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Article

Project time extensions and the relational Search

impact on unabsorbed home office
overhead
18th February 2021

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home-office-
overhead%2F&title=Project%20time%20extensions%20and%20th
When contractors submit a fixed-price bid on contracts, they anticipate that
the revenue derived from their projects will generate enough income. This
income should cover over and above the direct costs of their projects,
absorbing non-project costs and providing an overall company profit. The
non-project costs or “home office overhead” (HOOH) include such items as

“
management salaries, office rent, or any other costs related to the overall
operation of the company. Home office overhead is usually categorized as
General and Administrative (G&A) expenses in the contractor’s financial There is no standard “across-the-board,” accepted
statements.
way for calculating home office overhead recovery.
A contractor recovers home office overhead costs by including a markup on The various home office overhead recovery
its direct costs in its bids. Sometimes a contractor will identify a separate calculation methods can vary in both their formulas
markup as home office overhead or G&A but is more often just part of the and outcomes.”
overall bid markup. While the original bid markup on extra work may fairly
compensate a contractor for additional scope change orders, in the case of a Bob Dieterle, Jr., Manager HKA
delay (https://www.hka.com/delay-events-in-construction-delay-claims/) (https://www.hka.com/about-us/)
with no significant additional scope, contractors often seek compensation
for this unabsorbed or extended home office overhead. Put simply, these
claims are for the “loss opportunity” to be able to quickly replace the delayed
work with new work.
The American Association of Cost Engineers (AACE) addresses the issue of
the recovery of home office overhead, “[h]ome office overhead may be added
to a contractor’s bid as a percentage of direct project costs. The percentage
of home office overhead is generally based on a contractor’s historical
overhead rate and varies greatly from contractor to contractor depending on
the type of work (e.g. general construction
(https://www.hka.com/industries/construction-engineering/), electrical, etc.),
the method of accounting for home office overhead costs, etc. Percentages
or other formulations are often used because a more precise method for
allocating overhead to specific contracts that have experienced delay is
difficult to determine.”[1]
The approaches to this(https://www.hka.com)
recovery may be under a variety of methods,
depending on the terms of the contract, the project location and previous
court jurisdictional rulings.
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This article will describe and compare several commonly used home office
overhead costs formulas used in delay situations. The following formulas will 
be discussed: Eichleay,Contact
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Manshul, Locations Join UsEach formula will be
Hudson and Emden.
described, and the respective outcome of each will be calculated and
compared using the same data set of home office overhead costs.
Search
HOME OFFICE OVERHEAD FORMULAS

1. THE EICHLEAY FORMULA

ALLOCABLE HOOH TO PROJECT:

(Total Company Billings over Contract Period/
Total Home Office Overhead Costs)×Total Contract Billings
Daily HOOH for Contract:
Contract Performance Period/Allocable HOOH to Project
Unabsorbed HOOH:
Daily HOOH for Contract×Delay Days
The Eichleay Formula has been the standard for many courts in the United
States to calculate recovery of home office overhead. Prior to the 1940s,
unless it was expressed within the contract, contractors could not recover
damages related to home office costs for government delays. An article
published by Amarjit Singh and Thomas Taam about the history of
unabsorbed home office overhead gives insight into what laid the
groundwork for the Eichleay Formula in the 1940s. The authors state that,
“[i]n 1945, however, in the case of Fred R. Comb Co. v. United States ii, the
Court of Claims found the government liable to the contractor for home
office damages caused by delay. The court also found that the government,
having breached its contract, had no right to state that a contractor will go
uncompensated. This laid the foundation for the emergence of the Eichleay
Formula, which set up criteria and formulae for calculating compensation due
to the contractor.”[2]
The Eichleay Formula originated from the 1960 court case Eichleay
Corporation v. United States iii and a decision by the Armed Services Board
of Contract Appeals. In its appeal before the Board, the Eichleay Corporation
proposed a formula for calculating recovery of home office overhead. The
Board accepted this formula as a reasonable method for calculating the
damages (https://www.hka.com/services/expert/commercial-damages-and-
valuation/).[3]
Before the evolution of the Eichleay method, there have been at least two
other methods, the Allegheny and Carteret methods, used for pricing home
office overhead over the years in the United States. The Eichleay Formula has
emerged as the most commonly used method in claims and is now the only
method accepted by the federal courts on public contracts when certain
conditions are met.[4]
The Eichleay Formula is as follows:
The Eichleay Formula(https://www.hka.com)
is limited in the fact that, as it uses actual data, it can
only be used properly at the very end of a project. This means if a claim were
to happen while a project isTech
still ongoing,
HKAServices another method
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be used. Additionally, the Eichleay Formula was criticized by the courts
because it: (1) presumes that when a project is delayed that the contractor
was actually damagedContact
by Global
incurring unabsorbedJoin
home office overhead; and (2)
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Locations Us

