors, which is straightforward and simple to apply. In the final analysis,
obtaining a 100% accurate estimate of home office expenses is practically onerous. Therefore, representative formulas and techniques are
used to arrive at a reasonable value for the unabsorbed overhead.
DOI: 10.1061/共ASCE兲1052-3928共2003兲129:4共234兲
CE Database subject headings: Claims; Construction industry; Contractors; Costs.

Introduction
In the past, the difficulty in calculating, justifying, and substanti-
ating the time and costs has discouraged contractors from at-
tempting recovery for damages for home office overhead ex-
penses incurred when a project is delayed. Home office overhead
expense damage incurred due to project delay is called unab-
sorbed overhead. In this type of delay damage, the contractor
does not experience an increase in home office costs. Instead, the
allocations of home office costs are allocated in a disproportionate
manner due to the delay. The cost of the home office overhead
that can be attributed to a particular delay period for a particular
project is virtually impossible to accurately determine. The most
commonly applied method for calculating home office overhead
claims for damages due to delay is the ‘‘Eichleay formula.’’ This
paper will focus in on several areas relating to the Eichleay for-
mula. First, this paper will present background information on the
topics of damages, compensable delay damages, home office
overhead, and the effects of delay on home office overhead. The
paper will continue with details on the evolution of the Eichleay
Formula and provide an explanation of the elements of the for-
mula. Case law resulting from various board and court decisions
has provided precedence in shaping what the Eichleay Formula is
today, what the prerequisites are for its use, and how it is applied.
1
General Engineer, U.S. Army Corps of Engineers, Pacific Ocean Di-
vision, Bldg. 525, Rm. 131, Ft. Shafter, Hawaii 96858-5440. E-mail:
Thomas.Taam@usace.army.mil
2
Associate Professor, Dept. of Civil and Environmental Engineering,
2540 Dole St., Univ. of Hawaii at Manoa. E-mail: singh@
wiliki.eng.hawaii.edu
Note. Discussion open until March 1, 2004. Separate discussions must
be submitted for individual papers. To extend the closing date by one
month, a written request must be filed with the ASCE Managing Editor.
The manuscript for this paper was submitted for review and possible
publication on February 12, 2003; approved on April 4, 2003. This paper
is part of the Journal of Professional Issues in Engineering Education
and Practice, Vol. 129, No. 4, October 1, 2003. ©ASCE, ISSN 1052-
3928/2003/4-234 –245/$18.00.
The paper will mention controversy that has occurred in the past,
which has surrounded the use and applicability of the Eichleay
Formula. Various methods for calculating unabsorbed home office
overhead will be presented, and the results will be compared and
analyzed.
Compensable Damages
Compensable damages are damages that compensate the claimant
for losses or costs incurred because of a breach or a wrong com-
mitted by another party. The laws concerning damages attempt to
put the party who has been injured in the same economic situation
that it would have been in had the injury not occurred and the
contract had been performed in accordance with the contract
documents.
A category of compensable damages is ‘‘consequential dam-
ages’’ that flow from a breach of contract but are not the direct
result of it. The damage arises not as a result of ordinarily pre-
dictable factors but from the intervention of circumstances not
directly involved in contract performance. For example, the re-
sultant effect of a delay in the completion of a project for an
owner is the loss of revenue generated from the use of the project
or the delay of another project. For a contractor, the resultant
effect of a similar event would be unabsorbed, extended, or in-
creased home office overhead or job site overhead expenses.1
In order to recover damages, contractors are often required to
prove that the losses were foreseeable to everyone involved and
that the losses can be easily calculated and determined with a
reasonable certainty.
Compensable delay damages include items such as differing or
changed site conditions, defective contract documents 共i.e., draw-
ings and specifications兲, suspension of work by owner or owners
representative, delays in approvals or material furnishing by
owner or owners representative, interference of work by others,
and constructive changes to the scope of work. Unforeseeable
delays relating to such things as strikes, unusual weather, and
other acts of God are usually not compensable under most con-
tracts.

234 / JOURNAL OF PROFESSIONAL ISSUES IN ENGINEERING EDUCATION AND PRACTICE © ASCE / OCTOBER 2003
 When a compensable delay occurs, damages usually result in
five different areas. These areas are an increase in labor costs,
material costs, equipment cost, field overhead expenses, and
home office overhead.
Home office overhead damages due to delay are a very con-
troversial issue and is an area that is difficult to understand. Yet,
in many cases, it can be the largest component of the delay claim.
Home Office Overhead
Home office overhead is comprised of costs that are not directly
assigned to a particular project but must be recovered through
individual project billings in order for the contractor to remain in
business. Home office overhead normally consists of costs includ-
ing, but not limited to: rent, utilities, furnishings, office equip-
ment, executive staff salaries, support and clerical staff salaries,
project related staff 共engineers, estimators, schedulers兲, mortgage
costs, outside legal and accounting expenses, depreciation, auto
travel, professional trade licenses and fees, employee recruitment,
relocation, training and education, photocopying, entertainment,
contributions, donations, postage, cost of preparing bids, review
of submittals, taxes, advertising, insurance premiums, interest
costs, and data processing/computer costs. The contractor needs
to pay or recover these costs by allocating these costs to the
projects it performs. In construction contracting, the home office
overhead is normally added to the bid or contract price as a per-
centage of the direct cost amount. The number of projects that a
contractor has during a given period affects the markup percent-
age that he would allocate to any given project. Unabsorbed home
office overhead consists of the home office overhead that cannot
be recovered during an imposed delay because the contractor is
not able to perform compensable work on the delayed project or
is not able to shift home office resources to other work for which
the contractor will be compensated. Thus, other projects must
absorb costs for more than their share of the home office overhead
expense.
The concept of unabsorbed overhead as an item of damages
arises at least in part from the basic accounting concept that all
business costs are incurred to support ultimate, specific revenue
generating objectives and therefore should be allocated to these
objectives. Home office overhead costs do not directly benefit any
specific objective; therefore, the overhead is referred to as ‘‘indi-
rect’’ costs.2
Effects of Delays on Home Office Overhead
To further clarify how a contractor’s home office overhead is
affected during a delay, an example is provided below.
A contractor has multiple ongoing projects. This contractor has
home office overhead costs of $1,000,000 per year. The contractor
normally has four projects in progress at any one time, for a total
yearly volume of $20,000,000. The contractor allocates home of-
fice costs by adding a 5% markup to each bid. Each of the four
projects is valued at $5,000,000. What happens if one project
experiences a delay?
Originally, each project absorbs $250,000 共i.e., $1,000,000/4兲
of home office costs in 1 year, or about $21,000 per month. If one
of the projects experiences a 1-month delay, the contractor will
not be compensated for the home office costs that he had allo-
cated for that project for that month and will suffer a loss of
$21,000. If the delay is attributable to extra work, the contractor
may receive compensation from the markup on a change order. If
JOURNAL OF PROFESSIONAL ISSUES IN ENGINEERING EDUCATION AND PRACTICE © ASCE / OCTOBER 2003 / 235
there is no extra work, the project experiencing the delay under-
absorbs its share of the home office costs and the other projects
must over-absorb some of the costs.
Normally, if a project is suspended, the contractor experiences
extended home office overhead. If the project is extended without
an official suspension of work, the home office overhead damage
is called unabsorbed home office overhead. The calculation of
damages for each may differ.3 Contractors may or may not incur
additional expenses. However, since it is very difficult to deter-
mine extra resources used in the home office, courts have allowed
contractors to claim for unabsorbed overhead, regardless of actual
expenses.
