Court Opinion

ID: 9496116
Source: CourtListenerOpinion
Date Created: 2023-08-05 16:18:28.278047+00
Date Added: 2024-06-11T17:57:21.550682
License: Public Domain

PAULINE NEWMAN, Circuit Judge,
concurring in part.
I agree with the court that the contractor is entitled to establish its damages due to unabsorbed overhead caused by government delay. I part company with my colleagues, however, in their view that the Eichleay formula is inapplicable to this case.
Application of the Eichleay method of measuring compensation for unreimbursed overhead is not controlled by whether the contract is eventually performed or whether it is eventually terminated without performance. During the period when the contractor is required by the government to stand by, neither the contractor nor presumably the government knows whether the contract will be cancelled eight months later. It is the standby suspension of uncertain duration that creates the situation for which the Eichleay formula was devised; whether or not performance had begun before the suspension was imposed does not produce a “drastic shift” in the application of the formula. C.B.C. Enterprises, Inc. v. United States, 978 F.2d 669, 675 (Fed.Cir.1992). Precedent does not require that recovery of unabsorbed overhead is measurable by the Eichleay formula only if performance had begun before it was suspended.
This court has “specifically acknowledged two prerequisites to application of the Eichleay formula to recover unabsorbed overhead, assuming government-caused and hence ‘compensable’ delay: (1) that the contractor be on standby and (2) *889that the contractor be unable to take on other work.” Interstate Gen. Gov’t Contractors, Inc. v. Secretary of the Army, 12 F.3d 1053, 1056 (Fed.Cir.1993). The court explained that the “proper standby test focuses on the delay or suspension of contract performance for an uncertain duration, during which a contractor is required to remain ready to perform. Standby combined with an inability to take on additional work are the two prerequisites for application of the Eichleay formula, because taken together they prevent the contractor from mitigating unabsorbed overhead when it is incurred.” Id. at 1058.
The principle of compensation for un-reimbursed overhead costs flowing from suspension by the government is not changed by whether there had been partial performance before suspension, and is not changed by the later cancellation of the contract. See Melka Marine, Inc. v. United States, 187 F.3d 1370, 1375 (Fed.Cir.1999) (“Home office overhead typically includes accounting and payroll services, salaries for upper-level managers, general insurance, utilities, taxes, and depreciation.”); Interstate, 12 F.3d at 1058 (“Generally, unabsorbed overhead consists of the time sensitive indirect costs incurred despite construction inactivity on a project. ...”). Unabsorbed overhead may be incurred when the government-caused delay results in a “disruption of] the relationship between the contractor’s revenue and its overhead costs” that cannot be reasonably mitigated. Interstate, 12 F.3d at 1058. The court explained in C.B.C. Enterprises, 978 F.2d at 671, that “[t]he Eichleay formula was devised to calculate reimbursable home office overhead costs in the event of suspension of work on a contract, when the suspension decreases the stream of direct costs against which to assess a percentage rate for reimbursement.”
Thus, when the government requires that the contractor stand by for a period of uncertain duration, the Eichleay formula is a fair measure of compensation for the delay. It is a simplified calculation of the government’s share of the indirect and unabsorbed overhead when the contractor is reasonably unable to take on replacement work or make “reductions in home office staff or facilities.” See Wickham Contracting Co. v. Fischer, 12 F.3d 1574, 1577-78 (Fed.Cir.1994). When contract performance is interrupted, it is irrelevant whether it is interrupted before or after it commenced, and compensable overhead costs, if incurred, are not erased by later cancellation of the contract. The purpose of the Eichleay formula is to simplify, not to complicate, the measurement of damages arising from indirect costs.
The Eichleay formula is not a matter of legal entitlement; it is simply a mathematical equation for allocation of unreim-bursed overhead costs. It is incorrect to promote it to a substantive entitlement limited to an inflexible formula. In C.B.C. Enterprises, this court “decide[d] which of two methods [, ‘a fixed percentage mark-up of the direct costs incurred,’ or ‘a constructive daily rate derived using the Eichleay formula,’] should be used to reimburse a contractor for home office overhead costs incurred by reason of a contract extension to perform additional work.” 978 F.2d at 671-72. In that case, we held:
Where no element of uncertainty is imposed on the contractor, use of the Eichleay formula to calculate extended home office overhead is not permissible.... Thus, computation of extended home office overhead using an estimated daily rate is an extraordinary remedy which is specifically limited to contracts affected by government-caused suspensions, disruptions and delays of work. *890Absent these circumstances, ... it is inappropriate to use the Eichleay formula to calculate home office overhead for contract extensions because adequate compensation for overhead expenses may usually be calculated more precisely using a fixed percentage formula.
C.B.C. Enterprises, 978 F.2d at 675 (citation omitted). Then, in Community Heating & Plumbing Co. v. Kelso, 987 F.2d 1575, 1581-82 (Fed.Cir.1993), we noted the review of the two methods of recovering home office overhead in C.B.C. Enterprises and stated:
The first method would allow a contractor to recover a fixed percentage markup of the direct costs it incurred. [978 F.2d] at 672. However, if compensable delay occurs and the contractor demonstrates that it could not have taken on any other jobs during the contract period, the Eichleay formula, which calculates home office overhead on a daily basis, may also be used. Id. at 672-74. “The contractor having met this burden, the government may only preclude use of the Eichleay formula if it can somehow show that the contractor would suffer no loss by using a fixed percentage mark-up formula.” Id. at 674; see Capital Elec. Co., 729 F.2d at 745-46.
If the formula does not precisely fit the circumstances, this does not warrant either dismissal of the claim or determination that the Eichleay formula is inapplicable; rather, it warrants adaptation, if such is needed, to the situation as it existed. This court has suggested that “close variations” of the Eichleay formula may sometimes be appropriate. Capital Electric Co. v. United States, 729 F.2d 743, 747 (Fed.Cir.1984) (Although this court is “satisfied that the record does not support use of the modified Eichleay formula instead of the Eichleay formula” with regard to Capital, the primary contractor, the use of an “Eichleay-type formula” by its subcontractors, Poole and Kent, “appears to be appropriate to its circumstances.”). Furthermore, in Wickham Contracting, 12 F.3d at 1580 & n. 9, where we stated that “[w]hen 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,” we also stated that:
In a case such as Miles in which a contractor provides inadequate financial data for an accurate and fair Eichleay calculation, the contracting officer and appeals board have options beyond the “jury verdict” approach of Miles. For instance, the board may estimate the contractor’s total billings for the contract period. If the financial data is seriously incomplete, the Eichleay requirements are not met and, therefore, the claim for unabsorbed overhead compensation may simply be denied.
(Citations omitted). Thus I would reverse the ruling of the Court of Federal Claims as to the applicability of Eichleay principles.
This appeal reaches us on summary judgment, and the parties do not analyze the compensation that was paid to Nicon upon the termination for convenience. I take note of the government’s argument that Nicon has been adequately compensated, and Nicon’s argument that it has not. I would remand for determination of the predicate requirement of whether Ni-con was on standby and unable to take on other work throughout the period of delay and, if so, whether the compensation already paid included all or any portion of the unabsorbed overhead calculated in accordance with Eichleay principles.