Fairfax County Redevelopment & Housing Authority v. Worcester Bros.

Present:   All the Justices

FAIRFAX COUNTY REDEVELOPMENT AND
HOUSING AUTHORITY
                                         OPINION BY
v.   Record No. 980731        JUSTICE LAWRENCE L. KOONTZ, JR.
                                     February 26, 1999
WORCESTER BROTHERS COMPANY, INC.


             FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
                   Arthur B. Vieregg, Jr., Judge


      In this appeal, we consider whether the trial court’s award

of unabsorbed home office expenses to the contractor on a public

construction project following an unreasonable delay by the

contracting government agency was based upon sufficient proof of

the existence and amount of those damages.

                              BACKGROUND

      Under well established principles, we recount only those

facts relevant to our resolution of the appeal.   On September

14, 1995, the Fairfax County Redevelopment and Housing Authority

(the Authority) entered into a contract with Worcester Brothers

Company, Inc. (Worcester Brothers), a general construction

contractor, for site renovations and improvements of Washington

Plaza in Lake Anne Village (the project) in Reston.

      The Authority had originally solicited bids for the project

based on a projected start date in July 1995, with completion of

the work in 150 calendar days from the notice to proceed.    Thus,

the proposed date of substantial completion at the time bids
were solicited was mid-December 1995.    Worcester Brothers based

its bid on these conditions.    However, because the Authority did

not award the contract to Worcester Brothers until September 14,

1995, the substantial completion date for the project was moved

back to mid-February 1996.

     It is not disputed that at the time Worcester Brothers

commenced work on the project, the Authority had not yet

obtained the necessary clearances from an adjoining property

owner to allow work to proceed on a portion of the project site.

The Authority did not obtain the clearances until March 6, 1996.

     After the work was completed, Worcester Brothers filed

notice of potential change #15 (NPC 15) with the Authority’s

architect seeking additional payment for field office expenses

incurred on the job site due to the Authority’s delay in

obtaining the clearances.    Worcester Brothers also claimed it

had unabsorbed home office expenses attributable to the delay.

In NPC 15, Worcester Brothers calculated its additional field

office expenses based upon its daily field office overhead rate

multiplied by the 98 days of delay it attributed to the

Authority. 1   To calculate its unabsorbed home office expenses,



     1
      This figure was later revised to represent the actual costs
Worcester Brothers incurred in maintaining its workforce on the
project site during the delay period.



                                    2
Worcester Brothers used the so-called “Eichleay formula,” 2 to

determine a daily home office overhead rate and multiplied that

rate by the same 98 days of delay.       The architect, acting on

behalf of the Authority, denied the claims made in NPC 15.

     On November 4, 1996, Worcester Brothers filed a motion for

judgment against the Authority seeking damages for breach of

contract based upon the failure to pay NPC 15. 3     The Authority

filed an answer denying the allegations of the motion for

judgment and raising as an affirmative defense the claim that

“[h]ome office damages based on the Eichleay formula are

prohibited by Virginia law.”

     At trial, Worcester Brothers contended that during the

delay it incurred both additional field office expenses as a

result of having to maintain its personnel at the job site and

unabsorbed home office expenses.   It presented evidence of its

actual field office expenses related to the delay in the amount



     2
      The Eichleay formula is “the prevailing method” used for
calculating a contractor’s home office expenses attributable to
a government-caused delay on a federal contract. Capital
Electric Company v. United States, 729 F.2d 743, 744 (Fed. Cir.
1984).
     3
      Worcester Brothers also claimed damages resulting from the
cost of snow removal and protecting its equipment from winter
weather as a result of the delay in awarding the contract. The
trial court dismissed this claim, and Worcester Brothers has not
assigned cross-error challenging that ruling.



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of $46,359.11.    Worcester Brothers’ accounting system did not

allocate its home office expenses to particular contracts.

