The Eichleay Formula in Naval Facilities Engineering Command (NAVFACENGCOM) Contracting

When a delay causes contractors to be shut down or turn idle for a period of time, fixed overhead as well as general and administrative expenses continue to be incurred. However, the amount of direct costs to which these expenses can be allocated or expensed is reduced. The result is an amount of overhead that is unabsorbed, which can be allocated to that specific delay. Various pricing methods for calculating these unabsorbed home office overhead expenses currently exist in the construction litigation process today. The per diem Eichleay method is the most frequently utilized method. In this era of financial austerity, the armed forces are facing challenges to maintain operational readiness with fewer personnel and leaner operating capital due to shrinking defense budgets. One way to optimize these precious and limited resources is the efficient and effective use of construction funds and personnel in Naval Facilities Engineering Command NAVFACENGCOM construction administration. This report focuses on the commonly utilized Eichleay method of computation, as well as alternative methods currently utilized in todays construction industry. Research and analysis was conducted on current litigated construction claims resulting from disputes involving the Eichleay formula. Assumptions about the Eichleay formula method and its shortcomings have been provided. Emphasis on utilizing other methods of calculating these damages to the contractor as well as situation specific modifications of the Eichleay formula itself are also included. Conclusions were drawn from the data that identify significant strengths and weaknesses among these common place case situations. Recommendations were made for future possible improvements regarding the recognition and avoidance of potential claims by contractors.