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FAIRFAX CO. REDEV'T AND HOUSING AUTH. v. WORCESTER BROS. CO., INC.


FAIRFAX CO. REDEV’T AND
HOUSING AUTH.

v.

WORCESTER BROS. CO., INC.


February 26, 1999
Record No. 980731

FAIRFAX COUNTY REDEVELOPMENT AND HOUSING
AUTHORITY

v.

WORCESTER BROTHERS COMPANY, INC.

FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
Arthur B. Vieregg, Jr., Judge
Present: All the Justices
OPINION BY JUSTICE LAWRENCE L. KOONTZ, JR.


In this appeal, we consider whether the trial
court’s award of unabsorbed home office expenses to the
contractor on a public construction project following an
unreasonable delay by the contracting government agency was based
upon sufficient proof of the existence and amount of those
damages.

BACKGROUND

Under well established principles, we recount
only those facts relevant to our resolution of the appeal. On
September 14, 1995, the Fairfax County Redevelopment and Housing
Authority (the Authority) entered into a contract with Worcester
Brothers Company, Inc. (Worcester Brothers), a general
construction contractor, for site renovations and improvements of
Washington Plaza in Lake Anne Village (the project) in Reston.

The Authority had originally solicited bids for
the project based on a projected start date in July 1995, with
completion of the work in 150 calendar days from the notice to
proceed. Thus, the proposed date of substantial completion at the
time bids were solicited was mid-December 1995. Worcester
Brothers based its bid on these conditions. However, because the
Authority did not award the contract to Worcester Brothers until
September 14, 1995, the substantial completion date for the
project was moved back to mid-February 1996.

It is not disputed that at the time Worcester
Brothers commenced work on the project, the Authority had not yet
obtained the necessary clearances from an adjoining property
owner to allow work to proceed on a portion of the project site.
The Authority did not obtain the clearances until March 6, 1996.

After the work was completed, Worcester
Brothers filed notice of potential change #15 (NPC 15) with the
Authority’s architect seeking additional payment for field
office expenses incurred on the job site due to the
Authority’s delay in obtaining the clearances. Worcester
Brothers also claimed it had unabsorbed home office expenses
attributable to the delay. In NPC 15, Worcester Brothers
calculated its additional field office expenses based upon its
daily field office overhead rate multiplied by the 98 days of
delay it attributed to the Authority.
[1] To
calculate its unabsorbed home office expenses, Worcester Brothers
used the so-called "Eichleay formula,"
[2] to determine a daily home office overhead rate and
multiplied that rate by the same 98 days of delay. The architect,
acting on behalf of the Authority, denied the claims made in NPC
15.

On November 4, 1996, Worcester Brothers filed a
motion for judgment against the Authority seeking damages for
breach of contract based upon the failure to pay NPC 15.
[3] The Authority filed an answer denying the allegations
of the motion for judgment and raising as an affirmative defense
the claim that "[h]ome office damages based on the Eichleay
formula are prohibited by Virginia law."

At trial, Worcester Brothers contended that
during the delay it incurred both additional field office
expenses as a result of having to maintain its personnel at the
job site and unabsorbed home office expenses. It presented
evidence of its actual field office expenses related to the delay
in the amount of $46,359.11. Worcester Brothers’ accounting
system did not allocate its home office expenses to particular
contracts. However, Joseph P. Noonan, Worcester Brothers’
president, testified that the unabsorbed home office expenses
attributable to the delay amounted to $34,495.89. According to
Noonan, that figure was calculated from statements prepared by
Worcester Brothers’ accountants reflecting the total general
and administrative expenses of the company during the relevant
contract period and the application of the Eichleay
formula to those expenses.

