SAN JOSE – Though it’s been used in California trial courts and arbitration proceedings, a formula public works contractors rely on to calculate home office overhead damages in construction delay claims remained untested in state appellate court until recently.
Home office overhead damages can be sought when a construction project commissioned by a public entity is delayed and the contractor incurs additional overhead costs. The amount of the damages is calculated using the Eichleay formula (pronounced IKE-lee) if the contractor can prove the delay was imposed by the owner, that the contractor was on “standby” during the delay and the contractor couldn’t take on additional work because of the delay.
Though it’s an unknown aspect of construction law, damages in delayed construction projects ultimately cost taxpayers money, which makes the method of their calculation important, Joseph Rossini, a construction law attorney at Atkinson, Andelson, Loya, Ruud & Romo, told the Northern California Record. He has represented both contractors and project owners in litigation.
Eichleay is written into federal contracts as the method for calculating damages, but it’s not included in state contracts.
In JMR Construction Corp. v. Environmental Assessment and Remediation Management Inc., a contractor sued its subcontractor for damages it alleged it was owed after the subcontractor caused a delay during a public works project. EAR, the subcontractor, appealed a lower court’s decision for several reasons, including its use of the Eichleay formula. The California Court of Appeal in the Sixth Appellate District endorsed the use of Eichleay, making it the first state appellate court to do so in a published opinion.
“Before an appellate court will issue a decision at all, someone has to appeal it and make it an issue," Rossini said. "That hadn’t really happened."
A couple things probably account for this, he said. Trials in these claims are expensive and public entities can save money if they settle. In a recent suit he helped with, the owner settled for $400,000 in a claim that asked for more than a million dollars.
The cases are even more expensive to appeal, he said.
The JMR decision had some unique elements, as well. The suit was between a contractor and a subcontractor as opposed to a primary contractor and a project owner.
“I’ve never seen it used the way that they used it in this case,” Rossini said.
Additionally, the suit addressed a “complex” area of public works construction law. For a contractor to win a contract, the company has to be deemed responsible.
“Responsibility is determined by your financial capacity as a contractor, your past performance on jobs, those kinds of things,” Rossini explained. “Basically, whether you have the knowledge, skill and finances to build the building.”
In the suit, JMR alleged that the delay on the project caused by the defendant led the contractor to be deemed not responsible and prevented the company from winning any more contracts. Previously, Eichleay applied in claims when the contractor’s workers were kept on standby and couldn’t be assigned to new work, which would prevent the contractor from taking it on.
Now that an appellate court has considered the issue, the ruling helps clarify things for parties on both sides of a claim, Rossini said. In his experience, public entities just want to be clear on the law and know how much money they’re responsible for paying. They don’t want to overpay and they don’t want to “rip off” the contractor.
“It doesn’t benefit a public entity to have contractors losing money and going bankrupt because then there won’t be anyone to build the project,” Rossini said.