Opinion ID: 659890
Heading Depth: 2
Heading Rank: 1

Heading: The Eichleay Formula is Exclusive

Text: 13 The Board used the Eichleay formula 3 to calculate the amount of home office overhead costs for which Wickham would be reimbursed due to the GSA-imposed delay. Application of the Eichleay formula requires that compensable delay occurred, and that the contractor could not have taken on any other jobs during the contract period. 4 C.B.C. Enters., Inc. v. United States, 978 F.2d 669, 673-74 (Fed.Cir.1992). Government contractors may use the Eichleay formula to calculate unabsorbed home office overhead when disruption, delay or suspension caused by the government has made uncertain the length of the performance period of the contract. Id. 978 F.2d at 672. The uncertainty often precludes additional jobs. 14 Suspension or delay of contract performance results in interruption or reduction of the contractor's stream of income from payments for direct costs incurred. This in turn causes an interruption or reduction in payments for overhead, derived as a percentage of direct costs, which is set by the contract. Home office overhead costs continue to accrue during such periods, however, regardless of direct contract activity. Consequently, this decrease in payments for direct costs creates unabsorbed overhead, unless home office workers are laid off or given additional work during such suspension or delay periods. When the period of delay is uncertain and the contractor is required by the government to remain ready to resume performance on short notice (referred to as standby), the contractor is effectively prohibited from making reductions in home office staff or facilities or by taking on additional work. See Capital Elec. Co. v. United States, 729 F.2d 743, 748 (Fed.Cir.1984) (Friedman, J., concurring) ([I]t is, ordinarily, not practicable to lay off main office employees during a short and indefinite period of delay.). Other reasons such as exhaustion of bonding capacity may also preclude additional contracts. Interstate Gen. Gov't Contractors, Inc., 12 F.3d 1053 (Fed.Cir.1993). 15 For the purpose of compensating Wickham for the effects of a project delay on home office overhead, the Board properly defined overhead as those costs which are expended for the benefit of the business as a whole and which usually accrue over time. 92-3 BCA p 25,040 at 124,818. The pool to which the Eichleay formula is applied must contain only such indirect costs. 5 Home office costs, by their nature, cannot be traced to any particular contract. Thus, they are properly categorized as overhead costs and, assuming their allowability, included in the Eichleay pool. Were it possible to trace a cost to a particular contract, it would be a direct cost of the contract. C.B.C. Enters., 978 F.2d at 672. 16 The Armed Services Board of Contract Appeals devised the Eichleay formula to provide a fair method for allocating home office overhead costs, otherwise inallocable, to specific contracts. Eichleay Corp., ASBCA No. 5183, 60-2 BCA p 2688, 1960 WL 538 (July 29, 1960), aff'd on reconsid., 61-1 BCA p 2894, 1960 WL 684 (1960). The Eichleay board found it necessary to allocate overhead costs pro-rata because they cannot ordinarily be charged to a particular contract. They represent the cost of general facilities and administration necessary to the performance of all contracts. 60-2 BCA p 2688 at 13,574, 1960 WL 538. Thus, the Eichleay formula seeks to equitably determine allocation of unabsorbed overhead to allow fair compensation of a contractor for government delay. Id. at 13,573, 1960 WL 538. Allocation based on a pro-rata share is necessary because overhead cannot be traced to any particular contract since overhead consists of expenses which benefit and are necessary to every contract. Id.
17 In this case the ratio of billings from the delayed contract to total billings is about 34%. Thus, under the Eichleay formula, 34% of Wickham's overhead expense, incurred during the contract period, is allocable to the contract. However, Wickham claims that approximately 80% of its home office activity and, therefore, 80% of its home office overhead expense was devoted to the Albany contract during the delay period. 6 Thus, Wickham seeks compensation for 80% of the home office overhead costs actually incurred during the delay because, according to Wickham, they are directly attributable to the Albany contract. Wickham argues the Eichleay calculation is unfair because it is less than the actual percentage of overhead devoted to the delayed project. Therefore, per Wickham, the Eichleay formula should be used only when overhead costs cannot otherwise be accurately determined. In short, Wickham seeks to completely avoid the Eichleay formula. 18 Wickham's argument fails for a fundamental reason--Wickham confuses direct and overhead costs. As the Board noted, overhead costs benefit and are caused by the business as a whole, not any one project. Thus, overhead costs are never attributable to or caused by any one contract. Wickham's claim to directly attributable home office overhead is a non sequitur. If a cost is directly attributable to a contract, then it is a direct cost, not an overhead cost. 19 Wickham attempts to blur the distinction between overhead and direct costs simply to avoid the clear rule that the Eichleay formula governs the calculation of unabsorbed overhead. A contractor who wishes reimbursement for a cost directly attributable to a contract must submit it as a direct cost. In a case such as this, where a contractor and the government have already consistently treated a cost as overhead, we will not upset their agreement by ourselves treating that cost as a direct cost and ordering reimbursement as such. In any event, we would lack jurisdiction under the CDA to do so because there were no contracting officer and board decisions denying such costs as direct costs. Therefore, there is no fact finding or ruling for us to review; and, of course, as an appellate court we may not make fact findings or initial rulings, generally or in the circumstances of this case. 20 Responding to Wickham's argument, the Board said, [i]t makes no difference what the actual overhead effort was. We are here dealing with theoretics which produce approximations because more precise results cannot be obtained. 92-3 BCA p 25,040 at 124, 818, 1992 WL 88326. In this statement the Board refers to the concept that the Eichleay formula calculates the unabsorbed overhead by a pro-rata share out of necessity. The Eichleay pool contains only overhead costs, those which cannot be attributed to a particular contract and which benefit and are caused by the business as a whole. To accurately determine how much unabsorbed overhead was caused by any one contract is impossible, even though Wickham claims to have done so. 7 21 Unlike direct costs which are incurred only because of a particular contract, overhead costs are incurred even if the contractor had not undertaken a particular project. Ordinarily, all home office expenses fall into the overhead category because the contractor must operate a home office in order to seek work and administer contracts whether or not he is performing a particular contract. For instance, a contractor must provide for the home office space, pay for utilities pertaining to that space, pay licensing fees and officer's salaries even when the contractor has no current contracts and is merely seeking work. 22 Given this established definition of overhead costs, the very premise of Wickham's argument is incorrect. Wickham contends that because 80% of its home office activity related to the Albany contract, 80% of its home office costs is directly attributable to that contract. Wickham fails to recognize that a cost is directly attributable to a contract only when the cost is caused by the contract. The Albany project did not cause 80% of Wickham's home office costs because Wickham would have incurred the individual cost components of the home office overhead whether or not it ever undertook the Albany project. For instance, the Albany project did not cause 80% of Wickham's home office rent even if 80% of the activity in that office related to the Albany project. 8 Because Wickham would have incurred the same or similar rental expense in any event, no portion of the rent is directly attributable to the Albany project.
