Law of Numbers: Introduction to the Eichleay Formula

Spend enough time in federal contracting, and you’re bound to hear about the Eichleay Formula. Given its regal name, the Eichleay Formula sounds like the government contracting analog to the Theory of Relatively. It’s not. Eichleay is simply a damages formula with a specific application—calculating overhead expenses at a home office during government caused delays.

What is the Eichleay Formula?

The Eichleay Formula is a unique method for calculating delay damages resulting from overhead costs incurred by a construction company for its home office operations. Examples of these costs include payroll services, insurance, utilities, taxes, etc.

Given that overhead costs are incurred to manage all projects, calculating the costs attributable only to the delayed job can be challenging. The Eichleay Formula provides the solution. It allocates a proportionate amount of the total overhead costs to the delayed project.

The formula is named for the case Eichleay Corp., ASBCA No. 5183, 60-2 BCA ¶ 2,688.

What makes the Eichleay Formula unique?

According to the Armed Services Board of Contract Appeals, “[t]he Eichleay formula is an extraordinary remedy with strict prerequisites.” Extraordinary? Sounds great! But the ASBCA just means unusual. This is because the Eichleay Formula applies only where the government has delayed performance but requires the contractor to remain available to resume performance at a moment’s notice. This is a very specific set of circumstances.

The Court of Federal Claims has reduced the prototypical Eichleay fact pattern to a three-element test.

1. The government delayed the contractor.
2. The government required the contractor to remain on standby during the delay to immediately resume work.
3. The contractor was unable to obtain other work because it was on standby.

All three elements must be present to a contractor to recover damages using the Eichleay formula. If any factor is not present, recovery using the Eichleay formula will not be an option.

What contracts apply the Eichleay Formula?

The Eichleay Formula is typically applied to construction contracts. In fact, the Civilian Board of Contract Appeals has expressed doubt about the application of the Eichleay Formula outside of the construction context.

How are damages calculated under the Eichleay Formula?

Calculating damages using the Eichleay Formula requires a contractor to go through several steps. Given the number of steps, the Eichleay Formula looks daunting. It’s not.

In practice, it’s simply a matter of calculating what the daily rate for overhead allocable to the contract. There’s three steps. Those of you who are math squeamish may want to look away.

First, the Allocable Contract Overhead is calculated using the following formula:

Contract Billings / Total Billings x Total Overhead = Allocable Contract Overhead

Note: Total Billings and Total Overhead should be for the same period as contract performance.

Second, the Allocable Contract Overhead is divided by days to arrive at a daily rate for overhead expenses on the contract. That is calculated using the following formula:

Allocable Overhead / Days of Performance = Daily Contract Overhead

Third, having calculated the Daily Contract Overhead rate, it’s time to multiply that by the days of delays to arrive at damages. That’s calculated with the following formula.

Daily Contract Overhead x Days of Delay = Damages

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Ultimately, the Eichleay Formula is tool for a particular job. It calculates home office overhead damages associated with government caused delays. No advanced degree required.