Unabsorbed Overhead and the Eichleay Formula

One of the less understood elements in construction damage claims is the home office expense that is incurred when a project is delayed. In compensable delay cases, there is no doubt that home office overhead is a legitimate expense of the contractor. However, the methodology for the calculation of the expense incurred has been widely debated as well as the circumstances under which the methodology should be applied. The Eichleay formula was born in 1960, and has come a long way over the past 40 years in its use and application. Court and board decisions have shaped the prerequisite criteria for its application and made it what it is today. This paper provides the background concept of compensable damage due to project delay, the effects of delay on home office overhead, the Eichleay formula evolution, precedence for prerequisite criteria for the formulas’ application, and other formulas and methods that have evolved and been used. A “Direct Method” is proposed by the authors, which is straightforward and simple to apply. In the final analysis, obtaining a 100% accurate estimate of home office expenses is practically onerous. Therefore, representative formulas and techniques are used to arrive at a reasonable value for the unabsorbed overhead.