The Eichleay Trilemma

I. Introduction

Contract law restores wronged parties to their rightful position by requiring those who breach contracts to pay those whom they wrong their expectation interest, defined as “the benefit of his bargain by being put in as good a position as he would have been had the contract been performed.”1 In order for contract law to ensure that parties are properly compensated, it is necessary to devise a measure for the difference between the plaintiff's position as a result of the breach and their rightful position. Information about how the defendant’s breach has harmed the plaintiff is imperfect, so the legal system faces the choice between relying on imperfect measures, or, by refusing to utilize those imperfect measures, leaving plaintiffs without a way to calculate what they are rightly entitled to. 

One imperfect measure of damages which has found acceptance in the judicial system is the Eichleay formula, named for the case in which it originated.2 In Eichleay, the Armed Services Board of Contracting Appeals was tasked with interpreting a provision in a contract for the construction of a missile defense site.3 The contract provided that “[i]n the case of suspension of all or any part of the work for an unreasonable length of time causing additional expense or loss, not due to the fault or negligence of the Contractor, the Contracting Officer shall make an equitable adjustment in the contract price and modify the contract accordingly.”4 The issue in the case was how much of the contractor’s overhead costs should be attributed to the delay, and therefore compensated.5 The board adopted a formula holding the government responsible for the percentage of the company’s overhead costs proportional to the percentage of the firm’s total billings the contract made up.6 So, if a company has billings of $100,000 for the contract period, and the contract which the government unreasonably delayed completion of was worth $10,000, the Eichleay formula entitles the company to recover one tenth of its overhead expenses for the period of the delay. This Article begins by surveying judicial approaches to the Eichleay formula, proceeds to explain why a traditional breach-of-contract action proves an inadequate remedy, and concludes by assessing the formula’s tradeoffs and the extent to which parties may contract around it.

II. Analysis

There are three attitudes which jurisdictions can take toward the Eichleay formula: they can mandate its use, allow its use, or prohibit its use. One Federal Circuit Court and many State Courts of Appeals have held its use to be allowable.7 Two Federal Circuit Courts have held its use to be mandatory.8 One State Supreme Court has banned its use.9

Mandating usage of the formula may fail to compensate parties who can offer direct evidence that the contract contributed to their overhead costs. Allowing usage of the formula, but not mandating it, may lead to overcompensation of contractors who can elect between offering direct evidence of their costs when those costs are greater than they would be awarded by the formula not producing that evidence and relying instead on the formula when that is to their advantage. Refusing to allow usage of the formula may fail to compensate parties who are unable to track their overhead costs. When thinking about allowing the Eichleay formula to be used, jurisdictions must confront these three tradeoffs. Examining a case representing each approach sheds light on how courts have thought about these and other concerns.

A. Three Attitudes Regarding the Eichleay Formula

Virginia’s Supreme Court has allowed use of the Eichleay formula.10 Worcester Brothers is a contractor who contracted with the Fairfax County Redevelopment and Housing Authority (the Authority) to renovate a shopping plaza.11 The Authority failed to obtain permissions necessary for work to begin, and when the project was complete, Worcester Brothers filed a notice of potential change claiming that the delay caused unabsorbed home office expenses.12 Worcester Brothers sought compensation according to the Eichleay formula.13 The Supreme Court of Virginia found that, while no legislative act or judicial decision in Virgina had adopted the Eichleay formula and it was not in the contemplation of the parties as they drafted the contract, because it was a reasonable and logical way of measuring damages, “the Eichleay formula is an acceptable method, though not the only possible method, of calculating the portion of home office expenses attributable to delay.”14 The court did not adopt the Eichleay formula for use across the board, 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.”15

