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Recovering Damages from Government-Caused Delays

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Project delays are not unusual throughout the duration of a contract. If the project is delayed by the government, can a contractor recover damages arising from a government-caused delay, regardless of whether the delays impacted the contract performance period? Federal courts have upheld a contractor’s right to recovery of unabsorbed home office overhead caused by government delay, regardless of whether the contract was completed within the contract performance period, provided the contractor offers evidence supporting the recovery. The following cases involve government-caused delays and the outcomes of those cases.

Appeal of All State Boiler Work, Inc., 95-2 BCA 27831, VABCA No. 4537

In this case, the contractor, All State Boiler, Inc (All State), appealed the contracting officer’s decision denying its claim for unabsorbed home office overhead costs. The Veterans Administration (VA) awarded a contract to All State for boiler plant upgrades to the VA Medical Center in Northampton, Massachusetts. When asbestos was discovered at the job site, the government issued a stop-work order, and the contractor subsequently submitted a claim for additional costs, including home office overhead during the delay. The contracting officer allowed some parts of the claim but denied the rest, which included the claim for unabsorbed home office overhead. The contractor appealed and sought recovery of 58 days of unabsorbed home office overhead costs.

The Veterans Affairs Board of Contract Appeals (Board) determined that before the Eichleay formula could be used to compute unabsorbed home office overhead costs, the contractor must satisfy two prerequisites: (1) it must show that it was required to standby for the delay period; and (2) it was impractical for the contractor to take on additional jobs during the delay. The VA did not dispute the standby test had been satisfied but argued the contractor had to show that it was unable to take on additional work during the delay period. The Board disagreed, and found that such a requirement would:

“…impermissibly restrict the ability of Federal construction contractors to recover the costs of unabsorbed overhead expenses to which they are entitled under Federal contract law.”

To find otherwise would foreclose the use of the Eichleay formula, which the federal circuit courts and the Armed Services Board of Contract Appeals (ASBCA) had previously rejected. As a result, the Board found the contractor was entitled to judgment for its unabsorbed home office overhead costs.

 Interstate General Government Contractors, Inc. v. West, 12 F.3d 1053 (1993)

In this seminal case, the contractor, Interstate General Government Contractors, Inc. (IGGC), appealed the ASBCA decision denying its claim for unabsorbed home office overhead caused by the government delay in issuing a Notice to Proceed (NTP) on a contract to renovate the Pinwheel Barracks, at Hunter Army Airfield, Georgia. Referring to its decision in C.B.C ENTERPRISES, Inc. v. U.S., 978 F.2d 669 (Fed. Cir. 1992), the court acknowledged two requirements for the application of the Eichleay formula for recovering unabsorbed home office overhead, assuming a government-caused delay: (1) the contractor must be on standby, and (2) the contractor is unable to take on other work. The “standby” test focuses not on whether the contractor’s workforce was idle, but on suspension of work on the contract. The test simply requires the overhead is unabsorbed because performance has been suspended or significantly interrupted, and other contracts are unavailable when payment for the suspended contract would have supported the overhead:

“Suspension or delay of contract performance results in interruption or reduction of the contractor’s stream of income from direct costs incurred. Home office overhead costs continue to accrue during such periods, however, regardless of direct activity. Consequently, this decrease in direct costs necessary to support the continuing overhead creates unabsorbed overhead, unless home office workers are laid off or given additional work during such suspension or delay periods. Even then, fixed overhead costs usually remain.”

Unabsorbed overhead consists of time-sensitive indirect costs incurred during construction inactivity on a project, including accounting and payroll services, insurance, upper management salaries, heat, electricity, taxes, and depreciation. However, it is not enough to show the contractor was on standby. To establish entitlement to unabsorbed home office overhead, the contractor must also show the government-caused delay disrupted the relationship between the contractor’s revenue stream and its overhead costs.

Where a contractor is able to meet the original contract deadline or, as in IGGC finish early despite a government-caused delay, the originally bargained-for time period for absorbing home office overhead through contract performance payments has not been extended. In order to demonstrate the overhead has not been absorbed, the contractor must show:

“…the bargained for ratio of performance revenue to fixed overhead costs during the stipulated performance period, not just the delay period…has been adversely affected by the delay. This can only be established if such contractor shows that from the outset of the contract it: (1) intended to complete the contract early; (2) had the capability to do so; and (3) actually would have completed early but for the government’s actions.”

The court affirmed the ASBCA decision in this case because it found the IGGC’s evidence was insufficient to meet its burden of proving it incurred any unabsorbed overhead due to government delay. Unabsorbed overhead must be proven by the three-part test (as noted above). IGGC’s proof was legally lacking in all three of these elements.

 P.J. Dick, Inc. v. Principi, 324 F.3d 1364 (Fed. Cir. 2003)

In this case, the parties appealed the decision of the Veterans Affairs Board of Contract Appeals (VABCA)[1] who awarding damages for government delays arising from the construction of an addition to the Department of Veterans Affairs Medical Center in Ann Arbor, Michigan. During construction, the government issued over 400 change orders resulting in an increase of the contract price by over five percent, and caused the VA to add 107 days to the contract performance period. The VABCA granted the contractor a 260-day time extension but denied its request for unabsorbed home office overhead (Eichleay damages). The Circuit Court examined the requirements to show “standby”, which is established when the government has issued a written order suspending all contract work for an uncertain duration and requires the contractor to remain ready to resume work immediately, or on short notice. Where there is no written order, the contractor must show the following: (1) it must establish the government delay was substantial, and for an indefinite duration; (2) it must show during the delay it was required to be ready to resume the contract work at full speed, as well as immediately; and (3) it must show suspension of much, if not all of the contract work.