However, Joseph P. Noonan, Worcester Brothers’ president,

testified that the unabsorbed home office expenses attributable

to the delay amounted to $34,495.89.    According to Noonan, that

figure was calculated from statements prepared by Worcester

Brothers’ accountants reflecting the total general and

administrative expenses of the company during the relevant

contract period and the application of the Eichleay formula to

those expenses.

     The Authority asserted numerous objections to Worcester

Brothers’ evidence of damages.   Pertinent to the issue presented

on appeal, the Authority contended that Worcester Brothers had

proven no actual damages as a result of the delay.   It contended

that the Eichleay formula calculation did not constitute proof

of actual damages to a reasonable degree of certainty, but,

rather, is merely a method for determining the amount of

unabsorbed home office expenses attributable to a particular

contract once the existence of such damages has been proven by

other evidence.   The Authority contended that Worcester Brothers

had not shown that its workforce was actually idle as a result

of the delay in obtaining the clearances and, thus, that none of

its home office expenses was incurred as a result of the delay.

Moreover, the Authority contended that the Eichleay formula was

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“totally and wholly irrelevant” to “a contract governed by state

law.”

        At the conclusion of the evidence, the trial court

addressed the Authority’s contentions and reasoned that in order

to succeed on a breach of contract damage claim for unabsorbed

home office expenses resulting from a delay, the contractor was

first required to show that it had incurred such damages by

establishing that the government had caused the delay; that the

contractor’s workforce was placed on standby as a result; and

that the contractor was not free to engage in work on other

projects during the delay.    The trial court then found that the

Authority’s delay was “manifest on this record” and was

“egregious” and “frankly inexcusable.”     The trial court further

found that Worcester Brothers’ workforce had been on “standby”

because the Authority “never could advise the contractor that

the area would not be available until a particular date.

Instead it was a rolling deadline.”      Finally, the trial court

found that the “rolling deadline” also inhibited Worcester

Brothers from seeking other contracts, and thereby minimizing

the damage caused by the delay, since it could not be assured of

the availability of its workforce for another project.

        Having found that Worcester Brothers had satisfied its

initial “burden of proving [home office] damages with reasonable

certainty,” the trial court turned to the question whether the

                                     5
Eichleay formula could be used to calculate the amount of those

damages.   Recognizing that other courts had found the Eichleay

formula to be “a fair way of approximating” such damages, the

trial court noted that after auditing Worcester Brothers’ books,

the Authority did not contend that any of the specific expenses

were inappropriately claimed and that the Authority’s witnesses

failed “to present any reasoned analysis of why Eichleay is

inappropriate.”   Accordingly, the trial court entered judgment

for Worcester Brothers for both the field office expenses

($46,359.11) and the unabsorbed home office expenses as

calculated by the Eichleay formula ($34,495.89).    The trial

court granted the Authority’s motion to reconsider, and, after

receiving briefs from the parties, sustained its original

ruling.    We awarded the Authority this appeal.

                             DISCUSSION

     The Authority does not challenge the trial court’s

determination that the Authority was liable for damages caused

by the delay.   Nor does the Authority challenge that portion of

the judgment attributable to field office expenses.

Accordingly, our discussion is necessarily limited to a

determination of whether, as specified by the Authority’s

assignment of error, “[t]he trial court erred in finding that a

contractor had proved its home office damages with reasonable

certainty.”   (Emphasis added.)   We agree with the trial court’s

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reasoning that the resolution of this issue requires that we

first consider whether Worcester Brothers established that it

suffered damages in the form of unabsorbed home office expenses

attributable to the Authority’s delay, and, if so, whether there

was adequate proof of the amount of those damages.

     Home office expenses, commonly called overhead, include

those costs that a contractor must expend for the benefit of its

business as a whole.   These expenses include, for example, the

salaries of office staff, accounting expenses, dues and

subscriptions, equipment costs, and utility services.

Unabsorbed home office expenses comprise “those overhead costs

needlessly consumed by a partially or totally idle contractor.