Going at least one step further, in Wickham Contracting Co. v. Fischer16 the Federal Circuit Court, which has jurisdiction over contracts with the federal government,17 held the Eichleay formula is “the only proper method of calculating unabsorbed home office overhead.”18 Wickham Contracting Company had contracted for the General Services Administration (GSA) to renovate a post office and courthouse in Albany, New York.19 The project was to take 365 days, but in fact took 969 days due to delays caused by the GSA.20 Wickham argued it was entitled to 80% of its overhead expenses, rather than the 34% allotted by the Eichleay formula, because “80% of its home office activity and, therefore, 80% of its home office overhead expense was devoted to the Albany contract during that time frame.”21 The court explains in a footnote that this disparity results from Wickham’s two other contracts being managed on-site, whereas the Albany project was managed from the home office.22 Wickham would have overhead costs be measured directly, rather than through the formula, when it is possible to determine them.23 The court found that “[t]o accurately determine how much unabsorbed overhead was caused by any one contract is impossible, even though Wickham claims to have done so.”24  

The court claims that “[t]he Albany project did not cause 80% of Wickham’s home office costs because Wickham would have incurred the individual cost components of the home office overhead whether or not it ever undertook the Albany project.”25 This seems to overlook the possibility that, when faced with a delay running several years, an organization could shift around its resources or alter its fixed costs, like leases. In a footnote, the court notes that “[w]hile it is true that some home office expenses may increase slightly due to a particular contract . . . generally the amount of the increase is sufficiently small and difficult to trace and quantify that the increase is still treated as an overhead cost.”26 Nevertheless, the court’s example of rent does not seem to be “sufficiently small” or “difficult to trace and quantify” that it can be easily waved away in a footnote.

            The court seems to think that it is impossible to directly attribute overhead costs to specific contracts and finds the Eichleay formula to be “a feasible, equitable and predictable method of compensating a contractor for unabsorbed overhead.”27 The Eichleay formula is certainly feasible and predictable, but it may be thought to be inequitable if it fails to provide adequate relief to the wronged party, which seems to be the case in Wickham. Of course, the reverse of this situation is just as possible, as a contractor may be entitled under the formula to recover more than their actual overhead costs.

New York’s highest court rejected the use of the Eichleay formula as a method of calculating overhead costs.28 In Berley Indus., Inc. v. City of New York,a contractor took on a project building utilities systems for a police station and firehouse facility.29 The city agreed that due to its actions, the plaintiff was unable to finish its work until 355 days after the end of the contract’s two year period.30 Berley sued to recover its home office overhead expenses for that period, calculated by applying the Eichleay formula.31 The contractor did not submit any direct evidence of increased overhead for the period, relying solely on the Eichleay formula, and the court found that, without direct evidence or “any attempt to prove that the formula was logically calculated to produce a fair estimate of actual damages” there was not enough evidence to sustain awarding damages, as “[t]he mathematical formula did not fill the void.”32 The court acknowledges that the formula has been accepted elsewhere, describing this usage  as “almost as a matter of administrative convenience.”33 The court’s essential objection to the formula is that it does not take into account the amount of work which has been completed at the time the overrun has been started.34 For example, 87% of the contract value at issue in the case was completed during the contract period.35 It is therefore plausible that a similar percentage of the overhead activity associated with the project was completed, and only 13% of the total would have to remain on standby. The court seems to think that may be the case here and worries about overcompensating contractors with what it describes as “a harsh daily penalty.”36  

B. The Insufficiency of Suing for Breach

One question worth considering is why the Eichleay formula, or seeking compensation for delays generally, is the method by which contractors seek compensation when governments delay their projects. The simplest remedy for when a party breaches a contract, as the government does when it delays a contractor’s completion of a project, is to stop working and sue for damages. Contractors would, of course, have their compensation decreased to the extent they failed to mitigate the damages the breach caused them. The practice of compensating contractors their overhead costs for periods of delay may have developed because of the nature of government contracting, which is an atypical market in certain key regards. Construction contracts are distributed through a bidding process which necessarily takes time. This is only magnified in the context of government works, which builds in processes of public insight and oversight.37 If a party agrees to build a project with a construction period of five years, experiences a one year delay, and the bidding period for the type of projects they are working on is one year, which seems plausible, then it may be impossible for them to mitigate their damages.38 They cannot work for a year, because it takes a year to get new work. This circumstance would encourage contractors to induce governments to breach their contracts, an undesirable result. If some degree of unforeseeable delay is unavoidable, allowing contractors to halt work and seek compensation would likely reduce governmental negligence, as officials would know that delaying a contractor’s ability to perform will impose costs the contractor cannot mitigate and for which the government will be held responsible. At the same time, such a rule could increase the overall cost of public projects, as governments would have to price in the risk of delay-related compensation, which may in turn reduce the number of public works undertaken.

