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Unabsorbed Overhead

Unabsorbed Overhead/Eichleay

RECOVERY OF UNABSORBED OVERHEAD

When the government, by direction or constructively, causes a delay in the completion of the contract, a contractor may be entitled to recover certain continuing overhead costs. Unabsorbed overhead costs are indirect costs which would have been absorbed by the contract but for delay. When work under a contract is suspended, the other contracts have to absorb additional indirect costs, but a contractor has no way of recovering the increased costs under other fixed price contracts. Consequently, the contractor must change its method of allocation in order to fully recover overhead which would have been absorbed by the contract.

The Eichleay formula used to calculate unabsorbed overhead has been generally accepted by the boards and courts for many years, but has been modified to a certain extent by case law. In fact, Wickham Contracting Co., Inc v. Fischer, 12 F.3d 1574, 1580 (Fed.Cir.1994) held the Eichleay formula is the exclusive means available for calculating unabsorbed overhead applicable to the delayed contract. Based on the most recent interpretation, the use of the method requires the contractor to be on “standby”, which has been defined in a couple of cases. The most recent relevant court decision established four conditions that satisfy the requirement that the contractor has been put on standby for purposes of using the Eichleay formula to recover unabsorbed overhead:

(1) the contracting officer issued an order suspending all of the work for an uncertain duration with no time for remobilization;

(2) absent a direct suspension order, the contractor must show the delay was both substantial and of uncertain duration;

(3) during the delay, the contractor must have been ready to resume work at full speed without time to “remobilize”; and

(4) the contractor must show that much, if not all, of the work was suspended P.J. Dick v. Principi, 324 F.3d 1364, 1350. (Fed. Cir. 2003)

CECA has extensive experience in collecting Eichleay damages for contractors. If you think you may have a situation that may involve a suspension or delay, we will be happy to assist you.