Evolution of Eichleay Formula
History of Formula
For over 50 years, courts and boards of contract appeals have
permitted contractors to recover unabsorbed overhead arising
from government-caused delays. Over 50 years ago, in the case of
Fred R. Comb Co. v. United States,4 the Court of Claims found
the government liable to the contractor for damages cause by
delay. In this case, the contractor suffered damages caused by
government delay in settling a property dispute. The contractor
submitted its costs, including overhead expenses for the period of
delay. The government denied these costs. During this time, the
key for the government to allow these types of costs depended on
whether or not the language stated in the contract provided au-
thority to adjust the contract price. It did not matter whether the
government caused additional costs by their action to delay the
contract. The contractor took the matter to the Court of Claims
where the foundation was laid for the payment of unabsorbed
overhead costs. The court also found that the government, having
breached its contract, has no right to state that a contractor will go
uncompensated unless the contractor can prove its claim in the
matter.
Before 1940, entering into a contract with the government was
at the financial peril of the contractor. Unless expressly permitted
by the contract, the contractor could not recover consequential
damages for government delay. Quoting McCord v. United
States,5 the Court of Claims explained the government’s right to
demand such harsh results:
This privilege of the United States to make alterations on
the terms stated being expressly provided for in the con-
tract, the contract price related to that privilege as much as
to any other provision in the contract, and therefore it must
be taken as included in that price, and paid for in it.6
The further back one investigates into case law, the more one-
sided against contractors it becomes. In this case, the government
is saying that it has paid for the right to change the contract. With
this type of case law decision existing, the Fred R. Comb v.
United States7 decision by the Court of Claims was a very pivotal
case.
Throughout that course of time, the courts and boards have
struggled to determine the prerequisites to such a recovery, as
well as how to calculate the amount of the recovery. While most
tribunals have intuitively sensed the equity of permitting the re-
covery of unabsorbed overhead, few have settled on a consistent
and fair approach.8
Today, the most commonly utilized method for computing un-
absorbed home office overhead claims due to delay is the
Eichleay formula. The formula originated from a decision by the
Armed Services Board of Contract Appeals in 1960: Eichleay
Corporation v. United States.9 In its appeal before the Board, the
Eichleay Corporation proposed a formula for calculating dam-
ages. The Board accepted this formula as a reasonable method for
calculating damage. This formula has since become known as the
Eichleay formula.10
When the Eichleay Corporation originally proposed the for-
mula, the government challenged it stating that no overhead in-
crease had been proved during the delay period. The board re-
sponded by stating that the home office overhead expenses cannot
ordinarily be charged to a particular contract. Therefore, it is nec-
essary to allocate the home office overhead to specific contracts
utilizing a fair method of prorating the expense. The board agreed
that the overhead expenses did not increase during the delay, but
continued to be accrued. The board found the Eichleay formula to
be a reasonable approach in calculating delay damages for unab-
sorbed home office overhead.
Eichleay Formula
The Eichleay formula includes a simple, straightforward three-
step formula.
Actual Billings for Delayed Contract
Total Actual Billings for Period 共All Contractor Contracts)
⫻Total Home Office Overhead for Period
⫽Overhead Allocable to Delayed Contract (1)
Overhead Allocable to Delayed Contract
Days of Performance
⫽Daily Contract Overhead for Delayed Contract (2)
Daily Contract Overhead for Delayed Contract
⫻Number of Days Delay
⫽Overhead Claim Amount for Delayed Contract (3)
Explanation of the Eichleay Formula
The first step of the original Eichleay formula involves taking the
total actual billings for the contract that was delayed to date and
dividing that number by the total actual billings that the contrac-
tor had for all of his contracts for the period from when the
delayed contract started until the date of the delay. The resultant
quotient is then multiplied times the total home office overhead
expenses. The product will equate to the total allocable home
office overhead for the delayed project 关Eq. 共1兲兴.
Next, the allocable home office overhead, determined in the
first step, should be divided by the number of days of contract
performance 共including delay兲. The quotient will yield the daily
allocable overhead rate for the delayed project 关Eq. 共2兲兴. Finally,
the daily allocable overhead rate is multiplied by the number of
days of compensable delay. The product results in the home office
overhead damages for the delayed project 关Eq. 共3兲兴.
The Eichleay formula does two things. First, it determines the
allocation of home office overhead for a particular project. Sec-
ondly, it takes a portion of the allocation and applies it to the
delay period, which results in a specific home office overhead
cost for the delay claim. The Eichleay formula calculates com-
pensation due to a contractor for an owner-caused delay by allo-
cating a reasonable amount or fair share of the contractor’s over-
236 / JOURNAL OF PROFESSIONAL ISSUES IN ENGINEERING EDUCATION AND PRACTICE © ASCE / OCTOBER 2003
head to the delayed contract. The formula is an attempt to provide
a realistic basis for allocating home office overhead costs as dam-
ages to the delayed project.
Use and Application of Eichleay Formula
Accuracy of Eichleay Formula
The Eichleay formula is a simple, straightforward formula to
apply, but many have questioned how accurate it really is. The
Eichleay formula yields an ‘‘estimated’’ allocation of home office
overhead damages, which may result in somewhat inaccurate re-
sults that could be high or low. The formula results in a reason-
able approximation of the calculation of damages sustained.
Acceptance of the Use of Eichleay Formula
Since its inception, the Eichleay Formula has gained wide accep-
tance and has formed the basis for the recovery of home office
overhead in many state and federal cases. Certain courts and
boards have generated numerous opinions concerning the
Eichleay formula and its application. For example, in Excavation-
Construction, Inc. v. United States,11 the board recognized the use
of the Eichleay formula to determine the cost not only of a sus-
pension of work, but also of a delay caused by extra work. The
Engineering Board of Contract Appeals 共ENG BCA兲 opinion is
noted in the following:
The Board believes in general that an Eichleay-type ap-
proach is the preferred way to determine home office over-
head in a suspension situation and that a markup of direct
costs is the preferred way to determine home office over-
head for a change. However, no automatic approach can be
applied in avoidance of a careful scrutiny of the facts. In
this appeal, the changed work on the retaining walls is only
part of the reason for extension of the contract period.
Much of the delay and disruption occurred because the
change was not timely made. The parties have agreed that
the net effect was to extend the period necessary for per-
formance by 99 days. Measurement of the effect on home
office overhead by the costs alone is likely in these circum-
stances to understate the amount to which E-C is entitled.
Therefore, the Board considers this appeal to be a proper
one for application of the Eichleay Formula.12
In Wickham Contracting Co. v. Fischer,13 the third Federal
Circuit held that the Eichleay formula was the exclusive means
available for calculating unabsorbed overhead. This pivotal deci-
sion set significant precedence for future delay claims for boards
and courts acceptance of the use and application of the Eichleay
formula. This decision by the 3rd Federal Circuit Court overruled
the earlier decision by the GSBCA in this case.16
In 1984, in Capital Electric Co. v. United States,14 the second
Federal Circuit reaffirmed the viability of Eichleay. The issue at
hand was to determine whether Capital Electric was entitled to
recover extended overhead. The court found that it was impracti-
cal for Capital Electric to take on additional work on another
project during the delay period because of the ‘‘uncertainty’’ of
the delay on the contract. Therefore, the delay period was valid
and compensable, and the court overruled the board that initially
denied the claim.
While the second Federal Circuit’s decision in Capital Electric
reestablished the Eichleay formula as an acceptable method for
calculating unabsorbed overhead, disputes continued as to
whether the Eichleay formula was the only correct method and
whether other formulas led to a more accurate calculation of un-
absorbed overhead.15
Arguments Against Use of Eichleay Formula
The most common argument against the use of the Eichleay for-
mula is that the contractor is already compensated for home office
overhead in his markup of direct costs on changes and therefore,
requires no further compensation. The problem with this argu-
ment is that a contractor receives the markup regardless of
whether or not the change causes a delay. The markup needs to
clearly indicate that it includes an allowance for home office over-
head; otherwise, the argument that the Eichleay Formula should
not be used may not be a valid argument.
The Eichleay formula is often challenged and criticized in two
principal areas by authors, auditors, government attorneys, and
judges. These two areas are 共1兲 the overall concept of unabsorbed
overhead, as covered in the Eichleay formula; and 共2兲 the accu-
racy of the formula. In the case of Wickham Contracting Co. v.
