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We Like Ike!: California Permits Use of the Eichleay Formula

February 5, 2016

We Like Ike!: California Permits Use of the Eichleay Formula
by Carlo Paciulli, Esq.

While California often is at the vanguard on legal issues, it has finally come around and adopted the method federal courts have permitted since 1960 in computing a contractor’s extended home office overhead delay damages: the Eichleay formula. Eichleay produces a daily rate for a contractor’s home office overhead expense, which is then multiplied by the number of days a project is delayed to determine the amount a contractor may recover for its extended home office overhead costs as part of its delay damages. In JMR Construction Corp. v. Environmental Assessment & Remediation Management, Inc.,[1] the court of appeal, for the first time, approved the Eichleay formula as a proper method to calculate extended home office overhead damages in California.

In JMR, a dispute arose between the general contractor and its subcontractor, Environmental Assessment & Remediation (EAR), on a project owned by the U.S. Army Corps of Engineers. The trial court found that the Corps, EAR, and two others delayed the project. While JMR could not recover delay damages from the Corps because the delay was concurrent, it could seek damages against EAR. As a result, EAR was ordered to pay JMR its extended home office overhead as damages for the delay using the Eichleay formula. EAR appealed.

On appeal, the court of appeal rejected EAR’s attacks on the use of Eichleay. First, the court gave no weight to the fact that no California court had ever approved its use. Instead, the court noted that federal courts had long approved the Eichleay formula as the only means for calculating extended home office overhead damages and that the formula is used frequently in trials and arbitrations. That no California court had approved Eichleay’s use until now was of no consequence.

Second, the court approved the use of Eichleay in an unusual circumstance: where a general contractor seeks delay damages from a subcontractor rather than from a public agency. The court reasoned that JMR should have recovered such compensation from the Corps but could not because of EAR’s delay. Eichleay was an appropriate method to compensate JMR for the delay damages caused by EAR’s breach of contract.

With this decision, California reclaims its place in the vanguard of construction law by expanding the circumstances in which Eichleay may be used.

Carlo Paciulli is a Shareholder with Hunt Ortmann, a leader in California construction law. If you have any questions about this bulletin or the Eichleay Formula, please contact him at Paciulli@huntortmann.com.

[1] 243 Cal.App.4th 571 (2015)

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