Present: All the Justices
FAIRFAX COUNTY REDEVELOPMENT AND
HOUSING AUTHORITY
OPINION BY
v. Record No. 980731 JUSTICE LAWRENCE L. KOONTZ, JR.
February 26, 1999
WORCESTER BROTHERS COMPANY, INC.
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
Arthur B. Vieregg, Jr., Judge
In this appeal, we consider whether the trial court’s award
of unabsorbed home office expenses to the contractor on a public
construction project following an unreasonable delay by the
contracting government agency was based upon sufficient proof of
the existence and amount of those damages.
BACKGROUND
Under well established principles, we recount only those
facts relevant to our resolution of the appeal. On September
14, 1995, the Fairfax County Redevelopment and Housing Authority
(the Authority) entered into a contract with Worcester Brothers
Company, Inc. (Worcester Brothers), a general construction
contractor, for site renovations and improvements of Washington
Plaza in Lake Anne Village (the project) in Reston.
The Authority had originally solicited bids for the project
based on a projected start date in July 1995, with completion of
the work in 150 calendar days from the notice to proceed. Thus,
the proposed date of substantial completion at the time bids
were solicited was mid-December 1995. Worcester Brothers based
its bid on these conditions. However, because the Authority did
not award the contract to Worcester Brothers until September 14,
1995, the substantial completion date for the project was moved
back to mid-February 1996.
It is not disputed that at the time Worcester Brothers
commenced work on the project, the Authority had not yet
obtained the necessary clearances from an adjoining property
owner to allow work to proceed on a portion of the project site.
The Authority did not obtain the clearances until March 6, 1996.
After the work was completed, Worcester Brothers filed
notice of potential change #15 (NPC 15) with the Authority’s
architect seeking additional payment for field office expenses
incurred on the job site due to the Authority’s delay in
obtaining the clearances. Worcester Brothers also claimed it
had unabsorbed home office expenses attributable to the delay.
In NPC 15, Worcester Brothers calculated its additional field
office expenses based upon its daily field office overhead rate
multiplied by the 98 days of delay it attributed to the
Authority. 1 To calculate its unabsorbed home office expenses,
1
This figure was later revised to represent the actual costs
Worcester Brothers incurred in maintaining its workforce on the
project site during the delay period.
2
Worcester Brothers used the so-called “Eichleay formula,” 2 to
determine a daily home office overhead rate and multiplied that
rate by the same 98 days of delay. The architect, acting on
behalf of the Authority, denied the claims made in NPC 15.
On November 4, 1996, Worcester Brothers filed a motion for
judgment against the Authority seeking damages for breach of
contract based upon the failure to pay NPC 15. 3 The Authority
filed an answer denying the allegations of the motion for
judgment and raising as an affirmative defense the claim that
“[h]ome office damages based on the Eichleay formula are
prohibited by Virginia law.”
At trial, Worcester Brothers contended that during the
delay it incurred both additional field office expenses as a
result of having to maintain its personnel at the job site and
unabsorbed home office expenses. It presented evidence of its
actual field office expenses related to the delay in the amount
2
The Eichleay formula is “the prevailing method” used for
calculating a contractor’s home office expenses attributable to
a government-caused delay on a federal contract. Capital
Electric Company v. United States, 729 F.2d 743, 744 (Fed. Cir.
1984).
3
Worcester Brothers also claimed damages resulting from the
cost of snow removal and protecting its equipment from winter
weather as a result of the delay in awarding the contract. The
trial court dismissed this claim, and Worcester Brothers has not
assigned cross-error challenging that ruling.
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of $46,359.11. Worcester Brothers’ accounting system did not
allocate its home office expenses to particular contracts.
However, Joseph P. Noonan, Worcester Brothers’ president,
testified that the unabsorbed home office expenses attributable
to the delay amounted to $34,495.89. According to Noonan, that
figure was calculated from statements prepared by Worcester
Brothers’ accountants reflecting the total general and
administrative expenses of the company during the relevant
contract period and the application of the Eichleay formula to
those expenses.
The Authority asserted numerous objections to Worcester
Brothers’ evidence of damages. Pertinent to the issue presented
on appeal, the Authority contended that Worcester Brothers had
proven no actual damages as a result of the delay. It contended
that the Eichleay formula calculation did not constitute proof
of actual damages to a reasonable degree of certainty, but,
rather, is merely a method for determining the amount of
unabsorbed home office expenses attributable to a particular
contract once the existence of such damages has been proven by
other evidence. The Authority contended that Worcester Brothers
had not shown that its workforce was actually idle as a result
of the delay in obtaining the clearances and, thus, that none of
its home office expenses was incurred as a result of the delay.
Moreover, the Authority contended that the Eichleay formula was
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“totally and wholly irrelevant” to “a contract governed by state
law.”
