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, unfunded expenses start mounting the moment work is halted.”

TUSCALOOSA, AL (PRWEB) NOVEMBER 24, 2009 – According to construction claims expert, Glen L. 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, unfunded 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 amicable 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 and suspension, the Eichleay Formula.

“The problem,” said Eaton, “is that the Eichleay formula calculates overhead expenses as a percentage; the 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 the suspension of 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 is then left in the position of continuing to fund the home office – without the benefit of the project’s cash flow! Yet it’s still bound legally and financially to the government’s suspended contract. With the contractor’s assets and credit tied up in material purchase agreements, subcontracts, bond obligations, and equipment rental commitments, many times no “substitute work” can be undertaken … even if it could be found and acquired.

Source: Eichleay Formula Loophole Could Cost Government Contractors Hundreds of Thousands