The contractor was awarded a $1.4 million contract that was suspended pending a resolution of a protest.  Contract work did not commence where 10 months later the government terminated the contract for convenience.  Contractor settled most of its termination for convenience settlement proposal costs but the CO rejected $387,000 for 291 days of alleged unabsorbed home office overhead stating the contractor could not use the Eichleay formula to compute the unabsorbed overhead because there had been no contract billings.  (Editor’s Note. Unabsorbed overhead is the amount of overhead that cannot be absorbed because there is no direct costs expended and the Eichleay formula is computed by applying a daily overhead rate to the period of government caused delay which is derived from  multiplying the total overhead during contract period by the ratio of contract billings to total company wide billings during the contract period which is then divided by the days of contract performance.)  The contractor asserted it remained on standby for the ten months and was prevented from taking on additional work to absorb the overhead allocable to the contract and hence was entitled to additional compensation based on a modified Eichleay formula where it substituted contract price and anticipated contract duration for actual contract billings and actual contract performance.  

A lower court sided with the government ruling even if the contractor could demonstrate it met the conditions for recovering unabsorbed overhead (i.e. government imposed delay or suspension and inability to take on other work) the contractor could not recover because its modified Eichleay formula was “not the Eichleay formula” where Courts had ruled it was the “exclusive” means to compute unabsorbed overhead on government-caused delays.  However, the Appeals Court sided with the contractor noting that though the Eichleay formula is the “only” proper method to calculate unabsorbed overhead when the contractor begins contract performance, here there was no performance and therefore the Eichleay prohibitions did not apply because there was no contract billings to base the allocation on.  The Appeals Court stated as long as the conditions for recovering unabsorbed overhead were present there was “no bar” against recovering unabsorbed overhead as part of a termination for convenience claim due to a government-caused delay.  Though FAR 52.249-2, termination settlements does not specifically list unabsorbed overhead as a “cost” its emphasis on achieving a balance of  fairness with technical adherence to FAR makes it appropriate to recover unabsorbed overhead as part of its termination settlement proposal.  Accordingly, since its performance had not begun, and the government terminated the contract, Eichleay provisions do not apply and the contractor my use another reasonable allocation method to compute its unabsorbed overhead including the modified approach the contractor took.  However, the Court added the Eichleay formula must still be the exclusive method when contract performance has started (Nicon Inc. v. US., 2003 WL 21339165).

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