At the conclusion of the evidence, the trial court
addressed the Authority’s contentions and reasoned that in order
to succeed on a breach of contract damage claim for unabsorbed
home office expenses resulting from a delay, the contractor was
first required to show that it had incurred such damages by
establishing that the government had caused the delay; that the
contractor’s workforce was placed on standby as a result; and
that the contractor was not free to engage in work on other
projects during the delay. The trial court then found that the
Authority’s delay was “manifest on this record” and was
“egregious” and “frankly inexcusable.” The trial court further
found that Worcester Brothers’ workforce had been on “standby”
because the Authority “never could advise the contractor that
the area would not be available until a particular date.
Instead it was a rolling deadline.” Finally, the trial court
found that the “rolling deadline” also inhibited Worcester
Brothers from seeking other contracts, and thereby minimizing
the damage caused by the delay, since it could not be assured of
the availability of its workforce for another project.
Having found that Worcester Brothers had satisfied its
initial “burden of proving [home office] damages with reasonable
certainty,” the trial court turned to the question whether the
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Eichleay formula could be used to calculate the amount of those
damages. Recognizing that other courts had found the Eichleay
formula to be “a fair way of approximating” such damages, the
trial court noted that after auditing Worcester Brothers’ books,
the Authority did not contend that any of the specific expenses
were inappropriately claimed and that the Authority’s witnesses
failed “to present any reasoned analysis of why Eichleay is
inappropriate.” Accordingly, the trial court entered judgment
for Worcester Brothers for both the field office expenses
($46,359.11) and the unabsorbed home office expenses as
calculated by the Eichleay formula ($34,495.89). The trial
court granted the Authority’s motion to reconsider, and, after
receiving briefs from the parties, sustained its original
ruling. We awarded the Authority this appeal.
DISCUSSION
The Authority does not challenge the trial court’s
determination that the Authority was liable for damages caused
by the delay. Nor does the Authority challenge that portion of
the judgment attributable to field office expenses.
Accordingly, our discussion is necessarily limited to a
determination of whether, as specified by the Authority’s
assignment of error, “[t]he trial court erred in finding that a
contractor had proved its home office damages with reasonable
certainty.” (Emphasis added.) We agree with the trial court’s
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reasoning that the resolution of this issue requires that we
first consider whether Worcester Brothers established that it
suffered damages in the form of unabsorbed home office expenses
attributable to the Authority’s delay, and, if so, whether there
was adequate proof of the amount of those damages.
Home office expenses, commonly called overhead, include
those costs that a contractor must expend for the benefit of its
business as a whole. These expenses include, for example, the
salaries of office staff, accounting expenses, dues and
subscriptions, equipment costs, and utility services.
Unabsorbed home office expenses comprise “those overhead costs
needlessly consumed by a partially or totally idle contractor.
A contractor continues to incur overhead costs during periods of
reduced activity or delay on a particular contract. When this
occurs, the ‘reduced activity’ contract no longer ‘absorbs’ its
share of overhead costs.” Michael W. Kauffman and Craig A.
Holman, The Eichleay Formula: A Resilient Means for Recovering
Unabsorbed Overhead, 24 Pub. Contr. L.J. 319, 321
(1995)(footnotes omitted).
When a breach by one party imposes a delay on the ability
of the other party to perform its obligations under a contract,
“the damages are to be measured by the direct cost of all labor
and material . . . plus fair and reasonable overhead expenses
properly chargeable . . . during the reasonable time required”
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to complete performance. E.I. duPont deNemours & Co. v.
Universal Moulded Prod., 191 Va. 525, 581, 62 S.E.2d 233, 259
(1950)(emphasis added). In such cases, while the plaintiff must
prove its damages with reasonable certainty, “‘[a]n absolute
certainty as to the amount of the damages is not essential when
the existence of a loss has been established. The quantum may
be fixed when the facts and circumstances are such as to permit
. . . an intelligent and probable estimate thereof.’” Pebble
Building Co. v. G.J. Hopkins, Inc., 223 Va. 188, 191, 288 S.E.2d
437, 438 (1982)(citation omitted).
We recognize that not every instance of a delay caused by
the other party to a contract will result in a contractor
incurring either direct or overhead damages. However, where the
evidence shows that a contractor has incurred direct damages as
a result of the delay such as additional cost of labor and
material, the question whether the contractor also suffered
unabsorbed overhead damages necessarily must be determined from
the facts and circumstances of the individual case. It is not
necessary for the contractor to show that its overhead was
increased as a result of the delay, but only that it could not
otherwise reasonably recoup its pro rata home office expenses
incurred while its workforce was idled by the delay.
Here, the evidence showed that Worcester Brothers incurred
actual direct damages as a result of having to maintain its
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personnel on the job site far beyond the anticipated date of
substantial completion. The record supports the trial court’s
finding that the Authority was responsible for a delay that
caused Worcester Brothers’ workforce to be “on standby” and this
further prohibited Worcester Brothers from recouping its
unabsorbed home office expenses by seeking other contracts
during the delay period. Accordingly, we agree with the trial
court’s ruling that Worcester Brothers met its burden of proof
with respect to the existence of unabsorbed home office expenses
attributable to the Authority’s delay.
