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California Court Of Appeals Endorses The Eichleay Formula

Construction Delays and Damages

Most construction contracts include a provision that limits a contractor’s claim for delay damages to an extension of time for completion. A “no damage for delay” clause is intended to prevent a contractor from recovering additional costs resulting from owner caused delays in completing a project. Contractors have successfully challenged a “no damage for delay” clause where an owner knowingly provides misleading information during the bidding process, actively interferes with the contractor’s performance, or where a delay is so long that it constitutes an abandonment of the contract.

California Public Contract Code section 7102 permits a contractor to recover delay damages, provided the delay is unreasonable and not within the expectation of the parties. Furthermore, damages can be recovered even if a “no damage for delay” provision exists in a public agency contract. In Howard Contracting, Inc. v. McDonald Construction Co., Inc. and City of Los Angeles, a California appellate court held that a “no damage for delay” clause in a public works contract is invalid under Contract Code sec. 7102. The court also held that the contractor was entitled to compensation for the unabsorbed office overhead costs it incurred as a result of the owner caused delays.

 

The Eichleay Formula

The Eichleay formula has been adopted by Federal courts to determine a contractor’s recovery for office overhead costs incurred as a result of owner caused delays on Federal public works construction projects. When an owner delays or stops contract performance, the contractor’s stream of income and its direct costs for the project are reduced or interrupted. However, the contractor’s home office overhead operating costs continue to accrue until the project is completed. TheEichleay formula is commonly used to calculate a contractor’s compensable damages for office overhead costs due to owner caused project delays. Typically, the contractor must establish: (1) a government-caused delay; (2) that the contractor was on “standby” during the delay; and (3) that the contractor was unable to take on other work.

The three steps in calculating extended overhead damages using the Eichleay formula are: (1) determine the allocable contract overhead by multiplying the contractor’s total overhead cost incurred during the contract period by the ratio of billings from the delayed contract to total billings of the firm during the contract period; (2) get the daily contract overhead rate by dividing allocable contract overhead by the number of days of contract performance; and (3) determine the amount recoverable by multiplying the daily contract overhead rate by the number of days attributable to owner caused delays.

 

The JMR Construction Corp. Decision

There has been considerable debate about the application of the Eichleay formula in construction disputes in California courts. JMR Construction Corp. v. Environmental Assessment and Remediation Management Inc., decided by the California appellate court on December 30, 2015, is the first reported decision that holds that the Eichleay formula may be used to determine delay damages in construction disputes decided under California law. In that case, JMR Construction Corporation, the general contractor, sued its subcontractors alleging damages due to delays they caused in a Federal public works project. At trial, JMR provided documents and testimony from its project supervisors and experts that established the subcontractors’ responsibility for specific project delays due to inadequate staffing and supervision, deficient and late submittals, improper work and other issues. The evidence included e-mails JMR sent to its subcontractors during that project pointing out specific instances of delays and other problems with their work.

JMR’s experts used the Eichleay formula to establish JMR’s damages for home office overhead costs caused by the subcontractors’ delays. JMR also showed that it was unable to obtain replacement work during any period when work was stopped. The JMR Construction Corp. decision notes that delay damages are a common element of damages recoverable due to breach of a construction contract, and that the Eichleay formula is frequently used in California trial courts and arbitration proceedings to establish home office overhead damages.

 

Conclusion

Nothing in the JMR Construction Corp. decision suggests that its holding is limited to Federal public works projects. Thus, it appears that a prime contractor or subcontractor claiming delay damages against other participants in a California public works construction project will be able to use the Eichleay formula to establish home office overhead damages. However, depending on the circumstances, such damages may be precluded where a no damage for delay provision is included in a prime contract or subcontract for a private construction project.

 

Anthony P. Fritz is an attorney with Herrig & Vogt, LLP in Granite Bay, California, where he handles complex construction litigation.

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