Fischer,16 the board of contract appeals analyzed the concept of
unabsorbed overhead under the Eichleay formula:17
The idea is entirely theoretical. It assumes that the contrac-
tor, at the moment one of its projects is delayed, is engaged
in exactly the optimum number of projects for the equip-
ment, talent, people and financing then on hand. This, of
course, is almost never the case. At any one given point in
time any given company will find itself in one of three
states with respect to the adequacy of its home office staff
to handle the business of the company: 共1兲 it will have the
correct number of projects for the staff then available to
handle the work, or 共2兲 it will have a larger number of
projects than the available staff can handle, or 共3兲 it will
have a smaller number of projects than the available staff
can handle. In the first case you will have wasted
overhead18 as a result of a delay in any given project, un-
less additional work is obtained to replace delayed work.
With respect to the second case it is entirely possible that at
the moment of project delay, the home office is so overbur-
dened handling the multiple projects on hand that it is op-
erating far below peak efficiency. It is easily conceivable
that it is so inefficient that a delay in one of its projects,
because it eases home office burdens, increase home office
efficiency with respect to undelayed projects and thus en-
hances the productivity of the organization as a whole.
With respect to the third case, if the home office does not
have enough work to do at the time the delay occurs, either
because business is bad or because another project is also
stalled then the Eichleay formula, which is a simple prora-
tion, cannot give a correct result because it has no mecha-
nism for allocating wasted overhead where there are two of
more delay sources.
A leading commentator19 recently took issue with the Eichleay
formula by stating the following:
I recognize that the Federal Circuit has, in its lack of un-
derstanding of accounting and costing, endorsed the
Eichleay formula. This may make it the only acceptable
method of computing unabsorbed overhead but it, by no
means, makes it a correct method... .
A correct method would determine how much fixed
overhead would have been allocated to the contract in ques-
tions had there been no delay and how much was actually
allocated to that contract as a result of the delay. The
JOURNAL OF PROFESSIONAL ISSUES IN ENGINEERING EDUCATION AND PRACTICE © ASCE / OCTOBER 2003 / 237
Eichleay formula does not take into consideration the first
and most important factor—how much fixed overhead
would have been allocated to the contract. In addition, it
calls for a determination of the total overhead incurred dur-
ing the contract period. This too, is defective; since fixed
overhead 共the subject of unabsorbed overhead兲 is incurred
for accounting periods 共usually the contractor’s fiscal year兲,
not contract periods 共which would equate with the contrac-
tor’s fiscal year in only the most rare and unusual
coincidence兲.20
Erosion of Eichleay Formula
In the late 1970s and early 1980s, some courts began to erode the
formula. A judge for the GSBCA actually predicted its complete
demise. Nongovernment contract forums were the first to reject
the use of the Eichleay formula; courts in New York21 and Texas22
both refused to apply it in construction delay cases. The low point
for Eichleay was the General Serves Board of Contract Appeals
decision in Capital Electric Co.,23 where in a concurring opinion
Judge Lieblich stated:
We can be confident, after publication of the opinion, that
the government will never again go along with any pay-
ment to a contractor for ‘‘extended overhead’’ nor will it
ever again agree to the application of the Eichleay formula
to any overhead calculation in a construction case. Whether
distinguished or overruled, those prior decisions will be
dead letters hereafter.
For all intents and purposes, it appeared that Eichleay costs were
a thing of the past.24 Fortunately for contractors, the judge was
wrong, and within one year, the U.S. Court of Appeals for the
second Federal Circuit reversed the Capital Electric decision and
reinstated the contractor’s right to utilize the Eichleay formula to
recover home office overhead damages.
Prerequisite Compensability Criteria for Application of
Eichleay Formula
Since the inception of the Eichleay Formula in 1960, court deci-
sions have shaped the use and application of the Eichleay for-
mula. These decisions have formed prerequisite criteria to deter-
mine whether a particular situation would qualify for application
of the Eichleay formula. The first criteria is the uncertainty of the
delay or standby period and the second criteria is the ‘‘practical-
ity’’ and ‘‘possibility’’ for the contractor to take on additional
work, which would ‘‘absorb’’ home office expenses during the
period of delay. These compensability criteria only apply to the
circumstances under which Eichleay may be used, and do not in
any way undermine the Eichleay formula itself.
In Community Heating & Plumbing Co., Inc. v. Kelso,25 the
court found that there was no delay in this contract. Community
Heating & Plumbing Co. was suspended 共delayed兲 for the original
contract work, but was compensated for direct costs from addi-
tional work. Without the prerequisite criteria of an uncertain delay
period, Community Heating & Plumbing Co. did not experience
any unabsorbed home office overhead expenses. Because there
was no unabsorbed home office overhead, the application of the
Eichleay formula to recover home office overhead expenses was
not allowed, even though the contract had been extended.
In C.B.C. Enterprises, Inc. v. United States,26 the contractor
appealed the Navy’s denial of an extended overhead claim. The
courts found that there was no suspension, delay, or disruption of
work and that the period of performance was known. The con-
tractor argued that they were entitled to use the Eichleay formula
and claim for damages whenever there was a government-caused
delay or suspension. The court disagreed and stated that the delay
criteria were only part of the requirement for compensability. Re-
covery is permitted when a ‘‘cloud of uncertainty’’ exists regard-
ing the period of performance. Furthermore, the contractor must
show that it cannot take on additional work 共to absorb the
overhead兲.27
In Interstate General Government Contractors v. West,28 a
contractor brought up a case to the Federal Circuit Court. The
contractor claimed unabsorbed overhead costs because of
government-caused delay. The court did not contest the delay.
Instead, the court focused on the meaning of ‘‘standby’’ and an
entitlement of unabsorbed home office overhead if a contractor
finishes a contract earlier than scheduled. Standby is defined as an
order by a contracting office to not perform any further work on a
contract until requested to do so by the contracting officer. Being
on standby is one of the prerequisite criteria to recover using the
Eichleay formula. In this case, the project was delayed. When the
contractor received the notice to proceed, he hired additional
workers to complete the work. The delay period was 136 days,
and the contractor finished the project 13 days early. Because the
contractor completed the performance within the original contract
period, the Federal Circuit required the contractor to prove that
there was unabsorbed overhead. The contractor had to prove that
the delay caused an adverse effect for the entire performance
period. The Federal Circuit implemented a three-part test that
needed to be met whenever a contractor completes a contract
early. First, the contractor must prove that it intended to complete
the contract early. Secondly, the contractor must prove that it had
the capability to do so. Thirdly, it must prove that it actually
would have completed early, but for the government’s action. The
test is to assure prevention of a contractor receiving double pay-
ment on its overhead claim.29 In this case, the Federal Circuit did
not overturn the board’s initial decision to deny the claim for
damages, because the contractor could not show any costs that
were incurred that were unabsorbed.
In Wickham Contracting Co. vs. Fischer,30 Wickham Contract-
ing felt that they could reasonably allocate 80% of its home office
overhead to the delayed contract even though they also had two
other commercial construction contracts at that time. Wickham
claimed that the commercial contracts could be separated and
distinguished from the government contract because those con-
tracts included field office overhead. The Federal Circuit court did
not buy into this thinking, ruling that Wickham’s position did not
make any sense, and rejected the argument. In Wickham, the Fed-
eral Circuit Court also ruled that the Eichleay formula was the
formula to use to calculate home office overhead damages when
the Eichleay prerequisites were met. The prerequisites for use of
the Eichleay formula are standby with uncertainty, and the im-
practical ability to take on additional work during the delay pe-
riod to absorb home office overhead. This ruling was a milestone
decision in that in pre-Wickham cases, courts and boards ruled
that in order to use the Eichleay formula to calculate damages, the
contractor must provide proof of damage. In Wickham, the Fed-
eral Circuit also held that the Eichleay formula was the ‘‘exclu-
sive means available for calculating unabsorbed overhead.’’31
Since the Wickham ruling, the question in most government delay
damage cases has been more a question of entitlement instead of
a contractor having to prove damages in order to use the Eichleay
formula.
