Requirements for Eichleay Claims Clarified in 2 Court of Appeals Decisions


December 15, 2003

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Thelen Reid Brown Raysman & Steiner LLP

The U.S. Court of Appeals for the Federal Circuit has handed down two decisions clarifying when federal contractors may recover Eichleay damages for unabsorbed home office overhead.

The decisions spell out the elements that contractors must prove to qualify for Eichleay damages. And, they make clear that mere disruption of workplans, inefficiency or re-sequencing will not entitle the contractor to Eichleay damages.

Elements of Proof

A contractor entered into a fixed-price contract with the Department of Veterans Affairs to build a hospital addition in Ann Arbor, Michigan. During the project, the VA issued more than 400 change orders, causing multiple delays and increasing the contract price by more than 5 percent. The VA granted the contractor an additional 107 days of time to complete the contract.

In accepting the time extension, the contractor reserved its right to seek additional impact and suspension costs, including unabsorbed home office overhead under the Eichleay formula. The contract was completed 260 days after the original contract completion date and 153 days after the revised completion date.

After completion, the contractor presented its claims to the contracting officer. The CO denied all of the claims, and the contractor appealed to the Veterans Affairs Board of Contract Appeals. The contractor claimed that it was entitled to a 260-day time extension as well as field and home office overhead damages for most of the delays.

VABCA granted time extensions for the full 260 days but, based on the contract’s Suspension of Work clause, determined that the contractor was due only 65 days of field overhead damages. VABCA also rejected the contractor’s claims for Eichleay damages, concluding that the stipulation between the parties had not relieved the contractor of the burden of proving entitlement to Eichleay damages. VABCA determined that the contractor had not shown that it was on standby, a necessary element of an Eichleay claim, and was thus ineligible to recover for unabsorbed home office overhead.

The contractor appealed, contending that a contractor is automatically on standby any time there is a government-caused delay of an uncertain duration that extends performance of the contract and at the end of which the contractor can be required to immediately resume work.

The U.S. Court of Appeals for the Federal Circuit rejected the contractor’s legal definition of standby and affirmed VABCA’s determination that the contractor was not on standby. Nevertheless, the court reversed VABCA’s denial of the contractor’s claim for unabsorbed home office overhead and remanded the case to VABCA for calculation of such damages. P.J. Dick, Inc. v. Department of Veterans Affairs, 324 F.3d 1364 (Fed. Cir. 2003).

In its decision, the Federal Circuit enumerated the questions a court should ask when evaluating a contractor’s claim for Eichleay damages:

The court held: “Only where the above exacting requirements can be satisfied will a contractor be entitled to Eichleay damages.”

The Federal Circuit took a particularly close look at the fourth question in an effort to clarify what it called the “multi-faceted” inquiry of standby. In the absence of an express order from the CO putting the contractor on standby, the court said, the contractor must prove standby by the following indirect means:

The court thereby imposed a narrower definition of standby that requires the contractor to show a suspension, either formal or functional, of all or most of the work on the contract. Applying this more stringent interpretation of the standby requirement, the court rejected the contractor’s legal argument.

Moreover, the court agreed with the fact findings of VABCA: The contractor continued to perform substantial amounts of work on the contract -- nearly half what it planned -- during the alleged periods of suspension. As a result, the court concluded that the contractor was not on standby.

Despite the court’s lengthy exposition on the ground rules for an Eichleay damages claim and the court’s detailed inquiry into the issue of standby, the Federal Circuit ultimately decided in favor of the contractor on an entirely different basis: the parties’ negotiated “Stipulation on Quantum.”

The court held: “The language of the stipulation establishes a single condition precedent to [the contractor’s] receipt of the enumerated damages [for field and home office overhead]: entitlement to damages under the SOW [suspension of work] clause.” The stipulation, the court determined, “removed the need for [the contractor] to separately prove entitlement to home office overhead damages” under Eichleay.

No Claims for Lost Efficiency

The second case involved a contractor that entered into a fixed-price contract to improve and repair a building at an Army medical center in Colorado. The work was to be accomplished in two phases. Phase 1 dealt with the south half of the building; Phase 2 dealt with the north half of the building. The work on Phase 1 was to be completed within 190 days of the notice to proceed from the government. It was understood by both parties that the government would vacate that part of the building under construction.

