By Jessica C. Engler

Delays are an unfortunate, but common occurrence on construction projects. These delays are sometimes caused by the project’s owner through change orders, delays in providing equipment and materials, slow response to requests for information, etc. When these delays occur, contractors will often request adjustments to the contract to account for the delay.

A major expense that certain contractors—particularly those performing government contracts—can recover as a portion of the contract price is home office overhead. Home office overhead includes expenses like home office staff, home office utilities, rent, supplies, advertising, legal and accounting expenses, insurance, and other general home office expenses that cannot be traced to or attributed specifically to one construction project. When a project is extended without an adjustment to the contract price, the contractor’s income stream for that project can be interrupted, which affects home office overhead—particularly if the contractor is not working on another project during the delay. Consequently, a reallocation of home office overhead may be needed, and different methods have emerged for approximating that reallocation.

One commonly used formulas for allocating home office expenses in cases involving a government owner is the Eichleay formula, which was established by a decision of the Armed Services Board of Contract Appeals in Eichleay Corporation, ASBCA No. 5138, 60-2 BCA 2688 (1960), aff’d on recon., 61-1 BCA 2894. Stated generally, the Eichleay formula “computes that daily amount of overhead that the contractor would have charged to the contract had there been no delay, and gives the contractor this amount of overhead each day of delay that has occurred during performance.” [1]

In limited cases, Louisiana courts have applied Eichleay when awarding a contractor delay damages. Louisiana courts apply a three-prong test to determine if a claimant is entitled to recover extended home office overhead damages, comprising:

  1. The contractor must demonstrate that there was a government-caused delay not excused by a concurrent contractor-caused delay;
  2. The contractor must show that it incurred additional overhead expenses; and
  3. The contractor must have been required to remain “on standby” for the duration of the delay. [2]

To be considered “on standby” under this test, the contractor must show: (1) the delay was of indefinite duration; (2) the contractor was required to return to work at fully speed and immediately during the delay; and (3) most, if not all, of the contract work was suspended. [3]

The U.S. District Court for the Eastern District of Louisiana recently evaluated the meaning of “on standby” in determining whether a contractor was entitled to extended home office overhead. [4] Team Contractors, LLC v. Waypoint NOLA, LLC involved the development and construction of a hotel in downtown New Orleans, Louisiana (the “Project”). Team Contractors, LLC (“Team”) contracted with Waypoint NOLA, LLC (“Waypoint), the Project’s owner, to construct and/or renovate seven building floors. Waypoint also contracted with HC Architecture, Inc. (“HCA”), wherein HCA would serve as the Project’s architect and provide “all normal Architectural, Civil, Structural, and [mechanical, electrical, and plumbing] engineering services.” HCA subcontracted the mechanical, electrical, and plumbing (“MEP”) design work to KLG, LLC.

HCA delivered a complete set of specifications, including KLG’s MEP plans, to Team. Sometime after construction began, numerous components of KLG’s MEP design were determined to be noncompliant with New Orleans code requirements. Consequently, Waypoint issued several construction change directives, under which Team had to remove the faulty systems and rebuild the revised MEP systems before continuing its scheduled work.

Team filed suit, alleging breach of contract by Waypoint and negligence by Waypoint, HCA, and KLG. Team claimed that it incurred damages in the form of additional subcontractor work, hourly labor, increased supervision, and other recurring expenses, which extended its obligations and delayed the Project’s completion date. Among other damages, Team’s expert opined that Team suffered extended home overhead damages from the delay, with those damages calculated using the Eichleay formula.

The Defendants sought summary judgment that Team was not entitled to recover damages for extended home office overhead under Eichleay because there was no stoppage or suspension of the work. In response, Team presented evidence of and argued that there was a functional stoppage of “all or most of the work performed” pursuant to the contract, at least some of which was the result of construction change directives. For example, Team presented deposition testimony that the work was not advancing beyond minor, insignificant tasks.

The Eastern District Court evaluated Louisiana courts’ application of Eichleay, which it found has been “seemingly adopted . . . from federal courts without alteration.” Accordingly, the Court could rely on federal analyses of the issues. Federal courts have previously held that a total work stoppage is not required to recover extended overhead damages, so a contractor’s performance of minor tasks during the suspension does not bar recovery under Eichleay. The Court agreed that it was sufficient (for the purposes of Eichleay) for a contractor to demonstrate the work had “stopped or significantly slowed.” Therefore, to the extent it can prove it incurred delay-related damages and that those damages relate to the MEP errors, Team is not barred from recovering extended overhead damages under Eichleay.

This case is important for contractors, who often continue to perform some routine tasks or minor, minimal activities during a work delay. Under Team, continuing to perform work in some minor contexts, determined on a case-by-case basis, may not disqualify a contractor from being able to recoup delay-related damages. This case is also interesting because the suit was between private parties. Typically, the Eichleay formula is used in the context of government contracts. While the Eastern District did not make a specific ruling on the appropriateness of the Eichleay formula between private parties, this case leaves open the possibility that Eichleay could see more use in private contract disputes.

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[1] Id. (citing Bert K. Robinson, Construction Law: Elements of Contractor’s Damages, 38 La. B. J. 247, 248 (1990)).

[2] Gilchrist Const. Co., LLC v. State, Dep’t of Transp. & Dev., 2013-2101 (La. App. 1 Cir. 3/9/15), 166 So. 3d 1045, 1065.

[3] Id.

[4] CA-No. 16-1131, 2017 WL 4368084 (E.D. La. Oct. 2, 2017).