The Eichleay formula has not been only used for government
cases. In Aircraft Gear Corp. vs. Kaman Aerospace Corp.,32 a
238 / JOURNAL OF PROFESSIONAL ISSUES IN ENGINEERING EDUCATION AND PRACTICE © ASCE / OCTOBER 2003
case between two private contractors, the Eichleay formula was
used to calculate unabsorbed overhead that a general contractor
recovered from a subcontractor. In this case, the subcontractor
sued the general contractor for damages, and the general contrac-
tor counterclaimed for a delay caused by the subcontractor. The
court found in favor of the general contractor, and stated that the
subcontractor caused a delay by not timely performing its work.
In West v. All-State Boiler,33 the court found that the govern-
ment could not meet its burden by showing either ‘‘共1兲 that it was
not impractical for the contractor to obtain other work to which it
could reallocate its indirect costs; or 共2兲 that the contractor’s in-
ability to obtain other work was not caused by the government’s
suspension...’’ This decision further clarified the second prerequi-
site of a contractor having to prove that it was impossible to take
on new work, but only that it was impractical to do so and that
once the first Eichleay prerequisite has been proven 共i.e., uncer-
tainty of the delay兲, it is the government’s burden to ‘‘show’’ that
it was not impractical for the contractor to take on replacement
work.34
In a more recent case, Melka Marine, Inc. v. United States,35
the Court further clarified the requirements of the standby test and
the recovery of Eichleay damages where replacement work can
absorb some, but not all, of the otherwise unabsorbed home office
overhead. On the standby test issue, the court provided two rules
that defined the standby test. First, as long as work on the contract
continues uninterrupted—it could even be in a different order
than planned or scheduled—the contractor is not on standby. Sec-
ond, when the government identifies with certainty the date on
which its delay will end, the standby test is not met. Standby
requires an uncertain delay period where the government can re-
quire the contractor to resume work. In the second prerequisite,
the court observed that the Government’s burden ‘‘is one of pro-
duction only—关the contractor兴 still bears the ultimate burden of
persuasion that it was impractical for it to obtain sufficient re-
placement work.’’ A contractor’s ability to take on any other work
during the delay period is not a proper basis to deny Eichleay
damages. Additional work must replace the work lost due to the
delay. In remanding the case, the court pointed out ‘‘the heavy
burden that falls on the government once a contractor has estab-
lished its prima facie case of entitlement to Eichleay damages.’’36
The court continued by indicating that the government’s burden
cannot be satisfied simply by showing that the contractor contin-
ued its normal operations by bidding on and acquiring additional
work. In most cases, it is impractical for a contractor to acquire
additional work to absorb home office overhead that may require
commencement and completion of the additional work within the
delay period. The Government’s burden is to prove that it was not
impractical for the contractor to take on additional work and that
the additional work would absorb the home office overhead dam-
ages caused by the delay.
The case law and court decisions cited are pivotal cases that
have provided precedence in the development of the prerequisite
criteria for the determination of entitlement under the Eichleay
formula.
Alternate Methods and Formulas
The government has come a long way since McCord 共1940s兲.
Fifty years ago, in Fred R. Comb v. United States,37 the board
declared that overhead was payable to a contractor for the breach
of contract caused by government delay. Since then, boards have
considered a variety of formulas in paying contractors for unab-
sorbed overhead.38
Table 1. Example Project for Calculating Unabsorbed Overhead
Month 1 Month 2 Month 3 Month 4 Month 5
Performance 共dollars兲 共dollars兲 共dollars兲 共dollars兲 共dollars兲
Potential performance
Home office overhead 40,000 40,000 40,000 40,000 40,000
Contract billings 100,000 100,000 100,000 100,000 —
Other contract billings 400,000 400,000 400,000 400,000 500,00044
Total billings 500,000 500,000 500,000 500,000 500,000
Actual Performance
Home office overhead 40,000 40,000 40,000 40,000 40,000
Contract billings 100,000 100,000 — 100,000 100,000
Other contract billings 400,000 400,000 400,000 400,000 400,000
Total billings 500,000 500,000 400,00045 500,000 500,00046

Other Formulas and Methods
39
Capital Electric Co. v. United States, which reestablished the
viability of the Eichleay formula, was followed by disputes that
questioned if the Eichleay formula was the only correct method
and whether other formulas were more accurate in calculating
unabsorbed overhead damages. This debate allowed government
auditors to create and promote numerous alternate formulas,
which invariably resulted in much lower estimates of unabsorbed
overhead than found by the Eichleay formula. This uncertainty
occasionally allowed a particularly inventive contractor to find a
means of calculating unabsorbed overhead that led to a higher
result. This debate essentially ended when the Federal Circuit
Court held in Wickham Contracting Co. v. Fischer40 ‘‘that the
Eichleay formula is the exclusive means for compensating a con-
tractor for unabsorbed overhead when it otherwise meets the
Eichleay prerequisites.’’41 Even after Wickham Contracting Co. v.
Fischer42 held that the Eichleay formula was the exclusive means
available for calculating unabsorbed overhead, courts and boards
have not used Eichleay as the exclusive formula for calculation of
unabsorbed home office overhead damages. In the late 1970s and
early 1980s, the Eichleay formula endured a lot of criticism from
various courts and boards. The critics have suggested the use of
various formulas and methods for use in calculating unabsorbed
overhead damages, depending on the situation. Alternate methods
include the following methods:
1. Comparative absorption rate method 共CARM兲,
2. Burden fluctuation method,
3. Carteret method,
4. Allegheny method,
5. Canadian method,
6. Modified Eichleay method,
7. Calculation based on actual records,
8. Total direct cost allocation method 共DCAM兲,
9. Specific base allocation method 共SBAM兲, and
10. Direct method.
The following example43 will be used in this section to calculate
unabsorbed home office overhead claim damages using various
formulas and methods that have been developed and have been
used in the past.
Table 1 illustrates a project that could have been performed by
the contractor for a price of $400,000 over a 4-month duration,
assuming no change orders were issued and no suspensions of
work or other delays were encountered. The contractor in this
example has a fixed home office overhead rate of $40,000 per
month and regularly does $500,000 worth of total business per
month including the contract in question. These data are reflected
under the heading ‘‘Potential Performance’’ and reflect what
would have happened but for any changes or delays by the owner
on this project.
This example is a $400,000, 4-month contract with a 1-month
suspension and no change orders.
A major circumstance of this example is that ‘‘contract bill-
ings’’ and ‘‘other contract billings’’ are uniform throughout the
period of performance. This example was used for its simplicity
and ease for understanding the different methods.
Comparative Absorption Rate Method
The comparative absorption rate method is an alternate method
that determines the unabsorbed overhead by finding the difference
between overhead actually incurred and overhead that would have
been incurred if the contractor had been able to maintain a rea-
sonable absorption rate.
Potential Total Overhead
⫽Reasonable Overhead Rate (4)
Potential Total Billings
Reasonable Overhead Rate⫻Actual Total Billings
⫽Reasonable Total Overhead (5)
Actual Total Overhead⫺Reasonable Total Overhead
⫽Unabsorbed Overhead Claim (6)
A step-by-step example of the CARM is provided for illustration
purposes:
• From Table 1, Potential Total Overhead⫽$200,000; Potential
Total Billings⫽$2,500,000. Using Eq. 共4兲, we thus get the
Reasonable Overhead Rate to be equal to
$200,000⫼$2,500,000⫽0.08.
• From Table 1, Actual Total Billings⫽$2,400,000. Using Eq.
共5兲, we get Reasonable Total Overhead⫽0.08*$2,400,000
⫽$192,000.
• Finally, using Eq. 共6兲, the Unabsorbed Overhead Claim
⫽$200,000⫺$192,000⫽$8,000.
