CHAPTER
22
DELAY
Delay is a common problem with contracts of any sort, government or private. As strange as it may sound, in a government contract, the contractor assumes that the government will delay the project. But there is a limit to what a contractor has to assume. That limit is reasonable delay. A contractor assumes the risk only of reasonable delay. If the delay is unreasonable, a contractor is entitled to relief: more money, more time to complete the project, or both.
If a contractor finishes before the contract completion deadline but after the deadline it had set for itself, must the government pay delay damages?
It’s possible. The government cannot delay a contractor for free, even if the project is completed by the deadline the government set for the project. This kind of government-caused delay is compensable to a contractor if the contractor intended to complete the project ahead of schedule, it had the capability of doing so, and but for the government delay, it would have completed the project early.
This seems to go against common sense. If the government delays a contractor from completing a project but the contractor still completes the project by the government’s deadline, the government has not prevented the contractor from finishing on time from the government’s perspective. But the problem is that while the work was completed on time for the government, it was not done on time for the contractor. So it makes sense that the contractor is entitled to delay damages. This is true even though the government was never notified of the planned early completion date.
A contractor must establish its intent to perform the contract on the feasible and attainable accelerated schedule. This intent must be supported by the contractor’s actions and performance. For example, a contractor met the test for early completion damages. It had submitted a plan showing early completion, which the government had approved. It had made such progress on the project that when work was stopped, it was more than six weeks ahead of schedule. There was no evidence that the project was inadequately staffed. Nor were there any contractor-caused delays. The government was found liable for the delay (U. A. Anderson Construction Co., ASBCA No. 48087, April 27, 1999).
Before signing a release for a time extension given by the government, what land mine should a contractor be alert to?
A time extension modification waives all previous excusable delays. Regardless of whether a release has been signed identifying the other causes of delay, a time extension modification waives all previous excusable delays. Once waived, the delay cannot be used to excuse a termination for default. The rationale for this is that once a modification dealing with time extensions for delays is signed, the slate is wiped clean. Previous delays—whether known or not, whether waived or not, whether subject to a release or not—are in fact waived. Importantly, however, claims for delay costs are not waived. Thus, the “silent” waiver applies to excusable delays, but not to compensable delays.
There is one exception, however: Claims for delay costs are not waived where the contract modification included neither a waiver nor release of claims nor was there evidence that the parties intended to include delay costs in the modification.
What is the Eichleay formula and what does it do?
Eichleay determines delay damages. The Eichleay formula is named after the decision that started it all: Eichleay Corp., ASBCA 5183, 60-2 BCA ¶ 2688. The Eichleay formula calculates how much home office overhead a contractor lost due to government delay. When the government delays a project but makes the contractor “stand by” during the delay (that is, remain ready to resume the work), the contractor’s home office overhead during that delay is paid for according to the Eichleay formula.
Eichleay damages can be very contested issues. Both sides, government and contractor, have abused the concept that clearly has its place under certain circumstances. The contractor often will throw into a delay claim a demand for Eichleay damages simply because there has been a delay in the contract, whether or not the government caused the delay and whether or not there has even been a delay. Not to be outdone, the government abuses the Eichleay concept by routinely refusing to acknowledge its validity. Contracting officers (COs) are usually reluctant to pay Eichleay damages.
Nevertheless, courts and boards routinely allow—and disallow as well—the use of the Eichleay formula in delay situations. Let’s look at how the Eichleay overhead calculation is made, and what it is designed to pay the contractor for.
Any construction project should pay a company back enough money for all the company costs attributable to the project. Who can argue with that principle? So if the government hires a company to provide one person for a job, the government must pay the costs of that worker to the company, plus profit. That worker costs the company in two different ways. The worker costs the company directly by way of what the company pays the worker. This worker wage is the direct cost to the contractor and to the contract. But this worker wage is not the only cost to the company for this one worker. When this worker’s time sheets are entered into the company accounting system by a data entry clerk, the time the data entry clerk spent entering the data should be paid for by the project.
It is physically possible that the data entry clerk’s time could be precisely accounted for if the data entry clerk kept track of that part of the day devoted to entering the data for that one person on that one project. But that’s unreasonable. It would take more time to record the data entry clerk’s time on the project than it would be for the data entry clerk to enter the project worker’s time in the company accounting system.
