California Court Puts Out The Welcome Mat For The Eichleay Formula In Computing Home Office Delay Damages – What Took So Long?

In JMR Construction Corporation v. Environmental Assessment and Remediation Management, Inc. (Court of Appeal No. H039055, Monterey County Superior Court No. M105497), the Sixth Appellate District held the Eichleay formula which is used to compute home office overhead damages in construction delay cases applied to private litigants suing in California cases.

The Eichleay formula is a method of apportioning damages for home office overhead costs to a specific project that has been delayed or extended. The formula was developed in a 1960 Armed Services Board of Contract Appeals case (Eichleay Corp. (A.S.B.C.A.1960) 60-2 BCA (CCH) 2688, aff’d on reconsid., 61-1 BCA p 2894, 1960 WL 684) to award damages for the government’s delay on a federal public works project. The Federal Circuit has held “the Eichleay formula is the only means for calculating recovery for unabsorbed home office overhead.” (E.R. Mitchell Const. Co. v. Danzig (Fed.Cir.1999) 175 F.3d 1369, 1372, see also Nicon, Inc. v. U.S. (Fed.Cir.2003) 331 F.3d 878, 884.)

“Home office overhead costs” are costs “expended for the benefit of the entire business which, by their very nature, cannot be allocated to a particular contract.” (Altamayer v. Johnson (Fed.Cir.1996) 79 F.3d 1129). Damages continue to accrue during delays or extended completion dates, regardless of whether there is ongoing direct construction activity. In short, when there are delays on a project, a contractor is assumed to be unable to take on additional work during the delay, and incurs additional overhead costs which it is entitled to recover. Under the Eichleay formula the courts calculate home office overhead damages by calculating a daily home office overhead amount which is then applied for each day of delay. (Wickham Contracting Co., Inc. v. Fischer (Fed.Cir. 1994) 12 F.3d 1574).)

The JMR case involved the construction of a dental clinic at the Presidio of Monterey (“the Project”). The owner was the U.S. Army Corp of Engineers (the “Corp”). The Corp retained JMR Construction Corp. (“JMR”) as the general contractor. JMR in turn hired Environmental Assessment and Remediation Management, Inc. (“EAR”) to install the electrical and plumbing at the Project. JMR contended EAR caused delays to the Project because of late submittals, and improper plumbing work. After the Project was completed, JMR sued EAR for delay and disruption damages, including home office overhead. At trial, JMR was awarded the net amount of $315,631, which included offsets for the funds retained by JMR during construction. The verdict included an award for JMR’s home office overhead damages which were calculated using the Eichleay formula.

EAR appealed the trial court decision on a myriad of grounds. It specifically appealed the trial court’s use of the Eichleay formula to determine delay damages on the grounds that (1) no published California appellate decision had sanctioned its use, and (2) Eichleay was limited to delay cases where the defendant causing the delay was the government.

While acknowledging there were “no reported California appellate decisions approving the use of the Eichleay formula,” the Court held the “absence of California authority” did not mean the “Eichleay formula is unavailable as proof of delay damages in this state.” The Court noted that the formula has been “frequently used [in California] at the trial court level and in arbitration proceedings to compute damages.” The Court also referenced Howard Contracting, Inc. v. G.A. MacDonald Construction Co., Inc. (1998) 71 Cal.App.4th 38, 53, a reported appellate case where the parties used the Eichleay formula to measure delay damages. The Howard court, however, did not directly rule on its use as a measure of damages in California cases, since the City of Los Angeles, the party that caused the delay, conceded “that the Eichleay formula was the proper industry standard for analyzing construction delay claims.”

In JMR, the Court tackled the issue of the use of the formula head on. Since it was undisputed JMR incurred home office overhead losses from EAR’s delay, the Court found the Eichleay formula was the best method for calculating damages to ensure JMR was compensated “for all the detriment proximately caused….or which, in the ordinary course of things, will be likely to result . . .” from EAR’s breach of contract.

The court also rejected EAR’s argument that the Eichleay formula only applied where the entity causing the delay was a governmental agency/owner, and was not applicable to a dispute between private corporations. In the Court’s view, whether or not the party causing the delay was a governmental entity had no bearing on its belief that the formula accomplished the goal of “placing the plaintiff in as good a position as he or she would have occupied” if defendant had not breached the contract. Not allowing JMR to recover home office damages simply because EAR was a private corporation would lead to the unfair result of denying JMR a remedy for the loss caused by EAR’s conduct.

The JMR ruling is important as it is the first published California appellate opinion discussing and expressly approving the use of the Eichleay formula in California state litigation. It is also important for clarifying that the formula is applicable where the delay on a government job is caused by a private party and not the government. It brings the California courts in line with longstanding Federal decisions, and will likely be relied on by litigants (and trial courts) as the model for computing construction delay and disruption damages. One open question is whether the courts will hold that Eichleay applies to construction projects where the government is not involved in any way. While the Court raised the issue in passing (footnote 6 of the opinion), it did not provide any guidance. Thus, whether the Eichleay formula will be applicable to “private construction projects in California” will likely be the subject of future litigation.

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February 4, 2016