April 26–28, 2004

1. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

2. Unabsorbed Overhead in Delay Claims … Eichleay in the 21st Century # Session 701 James Grant & Nancy Harrison Government Contract Services - Ernst & Young L.L.P Monday April 26, 2004 11:15 – 12:15 pm NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 2 Orlando, FL

3. Eichleay Background • The Eichleay formula was originally set forth in 1960 by the Armed Services Board of Contract Appeals Eichleay Corp., 60-2 B.C.A at 13,568 (ASBCA July 29, 1960) • Serves as the means of calculating a contractor’s unabsorbed home office overhead costs • 1994 Court of Appeals for the Federal Circuit officially ruled that the Eichleay formula is the exclusive means for calculating unabsorbed overhead - Wickham Construction Co. Inc. v. Fischer, 12 F.3 d 1574 &1575, (Fed Cir. 1994) NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 3 Orlando, FL

4. Objective of Presentation • To understand the value of utilizing the Eichleay formula • Review recent successes and issues addressed in the courts. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 4 Orlando, FL

5. The Eichleay Formula  • Significant subjects encountered during the application and calculation consists of: – Delay Period, – Contract Performance, and – Fixed Overhead NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 5 Orlando, FL

6. The Eichleay Formula • Calculate Allocable Overhead, – Divide total contract billings by total company billings for the same period and multiply by total home office overhead for the period. • Calculate Daily Allocable Overhead, – Divide Allocable Overhead by the number of days of contract performance including delay days. • Calculate Unabsorbed Overhead: – Multiply the Daily Allocable Overhead rate by Number of delay days. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 6 Orlando, FL

7. Review of Recent Cases & Court Decisions NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 7 Orlando, FL

8. Contract Performance – Singleton Contracting Corp. ASBCA, No. 51692, 8/8/03 – Nicon Inc . v. United States, Fed. Cir., No. 02-5097, 6/10/03 • Both Cases involve situations where the contractor was terminated for convenience before work began on the contracts • The decisions indicated, that the fundamental elements of the formula are dependent on contract performance by definition NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 8 Orlando, FL

9. Examination of “Nicon” • “the Eichleay formula was created and intended for a factual situation in which a contractor’s performance has begun and then been delayed or suspended for an uncertain duration because of the government’s fault, thereby extending the time period of performance. The formula must be strictly applied and may not be modified to make it apply to situations in which there is no performance on the contract.” NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 9 Orlando, FL

10. Examination of “Nicon” • In Nicon, the Appellant Court rejected the lower courts decision by stating “the contractor may recover unabsorbed overhead costs as a part of it’s termination for convenience settlement if a reasonable method of allocation can be determined on the facts of the case and the contractor can otherwise satisfy the strict strict prerequisites for recovery of unabsorbed overhead costs.” NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 10 Orlando, FL

11. Are Alternative Methodologies Viable ? • Singleton attempted to use similar arguments hoping to achieve similar results … • However, the ASBCA found that even though there may have been a government-caused delay, there was also a concurrent delay caused by the contractor. • Their decision indicates that Singleton was denied recovery of unabsorbed home office overhead even if they sought to use an alternate method via it’s termination for Convenience proposal. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 11 Orlando, FL

12. Are Alternative Methodologies Viable? Continued … • "A review of the case law demonstrates that Eichleay applies only where 'contract performance' has been delayed, and not simply where there is government-caused delay." • that Eichleay damages are available only where the delay in issuing the Notice to Proceed (NTP) also delayed the contractor's contract performance. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 12 Orlando, FL

13. Are Alternative Methodologies Viable ? Continued … • Nicon’s claim for unabsorbed overhead differed from the typical case because it submitted no actual billings and contract performance was not delayed, • It proposed a modified calculation, substituting the original contract price for actual billings and the contract performance period for actual number of delay days • "Because Nicon seeks unabsorbed overhead under a formula that is not recognized by the Federal Circuit, its claim must be rejected.” NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 13 Orlando, FL

14. Contractor’s Take Note … • That the court decisions point towards the use of the Eichleay formula where the use and application should consider being limited to situations where actual contract performance has begun. • “Court has treated recovery of home office overhead through application of the Eichleay formula as an essential part of the federal contract claims process that should not be altered except by statute” NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 14 Orlando, FL