A comparison of absorption rates reveals that the contractor in-
curred $8,000 in unabsorbed overhead costs during the delay. The
calculation shows that the contractor was unable to maintain the
8% absorption rate due to the delay and only $32,000 共instead of
$40,000兲 would have been expended on home office overhead
during the delay.47

JOURNAL OF PROFESSIONAL ISSUES IN ENGINEERING EDUCATION AND PRACTICE © ASCE / OCTOBER 2003 / 239
Burden Fluctuation Method
The burden fluctuation method has been used in the past by the
courts and boards to calculate manufacturers’ unabsorbed over-
head claims. This method determines unabsorbed overhead by
finding the increase in the absorption rate and allocating that in-
crease to the noncontract work, which was forced to bear more
than its fair share of overhead expenses.
Total Billings⫺Contract Billings⫽Other Contract Billings
(7)
Actual Overhead Rate⫺Potential Overhead Rate
⫽Burden Fluctuation (8)
Burden Fluctuation⫻Other Contract Billings
⫽Unabsorbed Overhead Claim (9)
A step-by-step example of the burden fluctuation method is pro-
vided below for illustration purposes:
• From Table 1, Total Billings⫽$2,400,000, while Contract
Billings⫽$400,000. From Eq. 共7兲, Other Contract Billings
⫽$2,400,000⫺$400,000⫽$2,000,000.
• From Table 1, Actual Overhead⫽$200,000; Actual Total
Billings⫽$2,400,000; and Contract Billings⫽$2,500,000.
Therefore, from Eq. 共8兲, the Burden Fluctuation
⫽$200,000⫼$2,400,000⫺$200,000⫼$2,500,000
⫽8.33%⫺8.00%⫽0.33%.
• Finally, from Eq. 共9兲, the Unabsorbed Overhead
⫽0.33%*$2,000,000⫽$6,600.
Under the burden fluctuation method, the contractor could claim a
0.33% increase in his overhead rate. Applying this increase to the
work, which had to bear the extra overhead expense, would yield
the claimed amount of $6,600.48
Eichleay Formula Calculation
The Eichleay formula calculation method was provided in Eqs.
共1兲–共3兲. A step-by-step example of the Eichleay formula method,
using the data in Table 1, is provided for illustration purposes.
• From Table 1, Billings for Delayed Contract⫽$400,000, Total
Billings for All Contracts for Period⫽$2,400,000, and Total
Home Office overhead for period⫽$200,000. From Eq. 共1兲,
the Overhead Allocable to Delayed Contract
⫽共$400,000⫼$2,400,000兲*$200,000⫽$33,333.
• From Table 1, Period of Performance⫽5 months. From Eq.
共2兲, Monthly Contract Overhead for Delayed Contract
⫽$33,333⫼5⫽$6,667.
• Finally, since the period of delay⫽1 month, Eq. 共3兲 yields
Unabsorbed Overhead⫽$6,667*1⫽$6,667.
Modified Eichleay Method
The Eichleay formula method tends to understate the overhead
rate because it considers and includes the delay period in the
Percentage Markup 共from bid docs or audit)⫻Original Contract Sum
Original Number of Days in the Contract
240 / JOURNAL OF PROFESSIONAL ISSUES IN ENGINEERING EDUCATION AND PRACTICE © ASCE / OCTOBER 2003
formula calculation for the disputed contract. The modified
Eichleay method changes this by deleting the days of delay from
the number of days in the contract performance period 关Eq. 共11兲兴.
The result will be a higher daily overhead rate. The daily over-
head rate will be multiplied by the days of delay and will result in
a higher amount for claimed unabsorbed home office overhead.
The modified Eichleay formula calculation is provided for illus-
tration purposes.
Actual Billings for Delayed Contract
Total Actual Billings for Period共All Contractor Contracts)
⫻Total Home Office Overhead for Period
⫽Overhead Allocable to Delayed Contract (10)
Overhead Allocable to Delayed Contract
Days of Performance 共less delay period)
⫽Daily Contract Overhead for Delayed Contract (11)
Daily Contract Overhead for Delayed Contract
⫻Number of Days Delay
⫽Overhead Claim Amount for Delayed Contract
(12)
A step-by-step example of the modified Eichleay formula method,
using the data in Table 1, is provided for illustration purposes.
• From Table 1, Billings for Delayed Contract⫽$400,000, Total
Billings for All Contracts for Period⫽$2,400,000, and Total
Home Office overhead for period⫽$200,000. From Eq. 共10兲,
the Overhead Allocable to Delayed Contract
⫽共$400,000⫼$2,400,000兲*$200,000⫽$33,333.
• From Table 1, Period of Performance 共less delay period兲⫽4
months. From Eq. 共11兲, Monthly Contract Overhead for De-
layed Contract⫽$33,333⫼4⫽$8,333.25.
• Finally, since the period of delay⫽1 month, Eq. 共12兲 yields
Unabsorbed Overhead⫽$8,333.25*1⫽$8,333.25.
Canadian Method
An alternative method for calculating home office overhead costs
for delays is known as the Canadian method.49 This method is
used extensively in Canada. The Canadian method uses the con-
tractor’s actual markup for overhead in its calculation. This
markup is based on bid documents or from audit records. An audit
of the contractor’s records will determine a percentage based on
history. The percentage determined for his actual markup is mul-
tiplied times the contract amount 共original amount兲, and then di-
vided by the number of days in the contract. The daily monthly
rates shown in the formula can be converted to a monthly rate.
⫽Daily Overhead Rate (13)
This formula results in a daily overhead rate based on the amount Allegheny Method
the contractor bid. This daily overhead rate is applied to the total
The Allegheny Method gets its name from the Allegheny Sports-
number of delay days determined to be compensable.
wear Co.52 case, which was a supply contract claim 共1953兲. The
Daily Overhead⫻Number of Days of Compensable Delay formula is the difference in overhead rates between the actual
period of performance and the originally expected period of per-
⫽Compensation for Home Office Overhead (14) formance. Thus, the excess overhead rate is multiplied by the
contract base costs to determine the unabsorbed overhead
A step-by-step example of the Canadian method, using the data in amount.53
Table 1, is provided for illustration purposes.
• From Table 1, Original Contract Total⫽$400,000, and Origi- Incurred Overhead Rate during Actual Period
nal Period of Performance in the Contract⫽4 months. Assume
⫺Incurred Overhead Rate for Projected Performance
the planned overhead rate⫽8.00%. From Eq. 共13兲, the Daily
Overhead Rate⫽共8.00%*$400,000兲⫼4⫽$8,000. Period
• Finally, since the compensable period of delay⫽1 month, Eq.
共14兲 yields Unabsorbed Overhead⫽$8,000*1⫽$8,000. ⫽Excess Rate of Overhead (17)
The Canadian method is simpler than the Eichleay formula, be-
cause normally, there is no consideration given to unallowable Excess rate of Overhead⫻Base Costs of all Contracts
costs. Although this method is simple, it has not been widely used
⫽Unabsorbed Overhead (18)
in the United States.
A step-by-step example of the Allegheny Method, using the data
in Table 1, is provided for illustration purposes.
Carteret Method • Incurred Overhead Rate during actual period⫽Actual Over-
head for period⫼Actual Billings for period. From Table 1,
This method gets its name from the Carteret Work Uniforms50 Incurred Overhead Rate during Actual Period
case where the manufacturing company only had one contract and ⫽$200,000⫼$2,400,000⫽8.33%.
that was with the government. The contractor was to manufacture • Incurred Overhead Rate for Potential Period⫽Potential Over-
overcoats from government furnished sateen. The Armed Services head for the period⫼Potential Billings for the period. From
Board of Contract Appeals computed the unabsorbed overhead by Table 1, Incurred Overhead Rate during the Performance
applying the manufacturing overhead rate to the direct labor dol- Period⫽$160,000⫼$2,000,000⫽8.00%.
lars to determine anticipated manufacturing overhead for the • From Eq. 共17兲, Excess Rate of Overhead
delay period. The result was subtracted from the actual overhead ⫽8.33%⫺8.00%⫽0.33%.
rate during the delay period to determine the amount of claim • Finally, Table 1 provides the Actual Total Base Costs of all
damages. contracts⫽$2,400,000. Eq. 共18兲 yields Unabsorbed Overhead
Incurred Overhead Rate during delay ⫽0.33%*$2,400,000⫽$7,920.