Following notice to proceed, the government failed to vacate the southern half of the building as agreed, causing substantial delays in the contractor’s performance. Other problems included defects in the government’s specifications, a large number of change orders issued by the government and deficiencies in the performance of the contractor and its subcontractors.

Six months after the original completion date, the parties met and agreed on a two-month extension of time for performance of Phase 1. The contractor did not complete Phase 1 until 93 days after the extended completion date, and the government eventually terminated for convenience the contractor’s work on Phase 2.

Contractor subsequently filed claims, including an Eichleay claim for unabsorbed home office overhead. The Armed Services Board of Contract Appeals allowed certain claims but denied the contractor’s Eichleay claim based on a Defense Contract Audit Agency report alleging that overhead for the disputed period was “fully absorbed by the basic contract, contract modifications, and other projects” and “the contractor used both variable and fixed overhead expenses in computing the average daily overhead rate.” The contractor appealed.

The U.S. Court of Appeals for the Federal Circuit rejected ASBCA’s decision, ruling that ASBCA’s function was to determine whether the contractor “had established its case for Eichleay damages, not whether the auditor’s ‘finding’ that [the contractor] had not done so was supported by the record.” Based on ASBCA’s opinion, the court could not “determine whether it properly rejected [the contractor’s] Eichleay claim or determine how that question should be answered.”

On remand, ASBCA once again rejected the contractor’s Eichleay claim but, at the direction of the court, broadened the evidentiary basis of its decision, directly addressing the contractor’s entitlement to Eichleay damages. ASBCA determined that the contractor had failed to show standby because it had not shown that “performance of the work was suspended or significantly interrupted during the period” in dispute. The contractor again appealed.

The U.S. Court of Appeals for the Federal Circuit affirmed ASBCA’s decision. Charles G. Williams Construction, Inc. v. Thomas E. White, Secretary of the Army, 326 F.3d 1376 (Fed. Cir. 2003).

In its first opinion, the court had reiterated from prior decisions that one of the “two prerequisites to application of the Eichleay formula to recover unabsorbed overhead [caused by government delay]” is that the contractor be on standby. Charles G. Williams Construction, Inc. v. Thomas E. White, Secretary of the Army, 271 F.3d 1055 (Fed. Cir. 2001). “The proper standby test,” the court continued, ”focuses on the delay or suspension of contract performance for an uncertain duration, during which a contractor is required to remain ready to perform…. If both of these requirements are satisfied, the contractor has shown that it had unabsorbed general overhead for which it is entitled to Eichleay damages.”

In its second opinion, the court found that the contractor had failed to provide evidence that on any particular day it was unable to do any work at all on the contract while obliged to be ready to resume full work immediately. Nor was there any evidence that the government directed the contractor to remain idle and on call.

The court also called attention to the contractor’s apparent misunderstanding of the concept of “standby” as it relates to an Eichleay claim. In its brief, the contractor argued that a contractor would be entitled to Eichleay damages when the government significantly interfered with efficient performance of the contract. Similarly, in oral argument the contractor answered affirmatively when asked whether a contractor is entitled to Eichleay damages if, as a result of government delay, the contract cannot be performed as efficiently or effectively as it was understood it should have been performed.

The court responded that such a showing would not be sufficient to establish entitlement to Eichleay damages. That is because “such damages are utilized to compensate a contractor for its indirect costs that cannot be allocated to a particular contract for the period during which the government has made contractual performance impossible, while requiring the contractor to remain available to resume performance on short notice.”

The court added: “As long as the contractor is able to continue performing the contract, although not in the same way or as efficiently or effectively as it had anticipated it could do so, it can allocate a portion of its indirect costs to that contract. There is accordingly no occasion in that situation to resort to ‘recovery under the Eichleay formula,’ which is ‘an extraordinary remedy.’ ”

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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-369-7229 or at pwberning@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.





©2003 Thelen Reid Brown Raysman & Steiner LLP