The Eichleay Formula—Time to Retire?by Scott Mohn, ClaimsAvoidanceConsultant; 3D/International, Alexandria, VA,
Serial Information: Civil Engineering—ASCE, 1990, Vol. 60, Issue 6, Pg. 60-62
Document Type: Feature article
The Eichleay formula is the one most commonly used to settle claims by contractors against owners who delay a project. The formula is based on six questionable assumptions, however. When one or more assumptions are not satisfied, as is usually the case, the formula results in overcompensation of the contractor. When all are satisfied, the formula results in under-recovery. Furthermore, the formula has no validity in extended overhead situations. Four approaches to the problem are (1) Lobby Congress to conduct a study and draft a contract clause or replacement formula which will be used in federal contracts and serve as a model for private contracts; (2) litigate the issues after careful preparation; (3) contractually limit the impact of Eichleay formula calculations; and (4) contractually establish an alternate method of fixing home-office overhead claim costs. The best long-term solution may come out of the first approach. In the short term, contractually establishing an acceptable alternative method may be the most practical measure. This will be an arduous task, especially if the formula is already well-established in the area of jurisdiction. When the use of the Eichleay formula is unavoidable, it may still be possible to limit its impact through contractual clauses, fixing unabsorbed overhead to a percentage of contract price, for example.
Subject Headings: Model analysis | Contractors and subcontractors | Claims | Owners | Project delay | Federal government
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