This method should also be used cautiously because it yields only
⫺Normal Overhead Rate a rough order of magnitude estimate of the damage and because
the two periods will be intermixed, and the excess overhead is
⫽Excess Rate of Overhead on this project (15) calculated on the costs of the contract amount.

Excess rate of Overhead

⫻Total Base Costs of all contracts during delay period
⫽Unabsorbed Overhead51 (16)
A step-by-step example of the Carteret method, using the data in
Table 1, is provided for illustration purposes.
• Incurred Overhead Rate during delay⫽Actual Overhead for
delay period⫼Actual Billings for delay period. From Table 1,
Incurred Overhead Rate during delay⫽$40,000⫼$400,000
⫽10.00%.
• Normal Overhead Rate⫽Potential Overhead for the delay
period⫼Potential Billings for the delay period. From Table 1,
Normal Overhead Rate during the delay⫽$40,000⫼$500,000
⫽8.00%.
• From Eq. 共15兲, Excess overhead rate
⫽10.00%⫺8.00%⫽2.00%.
• Finally, Table 1 provides the Actual Total Base Costs of all
contracts during the delay period⫽$400,000. Eq. 共16兲 yields
Unabsorbed Overhead⫽2.00%*$400,000⫽$8,000.
This method has been used for manufacturing cases. This method
should be used cautiously because it is based on assumptions. It
assumes that if other work is being performed concurrently with
the contract it is proceeding normally.
Total Direct Cost Allocation Method
The total direct cost allocation method54 allocates the direct costs
incurred to calculate the overhead rather than what has been
billed. The calculation for the method is as follows:
Overhead Applicable to the Disputed Contract 共OHDC)
Disputed Contract Direct Costs
⫽
All Other Contract Direct Costs
⫻Total Company Overhead (19)
Daily Overhead Rate 共DOR)
OHDC
⫽
Days of Contract Performance 共less delay days)
(20)
Overhead Cost Claimed, COH⫽DOR⫻Days of Delay
(21)
A step-by-step example of the total direct cost allocation method,
using the data in Table 1, is provided for illustration purposes.
• From Table 1, Disputed Contract Direct Costs⫽$400,000,
Other Contract Direct Costs⫽$1,600,000, and Total Overhead

JOURNAL OF PROFESSIONAL ISSUES IN ENGINEERING EDUCATION AND PRACTICE © ASCE / OCTOBER 2003 / 241
 ⫽$160,000. From Eq. 共19兲, the Overhead Applicable to
the Disputed Contract 共OHDC兲⫽共$400,000⫼$1,600,000兲
*$160,000⫽$40,000.
• From Table 1, Period of Contract Performance 共less delay
period兲⫽4 months. From Eq. 共20兲, Daily Overhead Rate
⫽$40,000⫼4⫽$10,000.
• Finally, since the compensable period of delay⫽1 month, Eq.
共21兲 yields Unabsorbed Overhead⫽$10,000*1⫽$10,000.
The direct cost approach suffers from a number of weaknesses. It
does not consider the differences in the cost components from a
contractor’s various projects. The methodology assigns the same
overhead rate calculation to every project. Normally, rates are
determined based on the type of work involved in the contract.
Some projects may be more material or labor intensive, while
others may include mostly subcontracted work. Overhead rates
would vary based on the level of effort required.
Specific Base Allocation Method
SBAM55 is considered the most accurate allocation approach, but
is probably the most complicated and expensive to use. SBAM
allocates overhead costs based on the specific characteristics of a
job and each overhead cost element. SBAM would only be a
practical approach for making a claim if the methodology was
already in place or when the claim amount can justify the analysis
expense. The method involves creating indirect cost pool ac-
counts and a basis for allocating the accounts to each contract.
This involves developing, comparing, and establishing cost rela-
tionships for all elements. The costs for overhead items are allo-
cated to each job based on the established percentages of the
overall item cost.
The calculation involved for this method is as follows:
Allocation Basis 共AB兲
Allocation Item Cost on Disputed Jobs
AB⫽ (22)
Allocation Item Cost on All Jobs
Allocated Overhead of Pool Account 共AH兲
AH⫽Pool Account Cost⫻AB (23)
AH
Average Daily Overhead 共ADOH)⫽
Total Contract Days
(24)
Claimed Overhead Costs⫽ADOH⫻Days of Delay (25)
A step-by-step example of the specific base allocation method,
using the data in Table 1, is provided for illustration purposes.
• From Table 1, Allocation Item on the Disputed Contract
⫽$100,000, the Allocation Item on All Contracts⫽$500,000.
From Eq. 共22兲, the Allocation Basis⫽$100,000⫼$500,000
⫽0.20.
• From Table 1, the Pool Account Cost for Overhead⫽$40,000.
From Eq. 共23兲, Allocated Overhead of Pool Account
⫽$40,000*0.20⫽$8,000.
• Since the Period of the Pool Account Cost for Overhead⫽1
month, Eq. 共24兲 yields Average Daily Overhead⫽$8,000⫼1
⫽$8,000.
• Finally, since the compensable period of delay⫽1 month, Eq.
共25兲 yields Unabsorbed Overhead⫽$8,000*1⫽$8,000.
Calculation Based on Actual Records
Owners normally do not like to compensate contractors for home
office overhead delay costs, especially when damages are calcu-
242 / JOURNAL OF PROFESSIONAL ISSUES IN ENGINEERING EDUCATION AND PRACTICE © ASCE / OCTOBER 2003
lated using formulas that approximate or estimate the damage
cost, as is the case with the Eichleay formula. In the calculation of
damages based on actual records, the contractor needs to provide
detailed accurate records of home office overhead expenses that
will support the claim. In providing the records, the contractor
will need to determine the percentage of effort expended for this
project performance period or during the delay period. This per-
centage can be applied to the fixed home office costs, which will
result in an allocation for the particular project.56 This procedure
requires detailed accounting procedures from a record-keeping
standpoint, which can be quite onerous. However, the effort may
produce substantial benefits to the contractor, which might other-
wise not be realized.57
Direct Method
The direct method is a method proposed by the authors. For want
of a name, we propose to call it the ‘‘direct method’’ since it
espouses a one-step calculation.
Planned Overhead Rate
⫻Planned Earnings during the delay period
⫽Unabsorbed Overhead (26)
A step-by-step example of the direct method, using data in Table
1, is provided for illustration purposes.
• From Table 1, Planned Earnings during delay period
⫽$100,000. Assume the planned overhead rate⫽8.00%
共$40,000⫼$500,000兲. Eq. 共26兲 yields Unabsorbed Overhead
⫽8.00%*$100,000⫽$8,000.
The calculation of unabsorbed overhead should really not be more
complex than this, and this reflects exactly what the contractor
would have earned on the home office overhead had there been no
delay or standby. The expected 共i.e., planned兲 production during
period of delay can be known from client-approved contractor
schedules. In today’s construction environment, the preparation of
schedules is a necessary part of all construction contracts, so the
information required should be readily available. On more com-
plex, high-volume projects, especially those of the Department of
Defense, earned value reports are mandatory, so the expected
earnings should be available and be easily acquired. For this par-
ticular example, the result of the direct method agrees with the
Canadian, comparative absorption rate, the Carteret, and specific
base allocation methods. The important factor in the direct
method is that the planned earnings are based on the latest up-
dated schedule. There should not be any interference from total
billings in the calculation of unabsorbed overhead for a specific
project, and the direct method has taken this into account. The
direct method is much less convoluted than the other methods
presented.
