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The Extreme Difficulty of Recovery Of Home Office Overhead By Government Construction Contractors In Construction Claims Cases
The current (and relentlessly deteriorating) state of the body of judicial rulings (I refer primarily to federal court cases which I have observed most, not state courts) against contractors on recovery of unabsorbed overhead as an element of cost in a government construction claim is an abominable disgrace, unfair to contractors beyond comprehension.
In the last several years, more and more federal government construction owners defending contractors claims for equitable adjustment are throwing up twisted reasoning as to why the construction contractor should be denied recovery of the element of contract damages called home office overhead (home office G&A).......and federal claims courts and boards of appeals more often than not are upholding them.
That otherwise finely honed federal judicial minds are unable to sort out that a contractor’s home office facility and staff, including its equipment yard, overhaul shops and skilled mechanics, unlike its projects which have income-earning contracts, has NO contracts, is not believable.
This all-important contractor cost entity is a “dead horse”; its cost must be funded by the business’ contracts as there is no other means of funding it. The contractor’s home office produces no income. To exist it must receive “payments” from each contract the business has on the books.
Only the most imprudent, naïve, contractor will not include in each bid for a new contract an allowance for home office overhead (some say “general and administrative” costs … G&A).
Essentially the contractor’s G&A is thus funded by a percentage of the cash flow - from each ongoing contract. Observe what happens when an owner’s actions or inactions literally suspend the contractor’s performance on, for example, one (1) of its four (4) contracts. Clearly then, assuming for ease of illustration that each contract is of exactly the same price magnitude and performance difficulty, one-fourth of the contractor’s on-going G&A cost, for at least the duration of the suspension, will have to be extracted from the profit and overhead margins (if any) of the three (3) remaining active contracts.
What’s so hard to understand about that? What if the owner-suspended contract happens to be nearly the size of the other three (3) combined? The judiciary can’t understand this? In the words of the bit actor in “The Best Little Whore House In Texas”, “Please don’t piss on my boots and try to tell me it’s raining”. Anyone with common walking-around sense can grasp the unfair contractor-damaging elements involved here if the right to recover home office G&A is denied.
The thing is that the finely honed judicial minds in fact do understand, but will not acknowledge, this unfairness, opting instead to throw up legal barriers to force contractors to prove what a reasonable trier of fact knows almost assuredly cannot be proved.... the absolute inability of a government contractor in a contract suspended state to secure any kind or amount of "replacement work" whatever, for example ….among other devices.
Some of the judiciary are more blunt about it. Ultra-conservative Justice Clarence Thomas in a fairly recent case wrote that (paraphrasing) a decision doing equity to the contractor in the federal contract case at hand would overly burden the government as it might set an unduly expensive precedent for future litigation on similar issues.
Unfortunately, it doesn’t get better. See my Eichleay Formula White Paper.
Glen L. Eaton
Eaton Contract Services,Inc.
205-349-3516