On the other side of the table, even if governments were not on the hook for paying contractors working on delayed projects, they would not welcome ending their relationship with the original contractor, as it would require them to go through the lengthy and potentially expensive bidding process again. Firms may be wary of taking over a different firm’s project midstream (would you want to build a house on a foundation someone else built?) and would likely either increase the price of their bids or not bid on the project altogether. 

 The concern that contractors may attempt to induce breach to generate a windfall may be overstated, as contractors can be repeat players who may wish to complete a project to preserve relationships with the government or uphold their commercial reputation. However, if this is the case, firms may feel the need to remain on standby out of hope that the delay will be quickly resolved, a behavior which, to a point, is laudable, and should not be punished by denying them relief. Either way, the reasons why ceasing work and suing for breach of contract is not an adequate way to resolve this situation are apparent and illuminative of why the practice of contracting for compensation of delays may have developed.

C. The Eichleay Trilemma

Choosing whether to mandate, ban, or allow the Eichleay formula requires confronting significant tradeoffs. Mandating the use of the formula could lead to over-recovery or under-recovery in cases where overhead office expenses are not proportional to overall billings. However, this may be mitigated if contractors are then able to claim these as direct expenses. Banning the formula has almost the opposite effect, as parties without direct evidence seem to be left with no avenue to recovery. Contractors may avoid this consequence by more fastidiously tracking their overhead expenses and attempting to directly attribute them to individual projects, but this would impose significant administrative costs upon contractors, and it is possible these costs would exceed their expected value in litigation. Finally, allowing, but not requiring, the formula to be used, could lead to over-recovery if contractors, who are best positioned to determine whether the Eichleay formula overestimates or underestimates their actual costs, can choose to show direct proof or stand on their rights under the formula depending on which is more advantageous.

D. Bargaining Around Eichleay

It is worth considering whether the rule matters in this context. It is possible that in jurisdictions where contractors are denied recovery on the basis of the Eichleay formula (and are unable or unwilling to produce direct evidence), future bids will reflect the possibility of delays in a higher bid price. Governments would still be deterred from delaying projects, as contractors seem to be repeat players who would be capable of learning which jurisdictions are more or less likely to delay projects, and contractors could then adjust their future bids accordingly. Therefore, while it will determine whether individual contractors are able to recover, whether the Eichleay formula is accepted does not necessarily shift wealth from governments to contractors, or vice versa. 

It may be troubling to prevent parties from opting-in to the Eichleay formula. It is unclear whether jurisdictions which do not utilize the Eichleay formula would allow for its use in cases which contract for it specifically as the measure of overhead costs, but language in Berley describing the formula as imposing a “harsh daily penalty” makes it seem that the court would not have allowed the formula to be used even if the parties had explicitly bargained for it.39 This seems troubling because it can prevent the parties from protecting themselves adequately, even if future contractors will be able to avoid a similar misfortune by adjusting their bids.

Even if parties are permitted to opt-in to the Eichleay formula in jurisdictions which do not accept it as a general principle, there may be rational reasons for them not to contract for the Eichleay formula specifically. First, there are transaction costs to negotiating for increased precision. Second, it possible that parties want to keep their options open in case new and improved approaches to measuring overhead costs are developed. Third and finally, negotiating more specificity about the consequences of breaching may undermine the parties’ contracting relationship. For example, psychological experimentation suggests that liquidated damages clauses can lead parties to breach contracts more frequently, suggesting that explicitly encoding the option to breach and pay damages into a contract may change the psychological relationship parties attach to their contracts.40 Therefore, negotiating for the Eichleay formula to be used may lead governments to be more likely to fail to live up to their commitments under the contract, an outcome contractors may wish to avoid even if they will be able to recoup their costs through litigation.