So companies make an assumption: The amount of time the data entry clerk spends on a project is equal to the percentage that particular contract is to all the company’s business that year. So, if the project consisting of one worker is one-third of the company’s revenue that year, that data entry clerk spends one-third of his or her time on the project.
To convert this assumption into dollars, the company creates what is called an “indirect cost pool.” Like a swimming pool filled with water, the indirect cost pool gets all the indirect costs thrown into it. Indirect costs typically include what is called home office overhead. Home office overhead typically includes company costs like the electricity to keep the lights on, buying books for the library, and people completing time sheets and W-2s back at the office. And when a company is bidding a project, the company puts enough money into that project to pay for all the home office overhead expenses. So the company makes sure that, for as long as the project goes on, there’s enough home office overhead in that project to pay the way.
The way home office overhead normally gets paid is that the company gets paid the direct cost of the worker and adds into it not only a percentage for profit but also a percentage for overhead. So, for every day a person works and gets paid for the direct cost to the company, the indirect costs of home office overhead attributed to that worker also come back to the company.
But what happens if a project goes longer than the company had anticipated? If a company allotted enough money for 100 days of home office overhead, thinking that the project would last 100 days, what happens if that project gets delayed by the government and stretches out over 120 days? First of all, the project budget doesn’t have 120 days of overhead in it. How does the overhead get compensated?
The worker gets paid only for working. If the project is delayed, the worker doesn’t work and doesn’t get paid. Nor does the home office overhead get paid. Eichleay allows the company whose project is delayed to get paid the home office overhead that had not been paid due to the absence of a worker who gets paid by the hour.
Exactly how the Eichleay formula gets calculated is beyond the scope of this book. Generally, however, the delayed company follows these steps:
1. The company determines how much the delayed contract is worth in dollars compared to the company’s total work—say the delayed project was one-third of the company’s business in dollars.
2. The company determines its total overhead during the project.
3. To make sure the delayed contract picks up its share of overhead (say, one-third), the company determines how much money that one-third of the overhead was.
4. That one-third portion of the overhead that the project should bear, in dollars, is then divided by the number of days the project lasted so that the company knows how much overhead that project cost the company every single day. Once it is determined how much overhead that project should bear each day, that dollar value is multiplied by the number of days the project was delayed by the government.
The result is unabsorbed home office overhead. It is considered unabsorbed because it was not picked up or paid. There were no direct billings to which the indirect overhead billings could be attached for that period of delay.
Having looked at what the Eichleay formula deals with, let’s see how a contractor becomes entitled to Eichleay damages. As mentioned, the Eichleay formula compensates contractors for government-imposed delay. Here’s what a contractor has to prove to get Eichleay damages.
The delayed contractor must prove that there was a period of delay caused by the government during which time the contractor could not have taken on any other jobs. In other words, the contractor was on standby waiting for the government to tell the contractor when to get back to work. The government, significantly, never sent the contractor home or imposed a stop work order. The government required workers to stay around, doing nothing, so that the government would have the workers on hand to implement immediately any modifications the government thought proper, allowing work to resume.
An interesting issue is whether recovery of home office overhead after government delay can be done only on a per diem basis consistent with the Eichleay formula, regardless of whether home office overhead was recovered on a percentage basis during contract performance. Courts have ruled that this is true.
But an interesting issue is raised here. One typical type of damage recovery allowed a delayed contractor is the unabsorbed home office overhead. During contract performance, of course, this type of overhead is typically billed on a percentage basis, for example, ten percent of direct costs. However, when delay ensues, this type of overhead is calculated on a per day basis according to the complicated Eichleay formula.
Here’s the problem: FAR 31.203 requires a single distribution base for allocating a given overhead pool, while precedent from the U.S. Court of Appeals for the Federal Circuit seems to sanction the use of a percentage basis during contract performance and Eichleay’s per day calculation for delay. But none of the court’s decisions address this FAR provision.
Is the Eichleay formula applicable to modifications extending the contract?
No. Extended home office overhead for a project that gets extended, but not delayed, must be calculated by a fixed percentage method and not the Eichleay formula.