23 Wickham relies on Miles Construction, VABCA No. 1674, 84-1 BCA p 16,967, 1983 WL 13694 (Nov. 30, 1983), to support its argument that the Eichleay formula should be used to allocate overhead expenses only when more accurate proof of unabsorbed overhead expenses is unavailable. In Miles the contractor testified that during the contract period, he was performing no work other than the delayed government contract at issue. In addition, his financial statements indicated that he received no other income during the contract period. According to the Eichleay formula then, 100% of the contractor's overhead cost incurred during the contract period was allocable to the delayed contract. Id. at 84,375, 1960 WL 538; see note 3, supra. However, the contractor's financial records indicated purchases for undisclosed job accounts and unexplained labor costs during the delay period. The Miles Veterans Board concluded that [g]iven these unexplained activities, we cannot conclude that 100% of Appellant's overhead should be allocated to the VA contract.... Accordingly, we believe this situation justifies use of a 'jury verdict' approach. Miles Constr., 84-1 BCA p 16,967 at 84,375, 1983 WL 13694. The Miles Board decided that [g]iven the circumstances it was reasonable to allocate 90% of the overhead incurred to the delayed contract. Id. 24 Both the facts and the analysis of Miles are distinguishable from this case. The Miles Board decreased the award to the contractor from the amount calculated according to the Eichleay formula because the contractor's financial statements indicated that he may have performed undisclosed work during the delay period. The implication of the undisclosed work is that the contractor may have received undisclosed income during the contract period, which would have decreased the percentage of overhead allocable to the delayed contract. The Miles Board did not deviate from the Eichleay formula based on the rationale that any portion of the contractor's overhead was directly attributable to or caused by the delayed contract. Thus, Miles does not support Wickham's position. 25 In addition, the jury verdict approach of Miles has not subsequently been followed by any board, including the Veterans Board. Moreover, board decisions since Miles, including those of the Veterans Board, have uniformly rejected the use of other formulas in place of the Eichleay formula. See Bridgewater Constr. Corp., VABCA No. 2956, 91-3 BCA p 24,272, 1991 WL 160881 (Aug. 12, 1991) (rejecting an alternative calculation that gave a significantly higher daily rate of overhead than the Eichleay formula); Berkeley Constr. Co., VABCA No. 1962, 88-1 BCA p 20,259, 1987 WL 45887 (Oct. 27, 1987) (rejecting a total cost formula); G.S. & L. Mechanical & Constr. Inc., DOT CAB No. 1640, 86-3 BCA p 19,026, 1986 WL 19793 (May 22, 1986) (rejecting a modified Eichleay formula); Stephenson Assoc., Inc., GSBCA No. 6573, 86-3 BCA p 19,071, 1986 WL 19955 (Mar. 27, 1986) (rejecting a simulated work formula). 26 Finally, beyond concluding that Miles does not support Wickham's position, we hold that the jury verdict approach which was used in Miles and which Wickham effectively asks us to apply here is an improper method for allocating overhead to a delayed government contract to compensate a contractor for unabsorbed overhead. When a contractor satisfies the prerequisites for application of the Eichleay formula, that formula is the exclusive means available for calculating unabsorbed overhead to the delayed contract. 9 27 Due to the nature of overhead expenses, a precise method for allocating overhead to specific contracts cannot be devised, but the Eichleay formula provides a feasible, equitable and predictable method of compensating a contractor for unabsorbed overhead. By allocating a pro-rata share of the overhead expense to the delayed contract, the Eichleay formula fairly distributes the overhead. By reimbursing the contractor based on the length of the delay, the Eichleay formula compensates the contractor, but only for unabsorbed overhead, recognizing that a portion of the overhead allocable to the delayed contract will be absorbed by the direct costs of that contract. Thus it adequately compensates the contractor without unduly burdening the taxpayers. 28 In sum, because it is impossible to determine the amount of unabsorbed overhead caused by the delay of any particular contract, and because the Eichleay formula provides an equitable method of compensating a contractor for unabsorbed overhead without costing taxpayers more than they should pay, we hold that the Eichleay formula is the exclusive means for compensating a contractor for unabsorbed overhead when it otherwise meets the Eichleay prerequisites.