Summary of Unabsorbed Overhead Calculations
from Different Methods
The results for unabsorbed home office overhead damage calcu-
lations for each alternative are provided below in Table 2.
For this particular example, the results for most of the method
calculations appear to be relatively close to each other, with the
median result of $8,000. The Eichleay formula calculation, at
$6,667, is approximately 20% lower than the median value. Vari-
ous claimants have used different but rational approaches to cal-
culate the value of unabsorbed home office overhead.
Table 2. Summary of Alternate Formulas and Methods
Results
Method 共dollars兲
Burden fluctuation method 6,600.00
Eichleay method 6,667.00
Allegheny method 7,920.00
Canadian method 8,000.00
Comparative absorption rate method 8,000.00
Carteret method 8,000.00
Specific base allocation method 8,000.00
Direct method 8,000.00
Modified Eichleay method 8,333.25
Direct cost allocation method 10,000.00
Analysis of Results and Formulas for Alternate
Methods and Formulas
Why are the methods different and why do the results differ? The
results for the calculations of the various alternatives and methods
will vary based on the particular situation, conditions, and as-
sumptions used in each particular method. All of the alternatives
have been used at some time in the past to calculate damages for
unabsorbed home office overhead due to delay. The alternatives
and methods shown need to be used cautiously because they are
based on assumptions and approximations, have their own indi-
vidual issues and weaknesses, and they all result in estimates or
approximations of the damage.
The following will analyze and provide objective comparisons
between a few of the alternate methods that have been illustrated.
For the 11 methods explained in this article, there are 55 paired
comparisons that can be performed. That is too much to undertake
within the scope of this paper. Hence, a few comparisons are
provided, and the reader can adopt the comparison technique for
additional paired comparisons.
Modified Eichleay Method versus Canadian Method
Closely analyzing the modified Eichleay method and the Cana-
dian method shows that the only difference is that the percent
markup in the modified Eichleay method is based on actual bill-
ings while the Canadian method is based on planned billings.
Both methods are relatively simple, rational approaches to the
calculation of unabsorbed overhead damages. Because the Cana-
dian method utilizes planned billings in it’s calculation, it may not
consider that some of the billings may not be allowable cost for
indirect home office overhead expenses. The modified Eichleay
method may provide more scrutiny for consideration of allowable
expenses in utilizing actual billings.
Burden Fluctuation versus Allegheny Method
Analysis of the burden fluctuation method indicates that the over-
head burden fluctuation percentage is applied to the other con-
tracts that had to bear the extra overhead expense due to the delay.
The Allegheny methodology is very similar to the burden fluctua-
tion, except that the overhead burden fluctuation percentage is
applied to the total billings of all the contracts. In this compari-
son, the Allegheny method appears to be a more logical technique
because it considers the contribution of the existing contract while
the burden fluctuation method does not.
JOURNAL OF PROFESSIONAL ISSUES IN ENGINEERING EDUCATION AND PRACTICE © ASCE / OCTOBER 2003 / 243
Allegheny Method versus Carteret Method
The Allegheny and the Carteret methods are similar in that they
initially both calculate an excess rate of overhead. The differences
between the methods lie in how they calculate this rate and what
the resultant rate is applied to. The Allegheny method calculates
the excess rate of overhead over the entire period of performance
of the contract. The Carteret method focuses its calculation of the
excess rate of overhead on the delay period only. The Allegheny
method applies the excess rate of overhead result to the total
billings of all contracts for the entire performance period of the
contract; the Carteret method applies the excess rate result to the
billings of contracts during the delay period only. In this compari-
son, the Allegheny method appears to be a more logical approach
because it considers the entire performance period of the contract
in its calculation of the excess rate and the application of this rate
to the contract costs. By only considering the delay period in its
calculations, the Carteret method assumes that all other work that
is being performed concurrently with the contract is proceeding
on schedule and within cost, which is not always the case. In
addition, by applying the excess rate of overhead to the billings of
contracts during the delay period only, the Carteret method does
not consider the full contribution of the delayed contract in its
calculation of unabsorbed overhead.
Total Direct Cost Allocation Method versus Specific
Base Allocation Method
The DCAM and SBAM take similar approaches in the calculation
of unabsorbed overhead damages. Both methods initially calcu-
late the overhead that is attributable or allocable to the delayed
project, then calculate a daily or monthly rate, and finally apply
the rate to the period of delay. The primary difference between
DCAM and SBAM is the calculation of the overhead allocation
cost for the delayed project. DCAM allocates a cost for overhead
by taking the ratio of the planned direct cost of the disputed
contract and the planned direct costs for all other contracts and
multiplying the result by the planned company overhead cost.
SBAM is much more complicated in that it involves creating cost
pool accounts and providing a basis for allocating each account to
each contract. The costs for overhead items are allocated to each
contract. With the information, it is easy to determine the alloca-
tion basis and overhead for the delayed contract. SBAM is prob-
ably the most accurate method, but it is very complicated and
expensive to set up and maintain. In most cases, SBAM would be
impractical to use, unless the contractor is using this method as a
normal business practice. DCAM is a very straightforward calcu-
lation, but it does not consider the differences in the various con-
tracts. This method assigns the same overhead rate to every con-
tract. Overhead rates should be determined based on the type of
work involved in each contract and the level of effort required.
Modified Eichleay Method versus Total Direct Cost
Allocation Method
The modified Eichleay method and DCAM also take similar ap-
proaches in the calculation of unabsorbed overhead damages.
Both methods initially calculate the overhead that is attributable
or allocable to the delayed project, then calculate a daily or
monthly rate, and finally apply the rate to the period of delay. The
primary difference between the modified Eichleay method and
DCAM is the calculation of the overhead allocation cost for the
delayed project. DCAM allocates a cost for overhead based on the
ratio of the planned direct cost of the disputed contract and the sites set forth by case law, the direct method is proposed as an
planned direct costs for all other contracts and multiplying the alternate method for the calculation of unabsorbed overhead. The
result times the planned company overhead cost. The modified direct method is a simple, straightforward, and realistic method
Eichleay method uses actual billings in its calculation of allocable for calculating unabsorbed overhead damages. For the simple ex-
overhead. The calculation takes the ratio of the actual billings for ample provided in this article, the direct method result agrees with
the disputed contract and the actual total billings for all the con- the Canadian, comparative absorption rate, the Carteret, and the
tracts and multiplies the result by the actual overhead billings. specific base allocation methods but is less convoluted.
DCAM is a very straightforward calculation, but it does not con-
sider the differences in the various contracts. This method assigns
the same overhead rate to every contract. Overhead rates should Endnotes
be determined based on the type of work involved in each con-
tract and the level of effort required. In this comparison, the 1
McDonald, P. R., and Baldwin, G. C. 共1989兲. ‘‘Builder’s and
modified Eichleay method is a much more logical approach be- contractor’s handbook of construction claims.’’ Prentice-Hall,
cause it allocates overhead based on actual billings, which auto- Englewood Cliffs, N.J.
matically considers the level of effort required when allocating 2
Peckar & Abramson, P. C., Attorneys at Law. 共1999兲. ‘‘Reas-
overhead expenses. sessing Eichleay.’’ Peckar & Abramson Newsletter, X共2兲, Fall.
3
Trauner, T., Jr. 共1990兲. ‘‘Construction delays: Documenting
causes, winning claims, recovering costs.’’ R. S. Means Co.,
Summary and Conclusions Kingston, Mass., p. 145.
The Eichleay formula has come a long way since its roots in 4
Fred R. Comb Co. v. United States, 103 Ct. Cl. 174 共1945兲.