III. Conclusion

Examining the Eichleay formula provides a valuable illustration of the concerns which give rise to formulaic systems of compensation, how efficiency should be weighed against concern for individual parties before the court, and how much latitude parties should be afforded in attempting to negotiate how their future disputes will be resolved before they arise. Accepting, rejecting, and mandating the use of the Eichleay formula all pose drawbacks, and it is not clear that any attitude should be straightforwardly preferred to any other. Even if no single approach to the formula clearly dominates as a background rule, there is little basis for prohibiting parties from adopting the Eichleay formula as a liquidated-damages provision and selecting for themselves whatever downside they are willing to bear.

• 1Restatement (Second) of Contracts § 344 (Am. Law. Inst. 1981).
• 2Eichleay Corp., ASBCA No. 5183, 60-2 BCA ¶ 2688.
• 3Id.
• 4Id.
• 5Id.
• 6Id.
• 7See Nebraska Pub. Power Dist. v. Austin Power, Inc., 773 F.2d 960, 972 (8th Cir. 1985); JMR Constr. Corp. v. Env’t Assessment & Remediation Mgmt., Inc., 198 Cal. Rptr. 3d 47, 53 (2015), as modified on denial of reh’g (Jan. 28, 2016); Broward Cnty. v. Russell, Inc., 589 So. 2d 983, 984 (Fla. Dist. Ct. App. 1991); Gilchrist Const. Co., LLC v. State, Dep’t of Transp. & Dev., 2013-2101 (La. App. 1 Cir. 3/9/15), 166 So. 3d 1045, 1065, writ denied, 2015-0877 (La. 6/30/15), 172 So. 3d 1097; PDM Plumbing & Heating, Inc. v. Findlen, 431 N.E.2d 594, 595 (1982);  Complete Gen. Constr. Co. v. Ohio Dep’t of Transp., 760 N.E.2d 364, 371; Rowan Companies, Inc. v. Sw. Tenant Const., Inc., No. 01-95-01514-CV, 1999 WL 97545, at *6 (Tex. App. Feb. 18, 1999); Fairfax Cnty. Redevelopment & Hous. Auth. v. Worcester Bros. Co., 514 S.E.2d 147, 152 (1999).
• 8See Wickham Contracting Co. v. Fischer, 12 F.3d 1574, 1575 (Fed. Cir. 1994); George Hyman Const. Co. v. Washington Metro. Area Transit Auth., 816 F.2d 753, 759 (D.C. Cir. 1987).
• 9See Berley Indus., Inc. v. City of New York, 385 N.E.2d 281, 282 (1978).
• 10Fairfax Cnty. Redevelopment & Hous. Auth. v. Worcester Bros. Co., 514 S.E.2d 147, 152 (1999).
• 11Id. at 148–149.
• 12Id. at 149.
• 13Id.
• 14Id. at 152.
• 15Id. (quoting Pebble Building Co. v. G.J. Hopkins, Inc., 223 Va. 188, 191, 288 S.E.2d 437, 438 (1982)).
• 16Wickham Contracting Co. v. Fischer, 12 F.3d 1574 (Fed. Cir. 1994).
• 1728 U.S.C. § 1491.
• 18Id. at 1575.
• 19Id.
• 20Id.
• 21Id. at 1576.
• 22[1] Id. at 1578.
• 23Id.
• 24Id. at 1579.
• 25Id.
• 26Id.
• 27Id. at 1580.
• 28Berley Indus., Inc. v. City of New York, 45 N.Y.2d 683, 689, 385 N.E.2d 281, 284 (1978).
• 29Id. at 282.
• 30Id.
• 31Id.
• 32Id. at 283.
• 33Id.
• 34Id. at 284.
• 35Id. at 282.
• 36Id.
• 37See, e.g., U.S. Gen. Servs. Admin., Bidding on Federal Construction Projects, https://perma.cc/3DST-AD8M.
• 38See Alex Benarocche and Daniel Gray, The Construction Bidding Process Explained, Procore (2024), https://perma.cc/Y8ZM-FP4U (explaining the many stages in bidding for government construction contracts).
• 39Berley Indus., Inc. v. City of New York, N.E.2d at 282.
• 40See generally Tess Wilkinson-Ryan, Do Liquidated Damages Encourage Breach? A Psychological Experiment, 108 Mich. L. Rev. 633 (2010).