Eichleay Formula Loophole Could Cost Government Contractors Hundreds of Thousands

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The Eichleay formula helps contractors recoup additional costs caused by government delays. Construction claims expert Glen Eaton reveals a big loophole in the rules, however, that occurs between contract award and actual work beginning that could end up costing contractors hundreds of thousands of dollars in home office overhead expenses.

"When the government decides to put a contracted construction project on hold, contractors incur expenses while they wait," said Eaton. "From equipment rental to home office overhead costs, expenses start mounting the moment work is halted."

According to construction claims expert, Glen Eaton, a formula that has long been the standard for calculating costs incurred by contractors due to government delays has a major loophole that could end up costing government contractors hundreds of thousands of dollars.

"When the government decides to put a contracted construction project on hold, contractors incur expenses while they wait," said Eaton. "From equipment rental to home office overhead costs, expenses start mounting the moment work is halted."

When such a delay occurs, the standard procedure is for the contractor and the government to come to an amiable agreement – a contract price adjustment – based on the additional overhead expenses that the delay causes. Legal precedent has established a formula for calculating the amount due a contractor for home office overhead during such a delay, the Eichleay Formula.

"The problem," said Eaton, "is that the Eichleay formula calculates overhead expenses as a percentage as a ratio of the delayed contract's billings to the billings of the entire business. Billings, of course, consist predominantly of direct field costs. In some cases, the government will order a delay on a project that has just been awarded – before any field expenses have accrued."

Under this circumstance, the Eichleay formula will produce a result of zero. The contractor, however, is often in the position of continuing to fund the home office and is bound legally and financially to the government's delayed contract. With the contractor's assets and credit bound up in sub-contracts, bond obligations, and rentals, many times no other work can be undertaken.

"So, even though the government assumes that no costs are accruing because no equipment or labor is being expended on the contract, the contractor is unable to pursue other work and is accruing home office expenses every day," said Eaton.

The question becomes: why haven't the courts addressed this serious loophole? The answer, according to Eaton, a consultant and former government contractor with over 40 years experience, is that the current system is too difficult and expensive to navigate, often contradictory, and seems at times to have no regard for legal precedent.

"This coupled with contractors' limited ability to continue fighting legal battles that are ultimately costing them more than they stand to gain from a victory has lead to a number of unresolved cases that were either settled out of court or simply disappeared with the contractor cutting his losses," said Eaton.

Eaton believes that the Eichleay formula loophole requires more attention from the construction industry, legal experts, and government contracting officers. To help begin a dialog on the subject, Eaton is encouraging comments and debate about his white paper on the Eichleay formula loophole, which it is feely available at his website, http://www.constructionclaimsexpert.com/eichleay.

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