fails to produce a reliable estimate of the damages suffered by the contractor
due to the delay.[5] The federal courts also have deemed that, for a
contractor to recover unabsorbed home office overhead using the Eichleay Search
Formula, it must prove that it encountered a full stoppage of work (or were
put on standby), and that it was unable to begin additional work as a result of
being on standby. As a result of these criticisms, the Manshul Formula
emerged in New York State.

2. THE MANSHUL FORMULA

Direct Cost Incurred During Delay Period:
Actual Billings During Delay Period×(Contract Costs %/Costs + Markup %)
Home Office Overhead Recoverable:
Direct Cost Incurred During Delay Period × HOOH % per Bid
Although it is now the rule in the United States under Federal jurisdiction,
state courts have not always accepted the Eichleay Formula. For example, in
New York State, the courts have adopted the Manshul Formula in lieu of the
Eichleay Formula. Mark Nagata of Trauner Consulting provided some
background of the Manshul Formula in 2018 in his four-part contractor HOOH
evaluation. Nagata states that, “[t]he Manshul Formula was established by
New York State Courts in 1981. The case involved a construction project for
the Dormitory Authority of the State of New York (DASNY) for La Guardia
Community College, a division of the City University of New York, and the
contractor was the Manshul Construction Corporation. Different from the
Eichleay Formula, the Manshul Formula relied on the overhead percentage
specified for changes within the contract and calculated the contractor’s
home office overhead costs for the delay period in a different manner than
calculating a daily home office overhead rate.” [6]
The Manshul Formula is as follows:

The biggest challenge in calculating the Manshul Formula is deeming what

the correct allocable breakout for anticipated overhead truly was, unless bid
documents are provided. In the past, judges have sometimes evenly split the
mark-up between overhead and profit. For example, without proper bid
documentation for a project with a 15% mark-up, a fair division would be
7.25% allocated for overhead and 7.25% applicable to profit, as was
accepted by the courts in the appeal of Manshul Construction Corp v. DASNY
(79 A.D.2d 383 (1981)). [7] In order to accurately calculate these amounts, it
was necessary to back out the overhead and profit already included in the
billings.
Their calculation was as follows: .0725 + (1.0725 * .0725) = .15025 (slightly
over 15%). [8] When calculating the Manshul Formula, there may also be a
percentage that must be taken into consideration for bond, depending on the
contract. If actual financial statements are available, they can be used to
determine the actual home office overhead percentage, rather than trying to
estimate an even split.
 (https://www.hka.com)
3. THE HUDSON FORMULA
Home Office OverheadHKA
Recoverable:
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Headquarter & Profit %/100 x Project Price/Construction Time x Delay

The Hudson Formula was first derived
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Engineering Contracts, a text authored by Alfred Arthur Hudson and Ian
Norman Duncan Wallace in 1959. In the United Kingdom, the courts had
initially approved the Hudson Formula as the method for calculating home Search
office overhead costs in 1989. The Hudson Formula seeks to recover HOOH
by using the original bid made by the contractor, while presupposing that the
percentage used for the overhead rate is reasonable. [9]
The Hudson Formula is as follows:

The Hudson Formula has been much scrutinized for offering only an
approximation of what was planned, rather than considering the actual
situation. In construction, the actual situation often strays far from what was
initially planned. Although it can be argued that it is reasonable to use a
planned percentage allowance for home office overhead costs because it
represents previous years’ allocations and shows a fair representation of
current levels of overhead, courts may consider the amounts to be too
excessive or unrealistic. [10] When the courts deem these costs excessive,
they will then ask the Contractor to provide his actual home office overheads
(https://www.hka.com/unabsorbed-hoo-prove-it/) costs, thus discounting the
Formula method all together. As a result of this, many courts have abandoned
the use of the Hudson Formula, beginning with Whittal Builders Co. Ltd. V.
Chester Le Street in 1987.