The Authority contends, however, that even if Worcester
Brothers proved that it incurred unabsorbed home office expenses
as a result of the Authority’s delay, the trial court erred in
accepting the Eichleay formula as the method for determining the
amount of these expenses. The Authority asserts that the
contract provides that disputes between the parties will be
governed by Virginia law and, since no legislative act,
administrative rule, or case law in Virginia has “adopt[ed] the
use of the Eichleay formula in claims against public bodies in
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Virginia,” the use of the formula “was not within the parties’
contemplation at the time the contract was executed.” 4
The Authority is correct in noting that use of the Eichleay
formula has not been previously approved in this Commonwealth by
legislative or administrative act, nor has its use been
addressed in a published appellate court decision relating to a
public contract. However, we are not persuaded by the
Authority’s contention that a lack of prior authoritative
application of the Eichleay formula to a Virginia public
contract prevents its application in this instance. The
Eichleay formula is not a legal standard that must be formally
approved or adopted; rather, it is merely a mathematical method
of prorating a contractor’s total overhead expenses for a
particular contract. 5 As such, the question before the trial
4
On brief, the Authority asserts that certain items were
improperly included in the overhead expenses used by Worcester
Brothers in calculating its damages. At trial, the Authority
did not object to the introduction of the accounting records on
this ground. Accordingly, that issue is not before us. Rule
5:25. We also reject the Authority’s contention that the
contract provision for a 15% mark-up for “changes in the work”
should be applied to field office damages to determine a
liquidated award of home office expenses. Assuming that this
argument can be subsumed within the assignment of error, we are
not persuaded that the 15% mark-up applies to an award of
damages for delay.
5
To make that proration, the total amount billed on the
particular contract by the contractor (Bc) is divided by the
10
court was not whether, in the absence of an express term, the
parties contemplated using the Eichleay formula, or any other
method of calculating unabsorbed overhead damages, but whether
the resulting quantum was “an intelligent and probable estimate”
of the actual damages. Pebble, 223 Va. at 191, 228 S.E.2d at
438.
As an abstract proposition, the Eichleay formula has been
criticized as an inadequate substitute for direct evidence of
the actual amount of damages and “no less speculative” than
other unsupported opinion evidence simply “because it was cast
in a mathematical milieu.” Berley Indus., Inc. v. City of New
York, 385 N.E.2d 281, 283 (N.Y. 1978). In Berley, the New York
contractor’s total billings during the contract period (Bt) and
this quotient is then multiplied by the contractor’s home office
expenses attributable to the contract period (Ht) to determine
the amount of home office expenses allocable to the contract.
Next, the amount of home office expenses allocable to the
contract is divided by the total number of days of the
contractor’s performance under the contract (Dt) to determine a
daily contract home office expense rate. Finally, the daily
contract home office expense rate is multiplied by the number of
days of delay (Dd) to determine the amount of damages (A). See
Capital Electric, 729 F.2d at 747. This method of proration is
the Eichleay formula in its most basic application, and may be
stated mathematically in this way:
BcB
⎯ × Ht
BtB
⎯⎯⎯⎯ × Dd = A
Dt
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Court of Appeals rejected the use of the Eichleay formula as an
“administrative convenience,” where there was no supporting
evidence that any of the home office expenses were attributable
to the delay. Id.
Distinguishing Berley, the Florida District Court of
Appeals held that use of the Eichleay formula for calculating
unabsorbed home office expenses attributable to a delay is
proper so long as there is competent evidence of actual damage
having been sustained by the party seeking relief. Broward
County v. Russell, Inc., 589 So.2d 983, 984 (Fla. Dist. Ct. App.
1991). Similarly, other jurisdictions have held that where
there is sufficient proof that the plaintiff has suffered
damages as a result of the delay, the Eichleay formula affords a
reasonable basis for estimating the amount of those damages with
respect to unabsorbed home office expenses. See, e.g., Conti
Corp. v. Ohio Dept. of Admin. Serv’s, 629 N.E.2d 1073, 1077
(Ohio Ct. App. 1993); Golf Landscaping, Inc. v. Century Const.
Co., 696 P.2d 590, 593 (Wash. Ct. App. 1984).
We are of opinion that the rationale of the latter cases is
in accord with the general principles of law applicable to
proving damages for delay as outlined in the duPont and Pebble,
cases. Accordingly, where, as here, there is evidence that a
contractor has suffered actual damages as a result of an
unreasonable owner-caused delay, the Eichleay formula is an
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acceptable method, though not the only possible method, of
calculating the portion of home office expenses attributable to
delay. Cf. Southern New England Contracting Co. v. State, 345
A.2d. 550, 559-60 (Conn. 1974); PDM Plumbing & Heating, Inc. v.
Findlen, 431 N.E.2d 594, 595 (Mass. Ct. App. 1982).
In recognizing the adequacy of the evidence in this case to
support the use of the Eichleay formula to determine unabsorbed
overhead damages for the delay in this contract, we do not adopt
it as the standard for determining such damages generally.
Rather, as with any fact-specific question, the individual
circumstances of a given case will determine whether “an
intelligent and probable estimate” of such damages has been
proven. Pebble, 223 Va. at 191, 228 S.E.2d at 438.
CONCLUSION
For the reasons stated above, we will affirm the judgment
of the trial court.
Affirmed.
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