Contractors Head Office Overheads Entitlement for Delays – Eichleay Formula

Eichleay Formula

The Eichealy Formula is becoming increasing popular as a method of calculating head office overhead entitlement in the case of construction delay which are not due to the Contractor and are due to events for which the Employer is responsible under the Conditions of Contract.

A)  The Basic Formula

The basic Eichleay formula calculation is generally calculated at the end of a project when all work has been completed. In which case, the following three-step calculation is used to determine the Contractors entitlement in respect of Head Office Overheads due to a delay.

1. Allocated Overhead. This is a calculation to determine the portion of the Head Office Overhead that should be allocated to the project in question. This project is expected to contribute its fair share of Head Office Overhead and this is the method adopts in calculating this amount.

 

Total Contract Billings

X

Total Head Office Overheads

=

The Projects Allocated Overheads

Total Company Billings

 

2. Daily Allocated Overhead. Next, the Contractor needs to determine a daily rate for the allocation of Head Office Overhead.

 

The Projects Allocated Overheads

=

Total Head Office Overhead Rate

Contract Period including Delay Period

 

3. Head Office Overhead Entitlement. This is simply a matter of multiplying the number of delay days for which the Employer is obligated to compensate the Contractor for under the Contract by the daily allocable overhead rate calculated above.

Total Head Office Overhead  Rate

X

Period of Delay

=

Entitlement to Head Office Overheads

 

 

B)  Sample Calculation

For this example we shall assume that the Contract Amount is RM 3,000,000.00. The Contractor has suffered compensable delays amounting to 50 calendar days. During this period, the contractor has 10 projects running concurrently whose aggregate value is RM 20,000,000.00. The contractor’s Head Office Overhead during this period demonstrated to be RM 1,000,000.00. The duration of this project, including delays, is 365 days. Then the sample calculation of Contractors entitlement to Head Office Overhead recovery due to the delay would be as follows:

 

1. The Projects Allocated Overhead

 

3,000,000.00

x

1,000,000.00

=

150,000.00

20,000,000.00

 

2. Daily allocated Overhead.

150,000.00

=

410.96

365

 

3. Head Office Overhead Entitlement.

 

50

x

410.96

=

20,548.00

 

Thus, in this simple example, the Contractor’s entitlement is calculated at RM 20,548.00 in respect Head Office Overhead costs as a result of the delays.

C)  Potential Problems Associated with Adopting the Eichleay Formula

The Eichleay formula is considered an estimate or an approximation and its accuracy can be questioned. Even so, the Eichleay formula is generally considered to be a reasonable basis for estimating the amount of unabsorbed Head Office Overhead resulting from construction delays.

It is reasonable when questioning the validity of Eichleay calculations to demand that the calculations be based upon audited financial statements to determine actual Head Office Overhead costs. Smaller Contractors may not have audited information available and larger Contractors may not have audited information available immediately upon the completion of a project.

An objection to the inclusion of certain components in the value of Head Office Overheads may arise. As an example, on Government projects which are obtained through open tender, the cost of advertising and entertainment may be not be allowed.

It may be difficult to accept Eichleay calculations if the delay occurs late in the contract period. As an example, if the delay occurs when the project is all but complete, it could be argued that all alloctedHead Office Overhead expense have already been paid to the Contractor.