After reviewing precedent, the court determined the following rules for evaluating a claim for Eichleay damages:

“… a court … should ask the following questions: (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 (i.e., was the original time frame for completion extended or did the contractor satisfy the Interstate three-part test); (3) did the government CO 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 which 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; and (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. Only where the above exacting requirements can be satisfied will a contractor be entitled to Eichleay damages.”

The court determined the VABCA had correctly found that the contractor performed contract work during the delays and failed to prove that it was on “standby”, but the contractor was still entitled to recover home office overhead because the parties’ stipulation removed the need for the contractor to prove entitlement to those damages. This decision appears to be the most negative treatment of Interstate, supra.

Nicon, Inc. v. U.S., 331 F.3d 878 (Fed. Cir. 2003)

The contractor in this case appealed from the summary judgment granted by the U.S. Court of Federal Claims, which granted in favor of the government as the court determined the contractor could not recover unabsorbed home office overhead under Eichleay because the formula could not be applied where a contractor had not yet begun to perform. In that case, the contractor was awarded a contract by the U.S. Army Corps of Engineers (USACE) to repair a dormitory at MacDill Air Force Base, Florida. A protest was filed, and the government instructed the contractor to take no further action preparing submittals to the Resident Office. The bid protest was dismissed, but the government never directed the contractor to proceed with the contract, and it was eventually terminated for convenience.

After termination, the contractor submitted a settlement proposal including unabsorbed home office overhead for the time between contract award and termination. The contracting officer denied the contractor’s claim for $387,513 in unabsorbed home office overhead for the 288-day delay period. The contractor then filed suit, and on cross-motions, the court granted summary judgment in favor of the government, concluding that it could not apply the Eichleay formula as requested.

The Federal Circuit determined a contractor must meet strict prerequisites for application of the Eichleay formula. First, there must have been a government-caused delay of uncertain duration, citing to Interstate, supra. Second, the contractor must also show the delay extended the contract performance period, or that even the contract was finished within that period, the contractor incurred additional costs because he had planned to finish earlier, P.J.Dick, supra. Finally, the contractor must have been on “standby” and unable to take on other work during the delay period, Interstate, supra. If the contractor makes out a prima facie case, then the burden shifts to the government to show that either it was not impractical for the contractor to obtain replacement work during the delay, or the contractor’s inability to perform replacement work was caused by something other than government delay, Melka Marine, Inc. v. U.S., 187 F.3d 1375 (Fed. Cir. 1999), Nicon, at 883. The court wrestled with the idea that Eichleay could be applied to a contract that had not yet been performed.

“The Court of Federal Claims was therefore correct in concluding that the Eichleay formula is only applicable in situations in which contract performance has begun. However, that does not mean that a contractor, who is required to remain on standby because of a government-caused delay but is never allowed to begin performance, may not receive some unabsorbed home office overhead as part of its termination for convenience settlement by some other method of allocation. We have said a number of times in our cases that the Eichleay formula is the “only proper method of calculating unabsorbed home office overhead. No other formula may be used.” Wickham, 12 F.3d at 1575…”

Kudsk Construction, Inc. v. U.S., 144 Fed.Cl. 446 (2019)

In this case, the contractor filed a complaint seeking increased cost and unabsorbed home office overhead for the time when it was on “standby” during a bid protest. The contractor was awarded a contract by the U.S. Army Reserve Center to renovate six barracks in the Army Reserve Training Area. Approximately 10 days after award, the Army notified the contractor to suspend any work pending resolution of the protest. After the contract was complete, the contractor filed a certified claim, which was denied by the contracting officer, followed by a complaint. The government filed a motion to dismiss, which was denied by the court.

The court found the Federal Circuit’s most recent ruling on unabsorbed overhead, Nicon, provided binding precedent that must be applied. The three prerequisites are: (1) government delay of uncertain duration; (2) the delay extended the original performance period, or that even though the contract was finished with the contract performance period, the contractor incurred additional costs because he had planned to finish earlier; and (3) the contractor must have been on “standby”, and unable to take on any other work during the delay period. The court held that the contractor stated a claim for unabsorbed overhead.

JMR Construction Corp. v. U.S., 117 Fed.Cl. 436 (2014)

In this last case, the contractor filed a complaint seeking damages, for among other things, home office overhead. JMR Construction Corp (JMR) was awarded a contract by USACE to construct an aircraft maintenance facility at Nellis Air Force Base, Nevada. JMR faced numerous government-caused delays. On motions for summary judgment, the court stated the Eichleay formula requires contractors satisfy strict prerequisites. The first prerequisites requires a contractor must demonstrate there was a government-caused delay that was not excused by a concurrent contractor-caused delay, citing to P.J.Dick, supra. Second, the contractor must show it incurred additional overhead expenses either because the contract performance period was extended, or because the contractor would have finished early. Third, the contractor must establish it was on “standby” during the delay. The elements of “standby” are found in P.J.Dick, supra. If the contractor can make out a prima facie case of the “standby” elements, the burden shifts to the government to show that it was not impractical for the contractor to obtain replacement work or that the contractor’s inability to obtain replacement work was caused by another factor other than government delay. Idle workers are not necessary to demonstrate “standby”, citing to Interstate, supra, at 1057, although it would be evidence. It does require, however, that contractors show they were required to return to work with some urgency, citing to Mech-Con Corp. v. West, 61 F.3d 883 (Fed. Cir. 1995). JMR, at 445.

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1 In 2007, the VABCA was merged into the Civilian Board of Contract Appeals (CBCA)

About the AuthorWilliam Selinsky

With close to 40 years of legal expertise, William skillfully counsels clients through the complexities of government contracting and litigation with a wide breadth of legal knowledge in the both the private and public sectors.

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