The Authority asserted numerous objections to
Worcester Brothers’ evidence of damages. Pertinent to the
issue presented on appeal, the Authority contended that Worcester
Brothers had proven no actual damages as a result of the delay.
It contended that the Eichleay formula calculation did not
constitute proof of actual damages to a reasonable degree of
certainty, but, rather, is merely a method for determining the
amount of unabsorbed home office expenses attributable to a
particular contract once the existence of such damages has been
proven by other evidence. The Authority contended that Worcester
Brothers had not shown that its workforce was actually idle as a
result of the delay in obtaining the clearances and, thus, that
none of its home office expenses was incurred as a result of the
delay. Moreover, the Authority contended that the Eichleay
formula was "totally and wholly irrelevant" to "a
contract governed by state law."

At the conclusion of the evidence, the trial
court addressed the Authority’s contentions and reasoned
that in order to succeed on a breach of contract damage claim for
unabsorbed home office expenses resulting from a delay, the
contractor was first required to show that it had incurred such
damages by establishing that the government had caused the delay;
that the contractor’s workforce was placed on standby as a
result; and that the contractor was not free to engage in work on
other projects during the delay. The trial court then found that
the Authority’s delay was "manifest on this
record" and was "egregious" and "frankly
inexcusable." The trial court further found that Worcester
Brothers’ workforce had been on "standby" because
the Authority "never could advise the contractor that the
area would not be available until a particular date. Instead it
was a rolling deadline." Finally, the trial court found that
the "rolling deadline" also inhibited Worcester
Brothers from seeking other contracts, and thereby minimizing the
damage caused by the delay, since it could not be assured of the
availability of its workforce for another project.

Having found that Worcester Brothers had
satisfied its initial "burden of proving [home office] damages with reasonable certainty," the trial court turned
to the question whether the Eichleay formula could be used
to calculate the amount of those damages. Recognizing that other
courts had found the Eichleay formula to be "a fair
way of approximating" such damages, the trial court noted
that after auditing Worcester Brothers’ books, the Authority
did not contend that any of the specific expenses were
inappropriately claimed and that the Authority’s witnesses
failed "to present any reasoned analysis of why Eichleay
is inappropriate." Accordingly, the trial court entered
judgment for Worcester Brothers for both the field office
expenses ($46,359.11) and the unabsorbed home office expenses as
calculated by the Eichleay formula ($34,495.89). The trial
court granted the Authority’s motion to reconsider, and,
after receiving briefs from the parties, sustained its original
ruling. We awarded the Authority this appeal.

DISCUSSION

The Authority does not challenge the trial
court’s determination that the Authority was liable for
damages caused by the delay. Nor does the Authority challenge
that portion of the judgment attributable to field office
expenses. Accordingly, our discussion is necessarily limited to a
determination of whether, as specified by the Authority’s
assignment of error, "[t]he trial court erred in finding
that a contractor had proved its home office damages with
reasonable certainty." (Emphasis added.) We agree with the
trial court’s reasoning that the resolution of this issue
requires that we first consider whether Worcester Brothers
established that it suffered damages in the form of unabsorbed
home office expenses attributable to the Authority’s delay,
and, if so, whether there was adequate proof of the amount of
those damages.

Home office expenses, commonly called overhead,
include those costs that a contractor must expend for the benefit
of its business as a whole. These expenses include, for example,
the salaries of office staff, accounting expenses, dues and
subscriptions, equipment costs, and utility services. Unabsorbed
home office expenses comprise "those overhead costs
needlessly consumed by a partially or totally idle contractor. A
contractor continues to incur overhead costs during periods of
reduced activity or delay on a particular contract. When this
occurs, the ‘reduced activity’ contract no longer
‘absorbs’ its share of overhead costs." Michael W.
Kauffman and Craig A. Holman, The Eichleay
Formula: A Resilient Means for Recovering Unabsorbed Overhead
,
24 Pub. Contr. L.J. 319, 321 (1995)(footnotes omitted).

