UNABSORBED OVERHEAD OBSERVATIONS ON
WEST v. ALL STATE BOILER, INC.
146 F.3d 1368 (Fed. Cir. 1998), 17 FPD 76 [40 GC 359]

By: Howard N. Kenyon

There appears to be a lull in the contractors’ long-lived struggle for a final solution to the delay caused unabsorbed overhead problem. Not obvious is whether this is the result of apparent clarifications of certain issues by the U.S. Court of Appeals for the Federal Circuit in West v. All State Boiler, Inc. 146 F.3d 1368 (Fed. Cir. 1998), 17 FPD 76 [40 GC 359] or merely capitulation in the face of the seemingly daunting task of convincing the Court of any correct methods of determining entitlement and quantification of damages. But whatever the cause may be, the strife will certainly return. The All State Court left much unresolved. David G. Anderson, LL.M., CPA in a critical analysis of the All State decision explained these shortcomings, especially those regarding entitlement. See Guest Appearance, 12 N&CR 51.

In addition to what Mr. Anderson identified as significant problems in the All State decision, there are also significant quantification problems. The All State decision has created conflicts within itself and with the decision in Wickham Contracting Co. v. Fisher, 12 F.3d 1574 (Fed. Cir. 1994) 13 FPD 1, 36 GC 201, wherein it was held that the Eichleay formula (Eichleay Corp. ASBCA No. 5183, 60-2 BCA 2688, 2 GC 485) is the only method for calculating the amount of recovery of unabsorbed overhead.

Period in which Delay Damages Occur

Profound in the All State decision is the Court’s recognition of the period in which a contractor experiences delay damages, the extension period:

“Thus, we conclude that indirect costs are only unabsorbed, and thus only compensable, to the extent they accrue during the extension period because a contractor must continue to work on that contract to make up for standing by throughout an unexpected suspension caused by the government.”

Recognition that indirect-cost delay damages occur only in the extension period is an affirmation of the concept expressed in the original Eichleay decision where the Armed Services Board of Contract Appeals stated:

“It has, however, been sufficiently demonstrated by the mere fact of prolongation of the time of performance, and the continuation of main office expenses, that more of such expenses were incurred during the period of performance than would have been except for the suspension.”

Implicit in the Federal Circuit’s recognition in All State of the extension period being the only period in which fixed-cost delay damages occur is that such damages do not occur during suspension within the original contract period. If proof of this corollary were needed, it would be found in the fact that the contractor’s fixed costs for the original contract period were included in the original contract price and since the contractor will be paid the original price, no damages have occurred with respect to the original period.

The clarification of the period in which damages occur is fundamental to any progress toward resolving the unabsorbed overhead quantification issue. The stage should now be set for the rational quantification of delay damages in accordance with FAR cost principles for allocation of indirect costs based on beneficial or causal relationships. Certainly it is beneficial to the suspended contract to be supported by the contractor’s indirect costs in the extension period. Thus the work performed, or its surrogate during the continuing suspension in the extension period, should have allocated to it the indirect costs normally allocated to work performed in the period, consistent with the contractor’s established allocation methodology. If the Court has in fact progressed to the point of recognizing the extension period as the only period in which fixed-cost damages occur, then repricing the original contract work can be avoided and a more precise quantification can be achieved.

Unfortunately, the All State decision does not get us out of the woods. While the Court could clearly see the extension period as the only one in which delay damages occur, it got lost in the underbrush when proposing the quantification of All States’s damages. In fact, the Court did not propose any new quantification method, it only followed the Wickham dictum. And here is the conflict and undoing of the progress made. Wickham arbitrarily made it clear that the Eichleay formula was the only method by which unabsorbed overhead could be calculated. But the constituents of that formula are not limited to the activity of the extension period only. Fixed costs of the entire performance period are used as the basis for calculating the unabsorbed overhead due to delay. All State has thus produced an irreconcilable conflict extension period overhead v. total contract period overhead.

For its recognition of the significance of the extension period to the quantification of delay damages the Court should be applauded. But why after coming to a logical conclusion has the Court abandoned allegiance to its own logic and defected to Eichleay? Does the decision imply that there are two choices, Eichleay using total contract period costs, or some other method yet to be defined using the extension period costs only?

Period in which Replacement Work Occurs

A distinction between original contract period and extension period has equal significance to quantification of replacement work cost absorption. But when the Federal Circuit attempted in All State to explain the meaning of the second prong of the Eichleay prerequisites--the contractor’s inability to obtain replacement work--it stumbled on its failure to maintain a distinction between the extension period and original period of performance. The difference in these two periods is that replacement work can only occur where planned work is displaced by suspension, the original contract period. Any work performed in the extension period is new work for that period, not replacement work. It is clear that the Court made no distinction between the two periods but combined them for applying the replacement work test. It stated:

“Thus, the relevant time frame for replacement work analysis begins at the start of the suspension period and continues to the end of the extension period.”

In its attempt to maintain the second prong prerequisite recently demonstrated in both Mech-Con Corporation, ASBCA No. 45105, 94-3 BCA 27252, and Satellite Electric Co., v. Dalton, 105 F.3d 1418 (Fed. Cir. 1997) 16 FPD 12, 39 GC 99, 599--the Federal Circuit stated in All State:

“Thus, to prevent recovery, the government must rebut a contractor’s prima facie case by showing either (1) that it was not impractical for the contractor to obtain other work to which it could reallocate its indirect costs, or (2) that the contractor’s inability to obtain other work was caused not by the government’s suspension but by some other circumstance, as in Satellite Electric.”

If the court had associated this second prong rebuttal criteria with that part of the suspension period occurring only in the original contract period, its statement would have some meaning. It would mean that the contractor had a duty to mitigate damages (that occur later) by using the suspension period within the original contract period to take on replacement work. Thus, the test for the second prong is or should be a test of whether or not the contractor attempted to mitigate damages. And correspondingly, the government’s rebuttal would not be a showing that the contractor suffered no losses due to government suspension but a showing that the contractor failed to attempt mitigation.

But how could this rebuttal criteria have any application to the extension period? How does a suspension of unplanned work create schedule relief, an opportunity the non-use of which the contractor is obligated to justify? The suspended contract creates no void in the extension period and, therefore, provides no opportunity for additional work. So why should the government attempt to show that the contractor did not avail itself of this non-existent opportunity by either impracticality or government fault? The Court should always accept that it is impractical to fill an imaginary void. And it should accept that imaginary voids are created only by the Eichleay prerequisites.

It is highly likely that a suspension causing an extension to the contract period will interfere with scheduled work and disrupt the contractor’s efforts to take on new work. But if the suspension alone does not prevent taking on new work in the extension period, the suspended contract is still a beneficiary of the contractor’s continuing fixed costs in the extension period, whether it is standing by or resuming the contract effort after the suspension. If the contractor is denied the opportunity to recover fixed costs allocated pro rata in the extension period to the suspended contract, as is required by FAR 31.203, obviously it will be damaged. Thus, no test for damage is necessary.

Conclusion

For a number of reasons the Eichleay method of quantifying fixed-cost delay damages has to be abandoned. The Court seems to have gone in that direction in All State, but failed to build a real head of steam. Instead of tip-toeing through the illogic of precedent cases and redefining the Eichleay prerequisites so the desired outcome can be achieved every time an unabsorbed overhead case comes before it, the Court should build a logical basis for entitlement to and quantification of fixed-cost delay damages.

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