A contractor continues to incur overhead costs during periods of

reduced activity or delay on a particular contract.   When this

occurs, the ‘reduced activity’ contract no longer ‘absorbs’ its

share of overhead costs.”    Michael W. Kauffman and Craig A.

Holman, The Eichleay Formula: A Resilient Means for Recovering

Unabsorbed Overhead, 24 Pub. Contr. L.J. 319, 321

(1995)(footnotes omitted).

     When a breach by one party imposes a delay on the ability

of the other party to perform its obligations under a contract,

“the damages are to be measured by the direct cost of all labor

and material . . . plus fair and reasonable overhead expenses

properly chargeable . . . during the reasonable time required”

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to complete performance.    E.I. duPont deNemours & Co. v.

Universal Moulded Prod., 191 Va. 525, 581, 62 S.E.2d 233, 259

(1950)(emphasis added).    In such cases, while the plaintiff must

prove its damages with reasonable certainty, “‘[a]n absolute

certainty as to the amount of the damages is not essential when

the existence of a loss has been established.   The quantum may

be fixed when the facts and circumstances are such as to permit

. . . an intelligent and probable estimate thereof.’”    Pebble

Building Co. v. G.J. Hopkins, Inc., 223 Va. 188, 191, 288 S.E.2d

437, 438 (1982)(citation omitted).

     We recognize that not every instance of a delay caused by

the other party to a contract will result in a contractor

incurring either direct or overhead damages.    However, where the

evidence shows that a contractor has incurred direct damages as

a result of the delay such as additional cost of labor and

material, the question whether the contractor also suffered

unabsorbed overhead damages necessarily must be determined from

the facts and circumstances of the individual case.    It is not

necessary for the contractor to show that its overhead was

increased as a result of the delay, but only that it could not

otherwise reasonably recoup its pro rata home office expenses

incurred while its workforce was idled by the delay.

     Here, the evidence showed that Worcester Brothers incurred

actual direct damages as a result of having to maintain its

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personnel on the job site far beyond the anticipated date of

substantial completion.    The record supports the trial court’s

finding that the Authority was responsible for a delay that

caused Worcester Brothers’ workforce to be “on standby” and this

further prohibited Worcester Brothers from recouping its

unabsorbed home office expenses by seeking other contracts

during the delay period.    Accordingly, we agree with the trial

court’s ruling that Worcester Brothers met its burden of proof

with respect to the existence of unabsorbed home office expenses

attributable to the Authority’s delay.

     The Authority contends, however, that even if Worcester

Brothers proved that it incurred unabsorbed home office expenses

as a result of the Authority’s delay, the trial court erred in

accepting the Eichleay formula as the method for determining the

amount of these expenses.   The Authority asserts that the

contract provides that disputes between the parties will be

governed by Virginia law and, since no legislative act,

administrative rule, or case law in Virginia has “adopt[ed] the

use of the Eichleay formula in claims against public bodies in




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Virginia,” the use of the formula “was not within the parties’

contemplation at the time the contract was executed.” 4

     The Authority is correct in noting that use of the Eichleay

formula has not been previously approved in this Commonwealth by

legislative or administrative act, nor has its use been

addressed in a published appellate court decision relating to a

public contract.   However, we are not persuaded by the

Authority’s contention that a lack of prior authoritative

application of the Eichleay formula to a Virginia public

contract prevents its application in this instance.    The

Eichleay formula is not a legal standard that must be formally

approved or adopted; rather, it is merely a mathematical method

of prorating a contractor’s total overhead expenses for a

particular contract. 5   As such, the question before the trial



     4
      On brief, the Authority asserts that certain items were
improperly included in the overhead expenses used by Worcester
Brothers in calculating its damages. At trial, the Authority
did not object to the introduction of the accounting records on
this ground. Accordingly, that issue is not before us. Rule
5:25. We also reject the Authority’s contention that the
contract provision for a 15% mark-up for “changes in the work”
should be applied to field office damages to determine a
liquidated award of home office expenses. Assuming that this
argument can be subsumed within the assignment of error, we are
not persuaded that the 15% mark-up applies to an award of
damages for delay.
     5
      To make that proration, the total amount billed on the
particular contract by the contractor (Bc) is divided by the



                                    10
court was not whether, in the absence of an express term, the

parties contemplated using the Eichleay formula, or any other

method of calculating unabsorbed overhead damages, but whether

the resulting quantum was “an intelligent and probable estimate”

of the actual damages.    Pebble, 223 Va. at 191, 228 S.E.2d at

438.

