PA Board of Claims Accepts Eichleay Damages Calculation for Home Office Overhead

Nello Construction Co. v. Commwth of PA, Dept of General Services
(Commonwealth of Pennsylvania, Board of Claims, March 20, 2006)

Nello brought claims against the Department of General Services (“DGS”), arising from a contract entered into by Plaintiff and DGS on June 7, 2001, for the construction of a visitors’ center, museum, parking lot and other attendant facilities to be built in Beaver County, PA on behalf of the Pennsylvania Historical and Museum Commission. The initial value of the Contract was $ 2,433,000.00 and, with a contractually mandated duration of 335 days from the initial job conference within which to complete the work, the contemplated contract completion date was May 29, 2002. Because of various delays, final inspection on the project did not occur until January 30, 2003, 246 days past the contemplated contract completion date. Plaintiff requested damages of $ 462,010.48 for costs and expenses resulting from construction delays caused by Defendant’s actions and inactions.

Plaintiff asserted the following construction delays for which Defendant was liable: (1) delays caused by a change order issued by Defendant shortly after work on the project commenced, which required the installation of a redesigned HVAC system requested by the Pennsylvania Historical and Museum Commission; (2) delays caused by Defendant’s failure to promptly issue a change order to allow the excavation of a large portion of the work site in order to remove unsuitable, subsurface soil material and to refill the excavated areas with more stable material; (3) delays caused by Defendant’s decision to redesign a part of the building foundation, in order to avoid damaging trees that were located on an adjacent property but whose root systems were encroaching into the project’s excavation area; (4) delays caused by Defendant’s failure to provide access to a three-phase, permanent electrical power source in a timely manner; and (5) delays caused by Defendant’s failure to provide access to a permanent water and sewer system in a timely manner. Plaintiff’s claims for damages were not separately assigned and calculated based on each of the foregoing delays, but were instead calculated based on the costs and expenses incurred from May 29, 2002, the original contract completion date, to January 30, 2003, the date of final inspection.

Defendant denied liability for some of the construction delays, contested certain of Plaintiff’s damage claims, and asserted a counterclaim for $ 41,620.00 based on Plaintiff’s alleged failure to properly install and flush a geothermal well system. Plaintiff presented extensive and specific evidence regarding its costs and expenses that resulted from the extension of Contract work for an additional 246 days past the originally contemplated Contract completion date. Plaintiff’s damages testimony was corroborated by the testimony of Plaintiff’s damages expert, who concluded that Plaintiff’s extended costs and expenses had resulted from the many construction delays on the project and the manner in which Defendant dealt with change orders. Plaintiff’s expert also noted that the damages claimed by Plaintiff were reasonable and were significantly lower than those that would be produced using the “total cost” method of calculating damages.

Although Defendant contested its liability in regard to some of the delays on the project, it did not offer evidence on damages and did not seriously contest the methodology used by Plaintiff to calculate the extended costs that formed the greatest part of Plaintiff’s claim. The PA Board of Claims accepted Plaintiff’s damages methodology, holding that if a party does not contest a plaintiff’s methodology for calculating damages or the evidence supporting the plaintiff’s damage claims, that methodology and evidence affords a reasonable basis for awarding damages. Acchione and Canuso, Inc. v. Department of Transportation, 461 A.2d 765 (Pa. 1983).

Defendant did, however, challenge Plaintiff’s calculation of its extended home office and administrative costs of $ 90,680.52. Defendant argued that the Board should adopt the formula set forth in Manshul Construction Corp. v. Dormitory Authority to determine Plaintiff’s costs. See Manshul Construction Corp. v. Dormitory Authority, 79 A.D.2d 383 (N.Y. App. Div. 1981). Under the “Manshul” formula, costs are calculated in the following manner: (1) estimate the actual cost of the work done after the scheduled contract completion date by deducting from the contract price the portion allocable to overhead and profit; (2) allocate a percentage of this cost for overhead and allow this as excess overhead due to delay; and (3) add to this a profit percentage based on the excess overhead. Id. at 391-92. By Defendant’s calculation, this formula yielded an extended home office and administrative costs figure of $ 57,197.61, compared to Plaintiff’s claim for $ 90,680.52.

In contrast, the method used by Plaintiff was modeled on the “Eichleay formula” for calculating home office and administrative overhead costs. This formula seeks a ratio between the billings for the contract at issue to the company’s total contract billings during the period of the contract at issue; multiplies this ratio by the total company overhead during the contract period to determine the overhead allocable to the contract at issue; divides this allocable overhead by the actual days of contract performance to determine a daily rate for overhead; then multiplies this daily rate by the number of days of owner-caused delays to find the extended home office overhead/administrative cost attributable to the delay period.

This Board, while recognizing that neither method of calculation is perfect, chose to use Plaintiff’s “Eichleay-based” calculation. In dicta, the Board stated that the Eichleay formula has the benefit of using actual dollar and cent figures of the contractor to determine an actual ratio of overhead to contract billings for a period relevant to the contract at issue. In other words, if the contractor provides reliable company-wide figures for a period relevant to the contract, the Board can determine the overhead percentage that it actually experienced on a company-wide basis during the contract period and could reasonably expect from the project at issue. The Board also noted that the Eichleay formula has been criticized because, among other things, overhead experienced on other projects during a surrounding time period may have been adversely or beneficially affected by several other outside factors such that the overall ratio is not necessarily indicative of the overhead experienced on the contract at issue.

The Board contrasted the Manshul formula with the Eichleay formula, stating that the Manshul formula does not require the variable that may be introduced by work experience on other contracts. However, the Manshul formula does require certain assumptions be made which include assumptions as to the total overhead and profit margin (15% in Manshul) and a further assumption that overhead and profit are to be equally divided.

Using Plaintiff’s “Eichleay-based” methodology, the Board entered judgment in favor of Plaintiff in the sum of $ 544,881.23, consisting of $ 458,678.58 in aggregate extended cost damages; $ 83,648.29 in prejudgment interest on the amount of aggregate extended cost damages; and reimbursement of certain additional costs incurred due to Defendant’s delays.

Click here to view full opinion as PDF (provided with the permission of LexisNexis).

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