4. THE EMDEN FORMULA

Home Office Overhead Owed:
((Total Overhead & Profit/Total Company Turnover)/100)X (Gross Contract
Sum/Planned Contract Period)X Owner-Caused Delay Period
The Emden Formula was developed in response to the criticisms against the
Hudson Formula. Unlike the Hudson Formula, the Emden Formula expresses
the project overhead as an average percentage of the contract amount. In his
technical paper, Calculation and Recovery of Home/Head Office Overhead,
James Zack calls the Emden Formula “a creature of the Canadian courts”.[11]
The Emden Formula allocates to the delayed project a portion of the
contractor’s total overhead based on a historical average. “The Emden
formula is based on the assumption that the contractor would be able to
continue earning the same rate of overhead on another project, and the
formula compensates the contractor for the loss of opportunity to do so by
extending the overhead rate from the contract time to the delay period.” [12]
The Emden Formula is as follows:

The Emden Formula has been criticized for its inability to accurately portray
reality. According to Paul Sandori, the formula’s prescribed combination of
looking only at a project’s past performance and other work a contractor is
working on at the same time can pose problems. Sandori explains that “to
determine the average percentage of overhead, Emden typically looks back
at the two- or three-year period preceding the contract as well as the
contract time. Thus, the project overhead allocation to the delayed project is
primarily based on the contractor’s performance in the past. The contractor
may have so much other work during the contract time and the period of
(https://www.hka.com)
delay that only a reduced contribution would be required from the delayed
project, but the result HKA
of the Emden
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affected by this circumstance.” [13] For these reasons, courts cannot simply
determine the average overhead rate by considering exclusively past
performance, becauseContact
past performance
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performance, and other work taking place simultaneously also could weight
the overall results.
Search
FINANCIAL DATA

In order to best understand how compensation for unabsorbed home office

overhead may be calculated, each formula will be calculated using the
following “mock” financial data case set of GC Construction, Inc., below.
Please note that ‘cd’s’ is an abbreviation for calendar days in both the mock
financial data set as well as in the following formulas.

For purposes of this example, it is assumed that the Company G&A amounts
include only time-related costs. In a real-world application, this cost pool
should be “screened” to exclude costs that are not time related.
INDIVIDUAL CALCULATIONS

The following represent the home office overhead calculations for each of
the formulas described above:

Please note: the appellate court calculation for the Manshul Formula
includes a percentage of profit to be added onto the home office overhead
amount. This has been omitted from this calculation to compare everything
in a similar manner because none of the other HOOH calculations contain
profit.
 (https://www.hka.com)

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Below is a summary of the calculation results for each formula based on the
same set of financial data and a compensable delay of 200 days:

