The Eichleay Formula: How Contractors Recover Home Office Overhead on Delayed Projects
When a construction project is delayed through no fault of the contractor, the contractor incurs costs beyond the direct job costs. The field office stays open longer. The project manager stays assigned. But the home office — the contractor's corporate headquarters, with its rent, administrative staff, insurance, utilities, and shared services — also continues to accrue costs that were supposed to be absorbed by the delayed project's original duration.
These extended home office costs — technically called "unabsorbed home office overhead" — are not easily tracked project by project. A contractor's accountant can't point to specific invoices and say "these are the home office costs that should have been absorbed by this delayed project." Home office costs are allocated across all active projects; a delay on one project doesn't change the home office expenses, just how they're spread.
To handle this allocation problem, the US Armed Services Board of Contract Appeals developed what became known as the Eichleay formula in the 1960 case of Eichleay Corporation, and it became the accepted method on federal projects for calculating home office overhead recovery on delay claims. Many state and private contracts now accept Eichleay-based calculations as well.
The Eichleay formula has three steps:
The three steps of the Eichleay calculation
- Step 1: Allocated home office overhead = (Total contract billings during performance period / Total company billings during performance period) × Total company home office overhead during performance period
- Step 2: Daily rate of allocated overhead = Step 1 amount / Total days of contract performance
- Step 3: Recoverable home office overhead = Daily rate × Number of compensable delay days
Walking through a concrete example: a contractor has a $4M contract that was planned to run 400 days. During that 400-day period, the contractor's total company billings across all projects were $25M, and their total company home office overhead was $2M. The project was delayed 60 compensable days.
Eichleay example calculation
- Step 1: (4,000,000 / 25,000,000) × 2,000,000 = 16% × 2,000,000 = $320,000 home office overhead allocable to this contract
- Step 2: $320,000 / 400 days = $800/day rate for home office overhead
- Step 3: $800/day × 60 compensable delay days = $48,000 recoverable home office overhead
The formula is deterministic given the inputs. The disputes come from which billings count, which costs count as home office overhead, and whether the delays meet the prerequisites for applying Eichleay at all.
Federal case law establishes specific prerequisites for Eichleay recovery:
Eichleay prerequisites established by federal case law
- The delay must be government-caused (on federal projects) or owner-caused (on private projects accepting Eichleay)
- The contractor must be on standby — unable to take on replacement work during the delay period because of the uncertainty about when the delayed project would resume
- The contractor must have been impacted by the delay in a way that created the unabsorbed overhead (not just had the contract duration extended, but actually had work suspended or meaningfully slowed)
- There must be no other work the contractor could reasonably have performed during the delay that would have absorbed the overhead
The "standby" requirement is the most common reason Eichleay claims fail. A contractor whose project was delayed but who kept working on other projects during the delay period isn't on standby — they continued to generate billings that absorbed overhead. An Eichleay claim from a contractor who stayed busy is typically reduced or denied.
The standby requirement is strict. If the contractor was even partially productive during the delay period, an Eichleay claim may not hold. The underlying theory is that Eichleay compensates for the home office overhead that the delay prevented the contractor from earning elsewhere — if they were earning elsewhere anyway, there's nothing to compensate.
The formula requires identifying the contractor's total home office overhead during the performance period. This typically includes:
Costs typically included in home office overhead
- Office rent and occupancy costs for the home office
- Home office salaries for administrative and executive staff
- Benefits and payroll taxes for home office staff
- Home office utilities, insurance, and depreciation
- General administrative expenses — accounting, legal, IT, office supplies
- Business development and marketing costs
What does NOT count as home office overhead: direct project costs, field office costs (those are direct project costs), and costs specifically allocable to other projects. The distinction between home office (unallocated) and field office (allocable to specific projects) is usually straightforward but occasionally contested.
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Alternatives and Variations
Eichleay is the most common formula but not the only one. A few alternatives exist:
Alternative formulas sometimes used
- Modified Eichleay — variations on the base formula, often adjusting how contract billings or total billings are measured
- Hudson formula — a simpler calculation using the contractor's overhead percentage directly, common in UK construction and sometimes used as a cross-check
- Emden formula — a variation using an industry-standard overhead percentage rather than the contractor's specific numbers
- Daily cost method — simply tracking the specific home office costs attributable to the delay, without a formula-based allocation
In US federal construction, Eichleay is the default. Other formulas appear in private construction and international projects, and experts may use them as cross-checks to validate the reasonableness of Eichleay-based calculations.
On private projects, whether Eichleay applies at all depends on the contract. Some contracts specifically allow Eichleay recovery for compensable delays. Some specifically exclude home office overhead from recoverable damages. Some are silent, in which case general principles of damages law apply — often but not always allowing Eichleay-style recovery.
Contracts with "no damages for delay" clauses may exclude Eichleay recovery entirely. These clauses are enforceable in many jurisdictions (though with exceptions for bad-faith delay or abandonment of the project). A contractor signing a contract with such a clause should understand that delay damages including home office overhead are likely unrecoverable even if delays occur.
A credible Eichleay claim requires specific documentation:
Documentation supporting an Eichleay claim
- Total contract billings during the performance period — from project accounting records
- Total company billings during the performance period — from corporate financials
- Total home office overhead during the performance period — from corporate financials, with specific identification of what's included
- Contract performance period dates — from the schedule, with beginning and end clearly defined
- Compensable delay days — established through the delay claim's time impact analysis
- Standby evidence — documentation that the contractor was on standby during the delay period, typically including correspondence about work stoppages, lack of alternative work, or inability to demobilize without prejudicing later resumption
The Eichleay formula is the accepted method for calculating home office overhead recovery on delayed federal projects and by extension many private ones. The math is straightforward; the prerequisites are strict. A contractor pursuing Eichleay recovery should verify the standby requirement is met, document the home office overhead cost clearly, and ensure the contract allows overhead recovery at all. Misapplying Eichleay — or applying it without meeting the prerequisites — is a common way valid-looking claims get denied.
Written by
Marcus Reyes
Construction Industry Lead
Spent twelve years running AP at a $120M general contractor before joining Covinly. Lives in the world of AIA G702/G703, retainage schedules, and lien waiver deadlines. Writes about the construction-specific workflows that generic AP tools get wrong.
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