CROSS MOTIONS FOR SUMMARY RELIEF DENIED: May 13, 1994 GSBCA 12051(11312)-REIN RANCO CONSTRUCTION, INC. & REESE CONSTRUCTION, INC., A JOINT VENTURE, Appellant, v. GENERAL SERVICES ADMINISTRATION, Respondent. John W. Fowler, Jr., of Blank, Rome, Comisky & McCauley, Philadelphia, PA, counsel for Appellant. Barry D. Segal, Real Property Division, Office of General Counsel, General Services Administration, Washington, DC, counsel for Respondent. Before Board Judges DANIELS (Chairman), PARKER, and WILLIAMS. DANIELS, Board Judge. While Ranco Construction, Inc. & Reese Construction, Inc., a Joint Venture (Ranco-Reese), was performing a construction contract for the General Services Administration (GSA), the agency ordered a cessation of work. After more than a year had passed, GSA directed the contractor to resume its efforts. Ranco-Reese later submitted a claim for extended home office overhead for the period of delay. This claim, for $107,616.84, is based on the formula devised by the Armed Services Board of Contract Appeals in Eichleay Corp., ASBCA 5183, 60-2 BCA 2688, aff'd on reconsideration, 61-1 BCA 2894 (1960). The parties have asked us to decide, on cross-motions for summary relief, Ranco-Reese's entitlement to recovery. We are unable to do this. The theories advanced by the two parties are too simplistic for resolution of the case, and the uncontested facts presented are too limited to be supportive of a more complex analysis. Both motions are denied. Findings of Fact On March 25, 1988, the parties entered into a contract under which Ranco-Reese would alter and improve the Federal Office Building and Courthouse in Trenton, New Jersey. Joint Statement of Stipulated Facts (Stipulated Facts) 1, 2. The contract was in the amount of $1,460,000. Appeal File, Exhibit 1 at 2. GSA gave Ranco-Reese a notice to proceed on April 15, 1988, obligating the contractor to complete the job within 240 days thereafter. Stipulated Facts 3. On May 18, 1988, without advance notice, GSA ordered all work (except for demolition) suspended so that the agency might redesign portions of the project. Stipulated Facts 4. GSA rescinded the stop work order, again without advance notice, in February 1990. Id. 5, 7. Ranco-Reese was prohibited from performing under the contract for more than five hundred days. Id. 6. During the period of time when work was suspended, Ranco- Reese's bonding capacity increased from $1.5 million for a single project and $3 million for all work in hand to $2.5 million for a single project and $5 million for all work in hand. Stipulated Facts 10, 13. The contractor took on several jobs, such that its total billings increased from $1.7 million in fiscal year 1988[foot #] 1 to $2.4 million in fiscal year 1990. Id. 11, 13. Ranco-Reese did not reach its bonding capacity during the period of time that work was suspended. Memorandum of Law in Support of Appellant's Motion for Partial Summary Judgment at 9. The parties agree that Ranco-Reese's overhead rate rose from 26.5 percent in fiscal year 1988 to 30.0 percent in fiscal year 1989, and then fell to 15.6 percent in fiscal year 1990. Stipulated Facts 12, 13. The parties have not explained the derivation of these figures, however. The contract contains a standard Suspension of Work clause which states in part: If the performance of all or any part of the work is, for any unreasonable period of time, suspended, delayed, or interrupted (1) by an act of the Contracting officer in the administration of this contract, . . . an adjustment shall be made for any increase in the cost of performance of this contract (excluding profit) necessarily caused by the unreasonable suspension, delay, or ----------- FOOTNOTE BEGINS --------- [foot #] 1 A Ranco-Reese fiscal year ends on September 30 of the year cited. Appeal File, Exhibit 26 at 3. ----------- FOOTNOTE ENDS ----------- interruption, and the contract modified in writing accordingly. Appeal File, Exhibit 1 at page 31 of GSA Form 3506 (FAR 52.212-12--SUSPENSION OF WORK (APR 1984)). Discussion A construction contractor incurs two general types of costs in the course of its operations. Direct costs are attributable to a particular project. Indirect costs such as overhead, on the other hand, are expended for the benefit of the business as a whole. Wickham Contracting Co. v. Fischer, 12 F.3d 1574, 1578 (Fed. Cir. 1994). These costs, by their nature, cannot be specified and traced to any particular contract. C.B.C. Enterprises, Inc. v. United States, 978 F.2d 669, 672 (Fed. Cir. 1992). "Ordinarily, all home office expenses fall into the overhead category because the contractor must operate a home office in order to seek work and administer contracts whether or not he is performing a particular contract." Wickham, 12 F.3d at 1579. These expenses include salaries of upper-level management, accounting and payroll services, review of submittals from subcontractors, preparation of periodic progress reports, dues