Serving the Construction Industry

Winter 1999-2000 Newsletter

Construction Legal Review

RALEIGH, NORTH CAROLINA ........ WINTER 1999-2000

Timely information on important topics which affects your business in the Construction Industry for the Millennium and Beyond.

Getting Eichleay: The Basics of Calculating "Unabsorbed Home Office Overhead" Damages

Taking the mystery out of "unabsorbed home office overhead" is not easy because of the conceptual nature of the damages. However, any profitable contractor will tell you that the lost cash is hardly conceptual, and that overhead will sink your business if you allow it. The "mystery" is really the difficulty in allocating office overhead equitably to a particular job. There are many names and different ways to calculate the damage.

Whether you call it "Eichleay", "unabsorbed home office overhead" or "indirect office allocation", the basis for the damage is simple. To understand what "unabsorbed home office overhead" is (and isn't), it needs to be broken down and defined. "Overhead" is all of the actual incurred cost of doing business. If you narrow overhead by adding "home office", you are talking about the actual, incurred cost of the home office only. Whether contractor or subcontractor, "home office" excludes all costs associated with particular projects, or "field costs". Labor, material, and project site management can all be attributed to particular projects. Specific costs can be easily attributed to a project.

Subs and Suppliers Should Avoid Cut Off of Lien Rights by Issuing Notices of Subcontract

In North Carolina, sub and supplier lien rights are cut off if Contractor makes final payment to the first tier sub and files/posts a Notice of Contract. For out of town suppliers, a courthouse and job site search isn't practical. Send a Notice of Subcontract to the Contractor to preserve lien rights; afterward, Contractor must provide payment notices to discharge your lien rights.

Need help preserving your lien rights? Call James Laurie at (919) 573-6171 or jameslaurie@laurielaw.com

Calculating Eichleay To Recover Overhead Costs

"Home office overhead" is easily determined, where it includes all costs not associated with a particular project. This definition is straight forward enough, but the mystery arises when you attempt to relate the cost of overhead back to the project.

Calculating field overhead is simple. If a project superintendent is paid $5,000 a month, living and transportation expenses are $2,000 a month, and the project trailer, utilities, and office equipment are $3,000 a month, then project overhead is $10,000 a month. One hundred percent of this expense is attributable to this project. If this project finishes three months late, then the project has cost the contractor an additional $30,000 on field overhead to finish the project.

Calculating home office overhead is similar. If the monthly cost of maintaining the office is $50,000 (which includes project managers, office costs, officers, and all other home office costs), then home office overhead is $50,000 a month. Unfortunately, unlike field overhead, the calculation does not end there. That $50,000 covers more than one project, so the actual cost attributable to this project is a fraction of that cost. The mystery of "unabsorbed home office overhead" is determining the fraction attributable to this project.

Although it sounds like a mnemonic, "Eichleay" is not a formula, but is the name of a government contractor case which standardized the formula for calculating what fraction of the home office overhead cost is attributable to a particular project. The Eichleay formula tries to allocate costs equitably between the contractor and the owner, but it is far from perfect in application. Often, particular facts will cause the formula to calculate inequitable recovery for the contractor, sometimes favorable, sometimes not. Since Eichleay, courts often use additional formulas, subjective factors, or variations of the Eichleay formula to correct skewed results. Eichleay may be preferred, but there are many methods to calculate unabsorbed home office overhead. An Eichleay calculation can only be used when there are accounting records sufficient to make the calculation. When the accounting records are insufficient, the total Cost Method (TCM) is a simple calculation, which captures unabsorbed home office overhead in the damage calculation. However, the problem with the Total Cost Method is that it allows the contractor to recover for its own inefficiencies, in addition to the delay damage caused by others. Eichleay, or an explainable variation, is favored by most courts.

Questions about putting together a claim for delay or disruption? Call James Laurie at (919) 573-6171 or e-mail to jameslaurie@laurielaw.com

Avoiding Seizure and Forfeiture of Your Company's Vehicle Because of Employee's Past Offenses

If your employee drives a company vehicle and is stopped for repeat drug or alcohol offense, the vehicle may be impounded for forfeiture. The vehicle will be sold at auction, the lien holder paid off, and the Owner left with nothing! Sounds extreme; can they really do this? Unfortunately, yes they can. Most states have adopted forfeiture laws, which have been upheld by the Supreme Court.

Many contractors are learning of this extreme penalty the hard way. While the vehicle seizure and forfeiture statutes usually have provisions for "innocent owners", many Contractors will have a hard time meeting the conditions and providing the proof necessary to get the vehicle released. In most cases, the statute will allow for return of the vehicle only if the Owner provides proof of ownership, proof of insurance, proof that the vehicle used by the employee was unauthorized, proof that the Owner had no knowledge of the prior impairment offense by the employee, or else agrees to press charges against the employee for the unauthorized use of the vehicle. All of which must be proven at a hearing before a Judge, which is scheduled only after the vehicle owner files a petition with the Clerk of Court. Even if the vehicle Owner is successful at the hearing, the Owner must still pay the towing and storage charges since the original seizure. The actual process can take weeks, and the cost of the hearing, and towing and storage charges can mount up in the thousands of dollars very quickly. This is in addition to the loss of the use of the vehicle, which can tie up equipment on the vehicle, documents or records stored in the vehicle, and transportation of personnel critical to ongoing jobs. Most Project Superintendents or Crew Chiefs keep a roving office in their truck; MSD's, paperwork, daily logs, cell phones, pagers, cameras, hand tools, saws, drills, and even materials. Worse, many company vehicles are used to transport entire crews to job sites. Renting a vehicle won't solve the immediate need for these articles. Finally, whether equipment and other valuables will still be on the truck when it is released is questionable.

Contractors need to protect themselves by updating driving records often, keep keys and vehicles under lock and key when not in use, have written policies for employees regarding use of vehicles, and identify employees who are authorized to drive a vehicle.

Questions about whether you are prepared? Contact James Laurie at (919) 573-6171 or e-mail to jameslaurie@laurielaw.com

The Simplified Eichleay Formula (in English)