When a breach by one party imposes a delay on
the ability of the other party to perform its obligations under a
contract, "the damages are to be measured by the direct cost
of all labor and material . . . plus fair and
reasonable overhead expenses
properly chargeable
. . . during the reasonable time required" to
complete performance. E.I. duPont deNemours & Co. v.
Universal Moulded Prod.
, 191 Va. 525, 581, 62 S.E.2d 233, 259
(1950)(emphasis added). In such cases, while the plaintiff must
prove its damages with reasonable certainty, "‘[a]n
absolute certainty as to the amount of the damages is not
essential when the existence of a loss has been established. The
quantum may be fixed when the facts and circumstances are such as
to permit . . . an intelligent and probable estimate
thereof.’" Pebble Building Co. v. G.J. Hopkins, Inc.,
223 Va. 188, 191, 288 S.E.2d 437, 438 (1982)(citation omitted).

We recognize that not every instance of a delay
caused by the other party to a contract will result in a
contractor incurring either direct or overhead damages. However,
where the evidence shows that a contractor has incurred direct
damages as a result of the delay such as additional cost of labor
and material, the question whether the contractor also suffered
unabsorbed overhead damages necessarily must be determined from
the facts and circumstances of the individual case. It is not
necessary for the contractor to show that its overhead was
increased as a result of the delay, but only that it could not
otherwise reasonably recoup its pro rata home office
expenses incurred while its workforce was idled by the delay.

Here, the evidence showed that Worcester
Brothers incurred actual direct damages as a result of having to
maintain its personnel on the job site far beyond the anticipated
date of substantial completion. The record supports the trial
court’s finding that the Authority was responsible for a
delay that caused Worcester Brothers’ workforce to be
"on standby" and this further prohibited Worcester
Brothers from recouping its unabsorbed home office expenses by
seeking other contracts during the delay period. Accordingly, we
agree with the trial court’s ruling that Worcester Brothers
met its burden of proof with respect to the existence of
unabsorbed home office expenses attributable to the
Authority’s delay.

The Authority contends, however, that even if
Worcester Brothers proved that it incurred unabsorbed home office
expenses as a result of the Authority’s delay, the trial
court erred in accepting the Eichleay formula as the
method for determining the amount of these expenses. The
Authority asserts that the contract provides that disputes
between the parties will be governed by Virginia law and, since
no legislative act, administrative rule, or case law in Virginia
has "adopt[ed] the use of the Eichleay formula in
claims against public bodies in Virginia," the use of the
formula "was not within the parties’ contemplation at
the time the contract was executed."
[4]

The Authority is correct in noting that use of
the Eichleay formula has not been previously approved in
this Commonwealth by legislative or administrative act, nor has
its use been addressed in a published appellate court decision
relating to a public contract. However, we are not persuaded by
the Authority’s contention that a lack of prior
authoritative application of the Eichleay formula to a
Virginia public contract prevents its application in this
instance. The Eichleay formula is not a legal standard
that must be formally approved or adopted; rather, it is merely a
mathematical method of prorating a contractor’s total
overhead expenses for a particular contract.
[5] As such,
the question before the trial court was not whether, in the
absence of an express term, the parties contemplated using the Eichleay
formula, or any other method of calculating unabsorbed overhead
damages, but whether the resulting quantum was "an
intelligent and probable estimate" of the actual damages. Pebble,
223 Va. at 191, 228 S.E.2d at 438.

As an abstract proposition, the Eichleay
formula has been criticized as an inadequate substitute for
direct evidence of the actual amount of damages and "no less
speculative" than other unsupported opinion evidence simply
"because it was cast in a mathematical milieu." Berley
Indus., Inc. v. City of New York
, 385 N.E.2d 281, 283 (N.Y.
1978). In Berley, the New York Court of Appeals rejected
the use of the Eichleay formula as an "administrative
convenience," where there was no supporting evidence that
any of the home office expenses were attributable to the delay. Id.

