One method of claiming and calculating home office overhead for delayed construction in Ohio.
When delays occur on a construction project, contractors and subcontractors may incur additional costs caused by the delays. Delay costs are frequently categorized as either field costs or home office costs. Additional field costs are costs incurred at the project site, such as equipment rentals.
On the other hand, additional home office costs (also called unabsorbed home office overhead or extended home office overhead) are the costs of running a home office during the delay period, such as executive salaries, administrative personnel, general insurance, rent, utilities, telephones, advertising, and interest on loans. These home office overhead costs are the expenses involved in generally running a business and are not attributable to any one construction project. When a project is delayed, the home office overhead may end up supporting that project for longer than it should have, resulting in reimbursable damages.
Courts have recognized, however, that determining the value of extended home office overhead can be difficult. One method of performing the calculation is the Eichleay formula:
- (total billings for the contract at issue ÷ total billings from all contracts during the original contract period) * (total overhead during the original contract period) = overhead allocable to the contract.
- (overhead allocable to the contract) ÷ (original planned length of the contract in days) = daily contract overhead rate.
- (daily contract overhead rate) * (compensable period in days) = unabsorbed overhead damages.
For contractors and subcontractors in Ohio, the preceding principles have all been recognized and discussed by the Supreme Court of Ohio in Complete General Construction Company v. Ohio Department of Transportation, 94 Ohio St.3d 54 (2002). This means that the Eichleay formula is one way of calculating home office overhead damages for construction delay claims in Ohio.
And for those Ohio contractors and subcontractors pursuing a delay claim for home office overhead, Complete General Construction also included some tailoring for when the claims are governed by Ohio law. The contractor must demonstrate that it was on standby. A contractor is on standby when work on a project is suspended for a period of uncertain duration and the contractor can at any time be required to return to work immediately. The contractor must also demonstrate it was unable to take on other work while on standby. This looks at whether it was impracticable (but not necessarily impossible) to take on replacement work during the delay. The Supreme Court of Ohio’s Complete General Construction opinion included a good plain language explanation as well: “Once the contractor commits resources to a project the resources remain committed whether the project moves forward or not. The contractor is all geared up with nowhere to go. That problem results in damages once the original contract period runs out and the extension period begins. At that point the contractor begins expending home office overhead on the project beyond what the contractor had contemplated.”
Complete General Construction provided one more Ohio law modification to the Eichleay formula’s use. It held that a government owner may further dispute certain items in the contractor’s overall overhead, such as donations and contributions.
Preparing and litigating delay claims for home office overhead typically requires the help of a construction lawyer. Schwandner Law Firm LLC is a construction law firm with delay claim experience and is located in downtown Cincinnati, Ohio.