15. Delay vs. Stand by – Charles G. Williams Construction Inc v. Secretary of the Army, Fed. Cir., No. 02- 1462, 5/5/03 – P.J. Dick Inc. v. Secretary of Veterans Affairs [ii], Fed. Cir., No 02-1290, 4/7/03 • Is the contractor expected to be on “standby” during the delay period ? NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 15 Orlando, FL

16. Stand-by…Williams Case • Performance was never suspended or interrupted, • Loss of efficiency and effectiveness, and as a result was unable to perform during the delay period • If the government interfered with efficient performance, would that establish the basis for entitlement to Eichleay damages? NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 16 Orlando, FL

17. Stand-by…Williams Case continued… • Damages are available under Eichleay only as an extraordinary remedy when indirect costs cannot be allocated to a particular contract for a period during which the government made performance impossible and required the contractor to remain on standby • “based on auditor’s report and testimony, the daily reports, and other data referred to above, that the appellant has not proved that performance of the work was suspended or significantly interrupted during the period” involved. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 17 Orlando, FL

18. Standby …. P.J. Dick Case • Do government-caused delays, extending the performance for an undetermined duration, and requiring that the company perform immediately after the suspension period support “stand-by”? • The Board concluded, “PJD was able to progress other parts of the work during the time periods it alleges it was suspended” NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 18 Orlando, FL

19. What is Stand by ? • The PJ Dick Case Provided the following guidance & clarification: a) Determine whether the Contracting Officer has issued a written order that suspends all work on the contract for uncertain duration, b) Requires the Contractor to remain to resume work immediately or on short notice, and c) Where there is no written order, the contractor must prove standby by indirect evidence. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 19 Orlando, FL

20. What is Stand by ? • Specifically, the court said, the contractor must show that: 1. The government-caused delay was not only substantial but of an indefinite duration;  2. During the delay the contractor was required to be ready to resume full and immediate work on the contract; and 3. Much, if not all, contract work was effectively suspended, NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 20 Orlando, FL

21. Other Decisions …. • The Contractor must show a suspension, whether formal or functional, of all or most of the work on the contract. • While the contractor's work was not totally suspended during the 100-day government- caused delay period, progress was "significantly interrupted," and that this was enough to entitle the contractor to Eichleay damages. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 21 Orlando, FL

22. Other Decisions continued…. • The term "stand-by" does not require that a workforce be completely idle. While the government contended that the ability to move portions of the workforce to other projects meant that they were not on stand-by status, the court citing a 1993 Federal Circuit decision, found it sufficient that the contracted work was "significantly interrupted" NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 22 Orlando, FL

23. Other Arguments & Decisions… • A contractor must prove it incurred increased overhead as a result of the delay and, • If the government meets its burden of production, the contractor must also demonstrate taking on replacement work was impractical. • Ability to perform substantial work during suspension, although less than it had in previous months. • Proof that its billings were less than they would have been, absent the suspended work. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 23 Orlando, FL

24. Suspension of Work (SOW) requires less proof • P.J. Dick did not recover Eichleay damages, however,the court rejected a requirement to demonstrate entitlement to Eichleay damages in order to recover delay damages under the contract's Suspension of Work clause; • The Board’s conclusion stated "Entitlement to recovery under the SOW requires proof entirely different, and less demanding, than that required to show entitlement to Eichleay damages.” NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 24 Orlando, FL

25. Suspension of Work (SOW) requires less proof Furthermore, the Board concluded : 1. There must be a delay of unreasonable length extending the contract completion time; 2. The delay must have been proximately caused by the VA’s action or inaction; 3.The delay resulted in some injury; and 4. There is no delay concurrent with the suspension that is the fault of PJD. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 25 Orlando, FL

26. Conclusion • Success of Eichleay can be directly attributable to the Contractor’s ability to : – to provide the necessary records, – documentation, and – schedules • Data should demonstrate clearly the disruption, delay, notification of Stand-by, unabsorbed overhead, replacement work, performance days, etc… • Contractor’s should examine all communications internally and externally, and • Seek and obtain legal counsel as necessary NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World” April 26–28, 2004 Renaissance Orlando Resort at Seaworld 26 Orlando, FL