RECOVERY OF UNABSORBED OVERHEAD

When the government, by direction or constructively, causes a delay in the completion of a 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 the delay.  When work under a contract is suspended, the other contracts held by a firm 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 delayed 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 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)

Kendall – Dinielli consultants have 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.

A Kendall – Dinielli principal was directly involved with a case-law shown below:
http://www.leagle.com/decision/20031209331F3d878_11125

Nicon, Inc. v. United States, 331 F.3d 878, (Fed. Cir. 2003)

This decision affects contractors that incur unabsorbed overhead costs during a period of delay prior to the government's issuance of the notice to proceed and the termination for convenience of the contract before any contract revenues have been received. This case is particularly useful for contractors that are terminated for convenience after a lengthy bid protest that results in a termination for convenience. This case has gained attention in various publications and has already been cited in new decisions.

Previously, there was no case law which allowed the modification of the Eichleay formula to allow for the recovery of unabsorbed overhead. While the decision in Nicon's case does not allow for the modification of the Eichleay formula, it does allow for another reasonable method of allocation to be used.

In this case, the United States Court of Appeals for the Federal Circuit remanded a previous decision on a case heard by the Court of Federal Claims, which denied the recovery of unabsorbed overhead for Nicon, Inc. in its termination settlement proposal. The unabsorbed overhead costs proposed by Nicon in its termination settlement proposal were to compensate it for the government's delay in issuing the notice to proceed. The facts of the case follow:

On March 30, 1998, Nicon was awarded a contract by the U.S. Army Corps of Engineers, Mobile District, to repair Dorm 371 at Mac Dill Air Force Base in Florida. A bid protest was filed by an unsuccessful bidder on April 3, 1998. The bid protest was dismissed on July 15, 1998; however, the Corps of Engineers never did issue a notice to proceed. Notwithstanding, Nicon's repeated requests for the government to issue the notice to proceed fell on deaf ears until finally the government terminated the contract for convenience on January 12, 1999 - 288 days after the contract was awarded.

Our principal prepared a termination settlement proposal for Nicon, which included direct costs incurred and unabsorbed overhead costs for the period the contract was delayed. The Defense Contract Audit Agency (DCAA) audited Nicon's termination settlement proposal and issued a report questioning the unabsorbed overhead costs in total. Our principal assisted Nicon throughout the DCAA audit and prepared a response to the DCAA audit report. The result of that response led the government and Nicon to negotiate a settlement regarding the direct costs in the amount of $184,757 (including related G&A and profit), but denied Nicon the recovery of its unabsorbed overhead costs. Nicon's unabsorbed overhead costs were calculated using a modified version of the Eichleay formula. Because the contract was terminated 291 days after the contract award, and the original contract performance period was 270 days, Nicon's Eichleay formula estimated the contract billings at the full contract amount, since, theoretically, the entire contract period was taken up by the delay.

The government did not agree that the contract amount should be used as the contract billings in the Eichleay formula. The government's position was that since the notice to proceed had never been issued, no partial or progress payments were made to Nicon and the contract billings amount to be used in the formula should be zero. Inserting zero into the formula resulted in zero recovery. Nicon disagreed and filed a suit in the Court of Federal Claims seeking to recover its unabsorbed overhead costs in its termination settlement proposal.

The Court of Federal Claims initially held "that Nicon could not recover damages for unabsorbed home office overhead under the Eichleay formula because the formula could not be modified to fit a fact situation where the contractor has not yet begun to perform." Nicon, Inc. v. United States, No. 99-98-982C (Fed. Cl. Dec. 21, 2001).

Nicon appealed. In the June 10, 2003 decision of the Court of Appeals for the Federal Circuit, the court concluded "that the Eichleay formula as set forth in our precedent is the exclusive formula for the calculation of damages for unabsorbed overhead due to a period of government-caused delay in which contract performance has begun…However, in situations in which contract performance has not yet begun, but the government terminates the contract for convenience after a period of delay, the contractor is not left without a remedy. The contractor may recover unabsorbed overhead costs as part of its termination for convenience settlement proposal if a reasonable method of allocation can be determined on the facts of the case and the contractor can otherwise satisfy the strict prerequisites for recovery of unabsorbed overhead costs."