When a construction contract extends beyond the original completion date, it’s not always because the government delayed the project. When the government makes the contract go on for longer than expected because work is added to it, extended home office overhead is a cost that contractors routinely add to their bill. In dealing with extended home office overhead, there is no delay. In that event, Eichleay is not applicable. Extended home office overhead for more work but no government delay (“pure contract extensions”) should use a fixed-percentage markup of direct costs incurred.
A fixed-percentage markup is used because the rationale for Eichleay is no longer present. As one authority saw it, Eichleay was “an extraordinary remedy specifically limited to contracts affected by Government-caused suspensions, disruptions, and delays of work. In such situations the use of a fixed percentage formula to compensate for home office overhead is rendered inadequate or ‘absurd,’ since the flow of revenue from direct costs—a percentage of which goes towards recovery of home office overhead—is simply cut off or substantially reduced.”
How detailed and precise must the calculation of liquidated damages be?
To some extent, it’s the amount, not the process, that is the critical issue for liquidated damages. Reasonableness is the test. The reasonableness of liquidated damages depends on the reasonableness of the dollar value set for the liquidated damages, not the process by which the liquidated damages were established.
Assessing liquidated damages against a contractor is likely to bring a claim because doing so takes money out of the contractor’s pocket. Two typical arguments against liquidated damages are usually raised: (1) the CO, in setting the level of liquidated damages, did not thoughtfully establish them as required by FAR 11.5, but rather went to an agency chart and picked liquidated damages on the basis of that chart; or (2) the liquidated damages amount was unreasonable. This latter argument is a better one, if not the only one, since court and board decisions have greatly minimized the importance of the process used to set liquidated damages. Using charts is acceptable.
But first, why are liquidated damages used? They’re used when damages are uncertain or hard to measure. When a building is not ready on time, what is the loss to the government? Hard to say precisely. But that also says why it’s hard for liquidated damages to be found unreasonable; it is difficult to conclude that a particular liquidated damages amount or rate is an unreasonable projection of what those damages might be.
The FAR sets out a detailed process to be used to set liquidated damages. What happens if the CO does not do this detailed calculation but instead simply goes to a chart? Agencies have prepared charts for use in liquidated damages situations. Typically, the chart lists dollar values of the project down the side of a sheet of paper (say, $100,000 to $250,000) and for each dollar amount shows a daily liquidated damages figure that should be put into a solicitation.
Courts and boards have taken the position that they will enforce liquidated damages clauses if the amount was reasonable for the particular agreement at the time it was made. As a result, it doesn’t matter how the amount was calculated—use of a chart or not. All that matters is “Is the amount reasonable?” Or, as one court phrased it, “Is the liquidated damages amount extravagant, or disproportionate to the amount of property loss, as to show that compensation was not the object aimed at or as to imply fraud, mistake, circumvention or oppression?”
One decision found that there was nothing inherently unreasonable about a reduction of about one-fifth of one percent of the contract price per day ($3,157.00) on a phase one construction contract to be completed in a short period of time.
Can the government pay delay damages if a subcontractor is delayed but the prime contractor is not?
When the government knows and approves of a subcontractor’s duty to complete its work by a date certain, the prime and subcontractor are entitled to unabsorbed overhead for being put on standby by the government, even though the prime contractor completed the contract ahead of schedule.
Is all delay caused by a defective specification compensable?
Delay caused by a defective specification is usually, but not always, compensable. A defective specification doesn’t always give a contractor a blank check on delay damages. While all delay from a defective specification is usually considered unreasonable, contractor-caused delay after a defective specification has been identified must be charged to the contractor.
After all, any contractor doing business with the government accepts the fact that in many cases the government can delay the contractor for free. Typically, the government can delay a contractor for free for “a reasonable amount of time,” whatever that is. Usually, the government only pays for “unreasonable” periods of delay. One exception to this rule is delay due to defective specification. The general rule there is that the government pays for all delay. Since the government prepared the specification, if the contractor is delayed, the government should pay.
But delays caused by factors outside the government’s control relieve the government of liability irrespective of its faulty specifications. If, for example, a contractor had submitted a request for a modification after the discovery of a defective specification, the only way that delay would be compensated would be if the delay was caused by the defective specification. If the delay after the defective specification was discovered was due to the government’s reasonable consideration of a modification, the delay is not defective specification delay and is not compensable. Even though the delay followed a defective specification, the delay was not due to the defective specification—the delay may be due to the government’s slow but reasonable consideration of the modification.