and subscriptions, auto and travel, telephone, photocopying, general insurance, heat, electricity, taxes, and depreciation. Interstate General Government Contractors, Inc. v. West, 12 F.3d 1053, 1058 (Fed. Cir. 1993); C.B.C., 978 F.2d at 672 (both citing Capital Electric Co. v. United States, 729 F.2d 743, 746 (Fed. Cir. 1984)). Contractors formulate their bids on the assumption that successful fulfillment of a contract will permit them to recover their direct costs, plus the portion of the overhead costs which is allocable to the project. See C.B.C., 978 F.2d at 672. Suspension or delay of contract performance results in interruption or reduction of the contractor's stream of income from direct costs incurred. Home office overhead costs continue to accrue during such periods, however, regardless of direct contract activity. Consequently this decrease in direct costs necessary to support the continuing overhead creates unabsorbed overhead, unless home office workers are laid off or given additional work during such suspension or delay periods. Even then, fixed overhead costs usually remain. Interstate, 12 F.3d at 1057; see also Wickham, 12 F.3d at 1577- 78. Determining the precise amount of unabsorbed overhead involved in any particular situation is impossible. Wickham, 12 F.3d at 1579, 1580. The Court of Appeals for the Federal Circuit has held that "the Eichleay formula provides a feasible, equitable and predictable method of compensating a contractor for unabsorbed overhead." Id. at 1580. This formula "provides a method of constructively calculating daily extended home office overhead, using contract billings, total billings for the contract period, total overhead, days of contract performance, and days of delay." C.B.C., 978 F.2d at 671. The Court in Capital Electric authorized the use of the formula, and in Wickham, emphatically held that it is the "only proper method" -- the "exclusive means" -- "for compensating a contractor for unabsorbed overhead when it otherwise meets the Eichleay prerequisites." 12 F.3d at 1575, 1580-81, 1583. What those prerequisites are is the focus of the parties' cross-motions for summary relief in the instant case. The Court of Appeals has established three qualifications: (1) the Government must have caused a suspension, disruption, or delay in contract performance; (2) the contractor must consequently have been placed in a standby position, such that work was not being performed on the contract; and (3) the contractor must have been unable to take on other work, such that it could have mitigated unabsorbed overhead when that overhead was incurred. Interstate, 12 F.3d at 1056-58; C.B.C., 978 F.2d at 674-75. The Interstate Court has provided two succinct explanations of these requirements: "To prove unabsorbed overhead, the contractor must show that the government-caused delay disrupted the relationship between the contractor's revenue and its overhead costs." Id. at 1058. "[I]n order to show that any portion of the overhead was unabsorbed, . . . a contractor must prove that the bargained for ratio of performance revenue to fixed overhead costs during the stipulated performance period . . . has been adversely affected by the delay." Id. Ranco-Reese's motion emphasizes the first two parts of the Court's test. The contractor notes that the delay in performance of this contract was caused entirely by the Government, and that the contractor was consequently required to stand by, ready to resume work at any time, for more than five hundred days. "Consequently," says the contractor, "under the Suspension of Work clause, Ranco-Reese is entitled to an adjustment to the price of [the contract] for any increase in the cost of performing the contract, including unabsorbed overhead." Memorandum of Law in Support of Appellant's Motion for Partial Summary Judgment at 3. Ranco-Reese maintains that whatever growth it achieved during the period of delay was independent of the fact that performance of this contract was suspended. The contractor maintains (without support) that because it was required to prepare to resume work on the contract, it "could not release the capacity committed to [this job] to new work that would absorb the overhead costs that would have been borne by [the contract] if it were not suspended by GSA." Id. at 5. Ranco-Reese relies on this statement of the Court of Appeals: When the period of delay or suspension is uncertain, as it was here, and the contractor is required by the government to remain ready to resume performance on short notice, the contractor is effectively prohibited from mitigating such overhead costs by making reductions in home office staff or facilities. . . . Assuming that the contractor has not reached his bonding capacity, uncertainty in duration of delays or suspensions can also adversely affect the contractor's ability to absorb the overhead by taking on additional work during the delay periods, because at any given moment