Distinguishing Berley, the Florida
District Court of Appeals held that use of the Eichleay
formula for calculating unabsorbed home office expenses
attributable to a delay is proper so long as there is competent
evidence of actual damage having been sustained by the party
seeking relief. Broward County v. Russell, Inc., 589 So.2d
983, 984 (Fla. Dist. Ct. App. 1991). Similarly, other
jurisdictions have held that where there is sufficient proof that
the plaintiff has suffered damages as a result of the delay, the Eichleay
formula affords a reasonable basis for estimating the amount of
those damages with respect to unabsorbed home office expenses. See,
e.g., Conti Corp. v. Ohio Dept. of Admin. Serv’s,
629 N.E.2d 1073, 1077 (Ohio Ct. App. 1993); Golf Landscaping,
Inc. v. Century Const. Co.
, 696 P.2d 590, 593 (Wash. Ct. App.
1984).

We are of opinion that the rationale of the
latter cases is in accord with the general principles of law
applicable to proving damages for delay as outlined in the duPont
and Pebble, cases. Accordingly, where, as here, there is
evidence that a contractor has suffered actual damages as a
result of an unreasonable owner-caused delay, the Eichleay
formula is an acceptable method, though not the only possible
method, of calculating the portion of home office expenses
attributable to delay. Cf. Southern New England
Contracting Co. v. State
, 345 A.2d. 550, 559-60 (Conn. 1974);
PDM Plumbing & Heating, Inc. v. Findlen, 431 N.E.2d
594, 595 (Mass. Ct. App. 1982).

In recognizing the adequacy of the evidence in
this case to support the use of the Eichleay formula to
determine unabsorbed overhead damages for the delay in this
contract, we do not adopt it as the standard for determining such
damages generally. 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. Pebble, 223 Va. at 191, 228
S.E.2d at 438.

CONCLUSION

For the reasons stated above, we will affirm
the judgment of the trial court.

Affirmed.

 

 

FOOTNOTES:

[1] This figure was later revised to
represent the actual costs Worcester Brothers incurred in
maintaining its workforce on the project site during the delay
period.

[2] The Eichleay formula is
"the prevailing method" used for calculating a
contractor’s home office expenses attributable to a
government-caused delay on a federal contract. Capital
Electric Company v. United States
, 729 F.2d 743, 744 (Fed.
Cir. 1984).

[3] Worcester Brothers also claimed
damages resulting from the cost of snow removal and protecting
its equipment from winter weather as a result of the delay in
awarding the contract. The trial court dismissed this claim, and
Worcester Brothers has not assigned cross-error challenging that
ruling.

[4] On brief, the Authority asserts that
certain items were improperly included in the overhead expenses
used by Worcester Brothers in calculating its damages. At trial,
the Authority did not object to the introduction of the
accounting records on this ground. Accordingly, that issue is not
before us. Rule 5:25. We also reject the Authority’s
contention that the contract provision for a 15% mark-up for
"changes in the work" should be applied to field office
damages to determine a liquidated award of home office expenses.
Assuming that this argument can be subsumed within the assignment
of error, we are not persuaded that the 15% mark-up applies to an
award of damages for delay.

[5]To make that proration, the total amount billed on the
particular contract by the contractor (Bc) is divided
by the contractor’s total billings during the contract
period (Bt) and this quotient is then multiplied by
the contractor’s home office expenses attributable to the
contract period (Ht) to determine the amount of home
office expenses allocable to the contract. Next, the amount of
home office expenses allocable to the contract is divided by the
total number of days of the contractor’s performance under
the contract (Dt) to determine a daily contract home
office expense rate. Finally, the daily contract home office
expense rate is multiplied by the number of days of delay (Dd)
to determine the amount of damages (A). See Capital
Electric
, 729 F.2d at 747. This method of proration is the Eichleay
formula in its most basic application, and may be stated
mathematically in this way:

Bc

? ? Ht

Bt

? ? ? ? ? Dd = A

Dt

 

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