HOME OFFICE OVERHEAD CONCLUSIONS

In conclusion, there is no standard “across-the-board,” accepted way for

calculating home office overhead recovery. The various home office
overhead recovery calculation methods can vary in both their formulas and
outcomes. Using the data case set in the example, the most favorable option
for the contractor would be the Emden Formula, allowing them to recover
over $4.4M in home office overhead costs. Of course, having a different set
of data could yield different results entirely.
Ultimately, deciding which formula is best for any given situation boils down
to the courts and the jurisdiction in which the job is taking place. It appears
that, among each of the formulas, the Eichleay Formula and the Emden
Formula seem the most reliable, as each is based on actual data rather than
planned or past data.
This does not negate the fact that each of these formulas still have their own
limitations. For example, a limitation of the Eichleay Formula is that it can only
be used at the very end of a project. As a result, if a claim were to happen
while a project is still ongoing, another method would likely be used.
Additionally, the Eichleay Formula has faced significant legal challenges,
particularly in US Federal courts. If the matter was challenged in Federal
court, its use may be prohibited unless it meets specific criteria such as a
complete job shutdown, an uncertain delay, and inability to procure
(https://www.hka.com/procurement-creating-complexity-or-driving-
efficiency-the-search-for-value/) other outside work.
The Emden Formula has limitations because it looks at the past two or three
years and does not always accurately depict what will necessarily happen in
the future. In addition to the methods presented, there are more than 10
other formulas that are accepted in courts across the globe. Additionally,
there are multiple variations to many of the formulas, such as the Eichleay
Formula, which has two variations to the calculation shown here.
While it is difficult to offer any improvements to the formulas, variations
show how they have evolved over time. It is important that contractors who
believe they have suffered financial impact due to a delay or disruption be
aware of their ability to recover their costs in court with the appropriate
home office recovery method.
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Robert A. Dieterle, Jr. has experience in the evaluation of financial damages

(https://www.hka.com/working-effectively-with-financial-damages-experts/)
and cost impacts claimed by contractors on construction
(https://www.hka.com/industries/construction-engineering/) projects. His
project assignments have included industrial plants and building
(https://www.hka.com/industries/construction-engineering/industries-
construction-buildings/) projects, including new construction as well as
renovations to existing facilities. Mr. Dieterle has focused in the analysis and
preparation of fair and reasonable estimates for delay
(https://www.hka.com/services/expert/delay-disruption-analysis/), disruption
and acceleration (https://www.hka.com/what-is-constructive-about-
acceleration/) claims as well as calculating earned value and loss of
productivity assessments. Prior to joining HKA, Mr. Dieterle was a Senior
Accountant in Hill International’s corporate Finance Department. While
working in the Finance group, he analyzed operating group financial
performance, assisted in the preparation of company-wide budgets,
prepared cash flow forecasts and prepared monthly financial packages for
operations managers.
[1] Dieterle, Robert. The Eichleay Formula -Is Standby the Standard? 2008
AACE INTERNATIONAL TRANSACTIONS.
[2] Singh, Amarjit, and Thomas Taam. “Unabsorbed Overhead: Eichleay and
Other Methods.” Construction Research Congress 2009, 2009,
doi:10.1061/41020(339)19.
[3] Trauner, Theodore J. Construction Delays: Understanding Them Clearly,
Analyzing Them Correctly. Elservier-BH, 2009.
[4] Construction Law Handbook, by Robert Frank Cushman and James J.
Myers, Aspen Law & Business, 1999, pp. 1238–1238.
[5] Estis, Dennis, et al. “Delay Damages – What’s Hot, What’s Not: Making
Dollars & Sense of Construction Damages.” American Bar Association,
Forum on the Construction Industry, 2013,
www.imageserve.com/naples2013/papers/plenary1.pdf.
[6] Nagata, Mark. “Delay Damages: Contractor HOOH Formulas 3 of 4
(Manshul Formula).” LinkedIn, 2018, www.linkedin.com/pulse/delay-
damages-contractor-hooh-formulas-3-4-manshul-formula-nagata/.
[7] Harmon, Kathleen(https://www.hka.com)
M.J., and Kathleen O. Barnes. “Bringing Home the
Bacon — Overhead Calculations and the Law.” The Journal of AACE
International – The Authority for(https://www.hka.com/services/advisory/hka-tech/)
HKAServices
Tech TotalIndustries
Cost Management
Expert– Centre
Cost Engineering ,
CRUX Insight HKA
Events
Training
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& Insights
(https://hkatrainingacademy.com/)
About Us
vol. 54, no. 2, 2012, pp. 26–33.
[8] Appellate Division of the Supreme Court of the State of New York. (1981, 
March 10). MANSHULContact Global
(https://www.hka.com/contact/)
Locations
v. DORMITORY Join
AUTH: 79 Us 383 (1981):
A.D.2d
Ad2d3831408, https://www.leagle.com/decision/198146279ad2d3831408
[9] Harmon, Kathleen M.J., and Kathleen O. Barnes. “Bringing Home the Search
Bacon — Overhead Calculations and the Law.” The Journal of AACE
International – The Authority for Total Cost Management – Cost Engineering,
vol. 54, no. 2, 2012, pp. 26–33.
[10] “Contractors Head Office Overheads Entitlement for Delays – Hudson’s
Formula.” Malaysian Construction and Contract Law, 8 Feb. 2012,
simplymalaysia.wordpress.com/articles/delays/contractors-head-office-
overheads-entitlement-for-delays-hudsons-formula/.
[11] Zack, James. “CALCULATION AND RECOVERY OF HOME/HEAD OFFICE
OVERHEAD.” INTERNATIONAL COST ENGINEERING COUNCIL 3rd World
Congress on Cost Engineering, Project Management & Quantity Surveying
6th Pacific Association of Quantity Surveyors Congress, Apr. 2002
[12] Sandori, Paul. “CONTRACTOR’S HEAD OFFICE OVERHEAD — WHAT IS
THE RIGHT FORMULA?” The Revay Report, vol. 22, no. 2, June 2003.
[13] Sandori, Paul. “CONTRACTOR’S HEAD OFFICE OVERHEAD — WHAT IS
THE RIGHT FORMULA?” The Revay Report, vol. 22, no. 2, June 2003.