1960. The Eichleay formula has gone through a gauntlet of scru- 5
McCord v. United States, 9 Ct. Cl. 155, 169 共1873兲.
tiny and criticism from various boards and courts as well as gov- 6
Watson, J. W. 共1995兲. ‘‘Military law review.’’ Winter 共147兲,
ernment attorneys, private industry, and contractors. This paper 262–288.
has provided discussion of compensability issues, the history of 7
Fred R. Comb Co. v. United States, 103 Ct. Cl. 174 共1945兲.
the Eichleay formula and the issues that have arisen on its use and 8
Kauffman, M. W., and Holman, C. A. 共1995兲. ‘‘The Eichleay
application. Case law and court decision precedence that have formula: A resilient means for recovering unabsorbed overhead.’’
shaped the prerequisite criteria on the use and application of the Public Contract Law Journal, 24共2兲, 319.
9
formula have been discussed, and various alternate methods and Eichleay Corporation v. United States, ASBCA 5183, 60-2
formulas that have been used for the calculation of damages for BCA 2688.
10
unabsorbed home office overhead due to delay have been pre- Trauner Theodore Jr. Op. Cit.
11
sented. Paired analysis and comparisons were performed between Excavation-Construction, Inc. v. United States, ENG BCA
a few of the methods presented. The calculation of the results 3851 共1984兲.
12
have been summarized and discussed. Trauner Theodore Jr. Op. Cit.
13
Even critics of the Eichleay formula know of the difficulty in Wickham Contracting Co. v. Fischer, 12 F.3d 1574, 1580
determining and calculating delay damage costs. Exploration of 共Fed. Cir. 1994兲.
the calculations for various alternate methods has indicated that 14
Capital Elec. Co. v. United States, 729 F.2d 743, 748 共Fed.
no method stands out as being superior. As this paper has pre- Cir. 1984兲.
15
sented, many of these methods use questionable assumptions, end Peckar & Abramson, P. C., Attorneys at Law, Fall 1999. Op.
up ‘‘approximating’’ the damage costs, and often result with some Cit.
16
of the same problems that have been alleged against the Eichleay Wickham Contracting, Inc., GSBCA No. 8675, 92-3 BCA ¶
formula. 25,040, at 124,815, aff’d 12 F.3d 1574 共Fed. Cir. 1994兲.
17
The case law and court decisions cited along with hundreds of Kauffman, Micheal W., and Holman, Craig A., Winter 1995.
other cases have shaped the prerequisite criteria for the recovery Op. Cit.
18
of home office overhead delay damages using the Eichleay for- Idle capacity; owing to delay, staff are not fully engaged in
mula and has set voluminous precedence that has made the deter- productive work for the delayed project during the delay period.
mination of entitlement under the Eichleay formula what it is 19
Cibinic, J. 共1991兲. ‘‘The Eichleay formula: Does it spell re-
today. The prerequisite criteria that has been established by case lief?’’ The Nash & Cibinic Report ¶ 62 共Nov.兲.
20
law includes the uncertainty of the delay or standby period and Kauffman, Micheal W., and Holman, Craig A., Winter 1995.
the ‘‘practicality’’ and ‘‘possibility’’ for the contractor to take on Op. Cit.
21
additional work, which would ‘‘absorb’’ home office expenses Berley Industries, Inc. v. City of New York, 45 N.Y.2d 683,
during the period of delay. 385 N.E.2d 281 共1978兲.
22
In some cases, it may appear that the use of the Eichleay Guy James Construction Co. v. The Trinity Industries, Inc.,
formula overcompensates the contractor. The formula does not 644 F.2d 255 共5th Cir. 1981兲.
23
work perfectly in every case. The formula results in a reasonable Capital Electric Co. v. United States, GSBCA Nos. 5316, 17,
approximation of the calculation of damages sustained. There has 83,3 BCA ¶ 16.548.
been no exact method, presented to the courts to determine the 24
West, J. D., and Schechter, R. A. 共1994兲. ‘‘New life for the
amount of such expenses to be allocated to any particular contract EICHLEAY formula recovering home office overhead in
or part of a contract. Probably, an exact method or calculation is government—caused delay claims.’’ Government Contract Costs,
quite impossible to develop. The goal is to determine a fair allo- Pricing and Accounting Report, Vol. 94-3, May.
25
cation for compensating a contractor for the delay, because com- Community Heating & Plumbing Co., Inc., 987 F.2d 1575
pensability is undeniable. 共Fed. Cir. 1993兲.
26
Because compensability of unabsorbed overhead is undeniable C. B. C. Enterprises, Inc. v. United States, 978 F.2d 669
to a contractor for owner-caused delays that meet the prerequi- 共Fed. Cir. 1992兲.

244 / JOURNAL OF PROFESSIONAL ISSUES IN ENGINEERING EDUCATION AND PRACTICE © ASCE / OCTOBER 2003
 27 42
Watson, Jeffrey W. Major, Winter 1995. Op. Cit. Wickham Contracting Co. v. Fischer, 12 F.3d 1574, 1580
28
Interstate General Government Contractors v. West, 12 F.3d 共Fed. Cir. 1994兲.
43
1053 共Fed. Cir. 1993兲. McDonald, Phillip R. and Baldwin, George C. Op. Cit.
44
29
Watson, Jeffrey W. Major, Winter 1995. Op. Cit. Example assumes that total billings will remain at $500,000
30
Wickham Contracting Co. v. Fischer, 12 F.3d 1574, 1580 after project completion.
45
共Fed. Cir. 1994兲. Cost represents total work on other projects; no work on
31
Watson, Jeffrey W. Major, Winter 1995. Op. Cit. delayed project.
46
32
No. 93 C 1220, 1995 U.S. Dist. LEXIS 1301, at *35 共E.D. Total works remain at $500,000.
47
McDonald, Phillip R. and Baldwin, George C. Op. Cit.
Ill. Feb. 1, 1995兲 共LEXIS, PUBCON library, CTSBCA file兲. 48
Ibid.
33
West v. All-State Boiler, 146 F.3d 1368 共Fed. Cir. 1998兲. 49
34 Trauner Theodore Jr. Op. Cit.
Peckar & Abramson, P. C., Attorneys at Law., Fall 1999. Op. 50
Carteret Work Uniforms, ASBCA 1617, 6 CCF ¶ 61,561
Cit.
共1954兲.
35
Melka Marine, Inc. v. United States, 187 F.3d 1370 共Fed. 51
Nash, R. C., Jr., and Cibinic, J., Jr. 共1980兲. ‘‘Federal procure-
Cir. 1999兲. ment law.’’ Contract Performance, 3rd Ed., Vol. II, George Wash-
36
McCaleb, S. 共1999兲. ‘‘Melka Marine: The federal circuit’s ington Univ., Washington, D.C., p. 1410.
effort to unmuddy the Eichleay waters.’’ The Government Con- 52
Allegheny Sportswear Co., ASBCA No. 4163, 58-1 BCA ¶
tractor, 41共34兲, p. 4. 1684.
37
Fred R. Comb v. United States, 103 Ct. Cl. 174 共1945兲. 53
Nash, Ralph C., Jr. and Cibinic, John, Jr. Op. Cit.
38
Watson, Jeffrey W. Major, Winter 1995. Op. Cit. 54
Hewitt, R. 共1986兲. Winning contract disputes: Strategic
39
Capital Elec. Co. v. United States, 729 F.2d 743, 748 共Fed. planning for major litigation, Arthur Young, Sacramento, Calif.
Cir. 1984兲. 55
Ibid.
40 56
Wickham Contracting Co. v. Fischer, 12 F.3d 1574, 1580 Trauner Theodore Jr. Op. Cit.
共Fed. Cir. 1994兲. 57
Ernstrom, W. J., and Essler, K. S. 共1982兲. ‘‘Beyond the
41
Peckar & Abramson, P. C., Attorneys at Law., Fall 1999. Op. Eichleay Formula: Resurrecting home office overhead claims.’’
Cit. The Construction Lawyer, 3共1兲, pl 共5兲.

JOURNAL OF PROFESSIONAL ISSUES IN ENGINEERING EDUCATION AND PRACTICE © ASCE / OCTOBER 2003 / 245