P.J. Dick Inc. v. Principi: Raising the Bar for Eichleay Damages
 
December 12, 2003
 

The so-called Eichleay formula, a venerable formulation in construction cases and a component of virtually every delay claim, arose from the federal context,[1] and has since passed into wider use as a general measure of unabsorbed home-office overhead damages. Recently, in the case of P.J. Dick Inc. v. Principi,[2] the U.S. Court of Appeals for the Federal Circuit, while emphatically reaffirming the status of the Eichleay calculation as the proper test for calculating such damages, significantly tightened the restrictions upon their availability. In the wake of P.J. Dick, before contractors may assert the Eichleay formula for relief from continuing overhead burdens, they must now show that the government’s actions placed them into a state of enforced idleness.

The Eichleay formula itself is quite simple. First, the total overhead incurred during the contract period is multiplied by the percentage of the contractor’s total billings during that period represented by the subject contract (see Figure 1).

The resulting amount is then divided by the total days of performance to produce a daily contract overhead amount, which is multiplied by the number of days of nonconcurrent, government-caused delay (see Figure 2).

Figure 1

Total contract billings	X	Total Home Office	=	Allocable Overhead for
Total company billings		Overhead		This Project

Figure 2

Allocable overhead		Daily Allocable		Compensable		Home Office
Total Number of Days	=	Overhead Rate	X	Delay Days	=	Overhead
(including delays)						Damages

Drawing on elements from a wide array of federal precedent, the court in P.J. Dick set forth six questions that must be answered before Eichleay damages will be awarded:

1. Was there a government-caused delay that was not concurrent with another delay caused by some other source?

2. Did the contractor demonstrate that it incurred additional overhead? To show this, the contractor must either demonstrate that: (a) the original time frame for completion was extended, or (b) there was a nonconcurrent, government-caused delay resulting in a late finish or that the contract was completed on time, but the contractor had planned to finish even sooner.

3. Did the government contracting officer issue a suspension or other order expressly putting the contractor on standby?

4. If not, can the contractor prove there was a delay of indefinite duration during which it could not bill substantial amounts of work on the contract and at the end of such delay, it was required to be able to return to work on the contract at full speed and immediately?

5. Can the government satisfy its burden of production showing that it was not impractical for the contractor to take on replacement work (i.e., a new contract) and thereby mitigate its damages?

6. If the government meets its burden of production, can the contractor satisfy its burden of persuasion that it was impractical for it to obtain sufficient replacement work?

The court in P.J. Dick deviated from traditional Eichleay jurisprudence in its treatment of the fourth question. For the first time, the court clearly defined what is meant by being “on standby.” The court’s definition has struck many as a significant increase in the burden of proof on the contractor.

In the absence of a written suspension order demanding that the contractor be ready to return to the job site at any time, the Court held that the contractor must indirectly demonstrate “standby.” This requires a difficult three-part showing:

1. That the government-caused delay was not only substantial but was of an indefinite duration. This means that if the government suspends all work on the contract, but tells the contractor work will begin again on a date certain, the contractor is not on standby because he may demobilize from the site, seek replacement work and remobilize to the site at full strength.

2. That during that delay the contractor was required to be ready to resume work on the contract, at full speed as well as immediately. If the government grants a grace period during which the contractor may re-assemble its forces, or allows a “ramp up” period for the contractor to rebuild its workforce to full strength, the contractor was not on standby. In a break from previous Eichleay doctrine, the court held that the contractor must be required to keep at least some of its workers and necessary equipment at or near the site, even if idle, ready to return to work at a moment’s notice.

3. Third, in a substantial break from previous understandings of the Eichleay requirements, the court held that the contractor must show effective suspension of much, if not all, of the work on the contract. If minor tasks may still be accomplished on the contract, and any appreciable level of billing is proceeding, the contractor is not on standby, even if these nugatory tasks are proceeding while critical path work is suspended.

As a practical consequence, this new test dramatically raises the bar for contractors seeking to recover office overhead expense due to government-caused delay. Further, the test makes it impossible to recover unabsorbed home-office overhead caused by change orders that extend the duration of a project, so long as the contractor’s crew continues to work. A further unintended consequence of the decision may allow government contracting officers to grant suspended contractors short grace periods or ramp-up periods in order to short-circuit an anticipated claim for office overhead during suspension.

At this time, the P.J. Dick decision applies only to federal contracting. However, just as the Eichleay formula migrated from the federal contracting context into wider use, so this case is likely a harbinger of a general tightening of the restrictions on the availability of Eichleay damages.

For more information, e-mail Stuart Turner at stuart.turner@hklaw.com, or call toll free, 1-888-688-8500.

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1. See Eichleay Corp., ASBCA No. 5183, 60-2 B.C.A. (CCH) ¶ 2688 (ASCBA 1960).

2. 324 F.3d 1364 (Fed. Cir. 2003).