ADDITIONAL SOURCES USED FOR REFERENCE:

“Claim Management.” Law Explorer, 2015, lawexplores.com/claim-
management/.
Iyer, K.C., et al. “Case Study Approach Using Scenario Analysis to Analyze
Unabsorbed Head Office Overheads.” World Academy of Science,
Engineering and Technology International Journal of Architectural and
Environmental Engineering, Vol:12, No:10, 2018,
waset.org/publications/10009665/case-study-approach-using-scenario-
analysis-to-analyze-unabsorbed-head-office-overheads.
Ludwig, Hon Chi Yi. “Formulae to Formulate the ‘Head Office Overheads.’”
Surveyors Times, Nov. 2013,
www.hkis.org.hk/en/st/ST2013/201311/2013st11_6_mem.pdf.
Ruff, Randolph. “Lump-Sum General Conditions in Cost-plus Commercial
Construction Contracting.” Construction Executive | Welcome, 2018,
constructionexec.com/article/lump-sum-general-conditions-in-cost-plus-
commercial-construction-contracting.
Rymal, Stephen. “MDC Systems.” MDC Systems,
www.mdcsystems.com/home-office-overhead-hooh/.
Vertex. “The Eichleay Formula and Delay Claims – What You Need to Know.”
VERTEX, 2018, vertexeng.com/blog/the-eichleay-formula-and-delay-claims/.
**The intent of this article is to illustrate the different formulas. The
appropriate method in each case is dependent on the facts of the dispute,
the contract terms, the jurisdiction and other factors.

ABOUT THE AUTHOR:

Robert A. Dieterle, Jr. has experience in the evaluation of financial damages
(https://www.hka.com/working-effectively-with-financial-damages-experts/)
and cost impacts claimed by contractors on construction
(https://www.hka.com/industries/construction-engineering/) projects. His
project assignments(https://www.hka.com)
have included industrial plants and building
(https://www.hka.com/industries/construction-engineering/industries-
construction-buildings/)
HKAprojects,
Services including new construction as well asCRUX Insight
Tech (https://www.hka.com/services/advisory/hka-tech/)
Industries Expert Centre HKA
Events
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Academy
& Insights
(https://hkatrainingacademy.com/)
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renovations to existing facilities. Mr. Dieterle has focused in the analysis and
preparation of fair and reasonable estimates for delay
(https://www.hka.com/services/expert/delay-disruption-analysis/),
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Accountant in Hill International’s corporate Finance Department. While
working in the Finance group, he analyzed operating group financial
performance, assisted in the preparation of company-wide budgets,
prepared cash flow forecasts and prepared monthly financial packages for
operations managers.

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