LEGAL ISSUES California Adopts Eichleay Formula


By Maria Giardina Sedgwick LLP


damages is permitted to use the Eichleay formula to calculate home office overhead. In JMR Construction Corp.


A


v. Environmental Assessment and Remediation Management, Inc., 243 Cal.App.4th 571 (2015), the federal government (Owner) contracted with JMR Construction Corp. (Contractor) to build a dental clinic at the Presidio of Monterey. JMR, in turn, entered into electrical and plumbing subcon- tracts with Environmental Assessment and Remediation Management, Inc. (Subcontractor). During the project, the Contractor


notified the Subcontractor about delays, deficient and late submittals, and improper plumbing work. After the project was completed, the Contractor sued the Subcontractor for breach of the subcontracts based on the Subcontractor’s defective and untimely work. After a bench trial, the trial court entered a judgment in favor of the Contractor in the total amount of $315,631, which included $60,693 in home office overhead calculated using the Eichleay formula.


Appeals Court Rejects 3 Arguments By Sub


On appeal, the Subcontractor


challenged the trial court’s use of the Eichleay formula to calculate home office overhead damages. In the published portion of the opinion, as a matter of first impression, the court of appeal held that the trial court did not err in using the Eichleay formula. In doing so, the court rejected three arguments made by the Subcontractor. First, the court rejected the


Subcontractor’s argument that using www.AGC-CA.org


s a matter of first impression in California, a contractor asserting a claim for delay


the Eichleay formula was impermis- sible because there were no published California decisions endorsing its use. Te court noted that the formula is commonly used in federal litigation involving federal public works projects and cited an opinion from the United States Court of Appeals for the Federal Circuit holding that “the Eichleay formula is the only means for calcu- lating recovery for unabsorbed home office overhead.”


Delay Damages Commonly Awarded


Te court also observed that delay


damages are commonly awarded in California, and that extended home office overhead is one type of delay damages a contractor may seek to recover for breach of a construction contract. Although the court acknowl- edged the absence of published California appellate court decisions adopting the Eichleay formula, the court was persuaded by the widespread use of the formula in trial court and arbitration proceedings. Second, the court rejected the


Subcontractor’s argument that the Eichleay formula should not apply because the Contractor was seeking delay damages from a subcontractor, as opposed to a public owner. Te court credited the Contractor’s unrebutted trial testimony which established that the Owner had rejected the Contrac- tor’s attempt to recover home office overhead damages due to concurrent delay.


Te court also credited the


unrebutted testimony of the Contrac- tor’s construction management expert who explained that, in the typical case of concurrent delay caused by a project owner and a subcontractor, the owner may grant the general contractor additional time to complete the project, but will not compensate the general contractor for that time.


In light of


the evidence, the court concluded: “Indeed it would be anomalous to allow recovery to [the Contractor] for Eichleay extended home office overhead damages in a claim against the government-owner – had there been no concurrent delay and where, as here, [the Contractor] had established the fact of such damages and causation – while denying such recovery from [the Subcontractor] where [the Subcontractor] was concur- rently responsible for the delay.”


Requisite Elements of Eichleay Formula


Finally, the court rejected the


Subcontractor’s argument that the Contractor had failed to prove the requisite elements of the Eichleay formula, which include: 1. Te existence of a government- caused delay.


2. Proof that the contractor was on “standby.”


3. Proof that the contractor was unable to take on other work. Te Subcontractor asserted that


the Contractor failed to prove element (3). But the court found sufficient evidence based on the Contractor’s showing that, during the concurrent delay period, the Contractor’s rating was downgraded to marginal, which impacted its ability to obtain new work. In addition, the Contractor was unable to obtain bid bonds, which precluded it from bidding on public projects. 


Maria J. Giardina is of counsel with


Sedgwick Law, San Francisco. She can be reached at maria.giardina@sedgwicklaw. com or (415) 627-1520.


Associated General Contractors of California 13


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