In the first step, the contractor calculates what DCAA calls an allocation ratio by dividing the total company billings for the contract’s actual performance period by the total company billings for all contracts during the same contract performance period. This period represents actual days of performance (including the extension period) and covers the date of contract award until the date of contract completion.

The guidance recognizes price adjustment proposals are often submitted before completion of the contract and states the Eichleay formula does not preclude prospective billing if they are "reasonably estimated". It stresses that when projected periods are used, all the elements of the formula – contract billing, total billings, total overhead for contract period and days of performance should all be extended to the date of expected substantial completion.

The guidance also recognizes contractors may use other bases for calculating the allocation ratio (e.g. contract direct labor and total direct labor). Contractors should be prepared to demonstrate the resulting ratio does not differ materially from one based on billings.

Audit Guidance. Auditors are asked to be on the lookout for instances of overstating the delay contract billing (numerator in Step 1) resulting in an excessively high ratio. Examples include revising assumptions of the percentage-of-completion method of estimating revenue or understating total contract billing by not including undefinitized work and modifications.

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