the contractor could be required to shift his resources to resume work on the stalled project. Interstate, 12 F.3d at 1057-58; see also Wickham, 12 F.3d at 1577-78. According to Ranco-Reese, reading the third part of the test to give the Government the benefit of the contractor's efficiency in securing new work "would result in a windfall for GSA and exact a penalty from Ranco-Reese." Memorandum of Law in Support of Appellant's Motion for Partial Summary Judgment at 7- 8. GSA admits that it caused the delay in performance and that the contractor had to remain prepared, throughout the suspension period, to return to contract work. The agency emphasizes the third part of the Court's test -- whether the contractor was able to mitigate unabsorbed overhead by taking on other work -- in arguing that Ranco-Reese has not shown that it suffered any damages as a result of the delay. In this regard, GSA cites decisions of boards of contract appeals, including Atlas Construction Co., GSBCA 7903, et al., 90-2 BCA 22,812, Decker & Co. GmbH, ASBCA 38657, 92-2 BCA 24,970, and Daly Construction, Inc., ASBCA 34322, 92-1 BCA 24,469 (1991), aff'd, 5 F.3d 520 (Fed. Cir. 1993), for the proposition that a showing of damages is essential to recovery under the Eichleay formula. The import of the Government's argument is that permitting recovery in the absence of damages would give a windfall to the contractor. The fact that Ranco-Reese's billings grew during the suspension period demonstrates, according to GSA, that the contractor suffered no harm from the delay. On the basis of the fragmentary evidence presented by the parties, and assumptions we draw against each moving party, we cannot rule for either of them at this time. Ranco-Reese's position does not give effect to the last part of the Court's test of eligibility for application of the Eichleay formula. The Court has clearly made demonstration of an inability to mitigate unabsorbed overhead a necessary element of entitlement. Because Ranco-Reese has presented no evidence as to damages, it cannot now prevail. On the other hand, GSA's position is also too simplistic. The fact that the contractor's business was larger at the end of the period of delay than it was at the beginning of that period is not proof that Ranco-Reese suffered no harm by the Government's actions; the necessary connection between the increase in total billings and absorption of home office overhead which would have derived from the contract in question is not made. We know that the contractor was not precluded by a limitation in its bonding capacity from taking on new jobs during the suspension period. We do not know, however, the size of the contractor's billings at each particular point in time during that period, or how those billings related to absorption of the home office overhead which, but for the delay, would have been covered by revenue from this contract. If the contractor could show, for example, that it predicated its allocation of overhead on the assumption that it would receive funds from new jobs as well as this one, the growth in the size of the business might not have absorbed the overhead expected to result from this contract. We also do not know whether any peculiarities of the business or regulatory constraints caused Ranco-Reese to allocate its overhead in such a way that jobs begun after performance of our contract was suspended could not have covered all the overhead associated with the contract. In addition to the further development of facts, we invite briefing as to whether eligibility for recovery under the Eichleay formula (and calculation of benefits therefrom) should be measured in increments of time less than the entire period of delay. If during the suspension period, the contractor was able to secure jobs through which home office overhead initially allocated to this contract could be absorbed fully during some months, but not others, should this have an impact on recovery? The Court of Appeals' views of Eichleay as compensating for loss from a stream of income, caused by an interruption in the relationship between revenue and overhead coverage, Interstate, 12 F.3d at 1057, 1058, might be read as supporting this position. We also invite further development of facts and briefing as to whether, if the Government can show mitigation of damages, an award made through application of the formula might be reduced by the amount of mitigation. We question whether Eichleay is intended to bestow on a contractor recovery greater than the damages the firm actually sustained. Decision The cross-motions for summary relief are both DENIED. Within thirty days from the date of this decision, the parties shall jointly propose to the Board a schedule for further proceedings in this case. _________________________ STEPHEN M. DANIELS Board Judge We concur: _________________________ _________________________ ROBERT W. PARKER MARY ELLEN COSTER WILLIAMS Board Judge Board Judge