Construction delays are often the result of miscommunication between contractors, subcontractors, and owners. They are usually avoided through detailed critical path schedules of work specifications with the timetable and logical sequence of events to occur for project completion.
Client delays arise when clients do things like changing their minds, giving instructions too late, or are slow in approvals. They tend to overlook the fact that these delays push back the start for contractors. Delays are frequently expensive, since there is usually a construction loan involved with interest charges, management staff dedicated to the project with time dependent costs, and continual wage and material price inflation.
More complex projects result in unforeseen problems arising in the original contract, and other legal construction forms such as change orders, lien waivers and addenda are subsequently used. Where the schedule is being used to plan work, if a milestone deadline is delayed, completion will be late. The controversial Eichleay Formula has been used for over fifty years in attempting to recover extended or unabsorbed home office overhead (HOOH) from owner caused delay. The object is to keep all parties out of court or arbitration.
Under contracts, contractors are usually entitled to recover both time resulting from delay and delay damages. It is typical to go after extended field office overhead or general conditions costs of the delay, but calculating this cost is complex. With at least eight methods for calculating extended field office overhead costs, all calculations create different totals.
A Time Impact Analysis (TIA) or Time Impact Evaluation (TIE) is a time-estimating technique that shows the cause and effect of a change to a critical path method (CPM) schedule. It identifies the discrete issue’s relationship to activities or past delays and substantiates the impact of the delay on the project schedule.
The basic Eichleay three step calculation is done at project end to determine damages when all work is completed:
- allocable overhead calculation determines the portion of the home office overhead to be allocated to the project
- daily allocable overhead determines a daily rate for the allocation of home office overhead
- home office overhead damages is multiplying the number of compensable delay days by the daily allocable overhead rate.
As an example, assume the contract amount is $3,000,000 with compensable delays amounting to 45 calendar days. During that time, the contractor has 4 projects with an aggregate value of $12,000,000. The contractor’s home office overhead in that time period totaled $250,000. The project duration, including delays, totals 265 days. Divide 3 million by 12 million to get .25 (percent) times the total 250,000 HOOH which equals $62,500 for that project. Divide the 62,500 by 265 days to get the daily HOOH cost of 235.849. Multiply that by the 45 days of compensable delays for a total of $10,613, the contractor’s claim in compensation for home office overhead because of increased project duration.
Issues with the Eichleay formula may be:
- The validity of Eichleay calculations may be questioned with a demand made that the calculations be based on audited financial statements for determining actual home office overhead costs.
- Small contractors may not have these, and larger contractors may not have the audited information available project completion time.
- Objections to certain components being included may arise such as advertising and entertainment costs being disallowed on public works projects obtained through hard bidding.
- Some state courts may not recognize Eichleay as an acceptable method.
- If the delay happens late in the project, like when it is 99 percent complete, an argument may be that allocable home office overhead has already been paid.
Contract language can be included which sets forth the rules and specifies which formula is to be used if such a delay arises. The owner may use the ‘No Damage for Delay Clause’ to limit recovery costs, if the project is in a state where such clauses are still enforced. Federal government contracts usually accept the Eichleay formula.