       As an abstract proposition, the Eichleay formula has been

criticized as an inadequate substitute for direct evidence of

the actual amount of damages and “no less speculative” than

other unsupported opinion evidence simply “because it was cast

in a mathematical milieu.”       Berley Indus., Inc. v. City of New

York, 385 N.E.2d 281, 283 (N.Y. 1978).      In Berley, the New York



contractor’s total billings during the contract period (Bt) and
this quotient is then multiplied by the contractor’s home office
expenses attributable to the contract period (Ht) to determine
the amount of home office expenses allocable to the contract.
Next, the amount of home office expenses allocable to the
contract is divided by the total number of days of the
contractor’s performance under the contract (Dt) to determine a
daily contract home office expense rate. Finally, the daily
contract home office expense rate is multiplied by the number of
days of delay (Dd) to determine the amount of damages (A). See
Capital Electric, 729 F.2d at 747. This method of proration is
the Eichleay formula in its most basic application, and may be
stated mathematically in this way:

                           BcB




                           ⎯ × Ht
                           BtB




                           ⎯⎯⎯⎯ × Dd = A
                              Dt



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Court of Appeals rejected the use of the Eichleay formula as an

“administrative convenience,” where there was no supporting

evidence that any of the home office expenses were attributable

to the delay.   Id.

     Distinguishing Berley, the Florida District Court of

Appeals held that use of the Eichleay formula for calculating

unabsorbed home office expenses attributable to a delay is

proper so long as there is competent evidence of actual damage

having been sustained by the party seeking relief.     Broward

County v. Russell, Inc., 589 So.2d 983, 984 (Fla. Dist. Ct. App.

1991).   Similarly, other jurisdictions have held that where

there is sufficient proof that the plaintiff has suffered

damages as a result of the delay, the Eichleay formula affords a

reasonable basis for estimating the amount of those damages with

respect to unabsorbed home office expenses.     See, e.g., Conti

Corp. v. Ohio Dept. of Admin. Serv’s, 629 N.E.2d 1073, 1077

(Ohio Ct. App. 1993); Golf Landscaping, Inc. v. Century Const.

Co., 696 P.2d 590, 593 (Wash. Ct. App. 1984).

     We are of opinion that the rationale of the latter cases is

in accord with the general principles of law applicable to

proving damages for delay as outlined in the duPont and Pebble,

cases.   Accordingly, where, as here, there is evidence that a

contractor has suffered actual damages as a result of an

unreasonable owner-caused delay, the Eichleay formula is an

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acceptable method, though not the only possible method, of

calculating the portion of home office expenses attributable to

delay.    Cf. Southern New England Contracting Co. v. State, 345

A.2d. 550, 559-60 (Conn. 1974); PDM Plumbing & Heating, Inc. v.

Findlen, 431 N.E.2d 594, 595 (Mass. Ct. App. 1982).

     In recognizing the adequacy of the evidence in this case to

support the use of the Eichleay formula to determine unabsorbed

overhead damages for the delay in this contract, we do not adopt

it as the standard for determining such damages generally.

Rather, as with any fact-specific question, the individual

circumstances of a given case will determine whether “an

intelligent and probable estimate” of such damages has been

proven.    Pebble, 223 Va. at 191, 228 S.E.2d at 438.

                             CONCLUSION

     For the reasons stated above, we will affirm the judgment

of the trial court.

                                                           Affirmed.




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