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California Court of Appeal Endorses Eichleay Formula for Calculating Home Office Overhead Damages

Posted January 13, 2016 --> • News

Most contractors are familiar with the Eichleay formula, undoubtedly the most common method of calculating home office overhead damages on construction projects in the United States. Nonetheless, it is not uncommon for a California contractor or construction attorney pursuing such claims to be met with cries of “Eichleay has never been approved by a California appellate court!” from the other side. A December 30, 2015 decision from the Sixth Appellate District should finally silence such cries, and confirm that Eichleay is the method for calculating home office overhead damages in California.

In JMR Construction Corp. v. Environmental Assessment and Remediation Management Inc., a general contractor (JMR) successfully sued its subcontractor (EAR) for delay damages, and obtained a $315,631 award. On appeal, EAR challenged the trial court's acceptance of the Eichleay formula to calculate JMR’s extended home office overhead damages on the grounds that no reported California decisions had endorsed the use of Eichleay. The Court rejected EAR’s argument and held that Eichleay was a legally permissible way of calculating JMR’s home office overhead damages.

In reaching its decisions, the Court acknowledged that there were no reported California appellate decisions approving the use of Eichleay. However, the Court refused to infer from the absence of California authority that the Eichleay formula cannot be used to prove delay damages in California. Rather, the Court relied on the fact that Eichleay is generally accepted by all federal courts and frequently used at the trial court level and in arbitration proceedings in California to conclude that “the calculation of extended home office overhead damages using the Eichleay formula was an appropriate method to compensate JMR for all the detriment proximately caused by EAR’s breach of contract.” As such, the Court held that the trial court had properly applied the Eichleay formula “as a legally permissible method of determining JMR’s home office overhead damages.” In doing so, the Court became the first California appellate court to endorse the use of Eichleay in a reported decision.

In addition to its importance as the first reported California case to endorse the use of Eichleay, the JMR opinion contains a good analysis of the elements and evidence required to prevail on an Eichleay claim, as well as the evidence JMR used to succeed on its “modified total cost claim.” For these reasons, contractors and their legal counsel should find the JMR opinion to be worthwhile reading. A copy of the full opinion can be found HERE.

Christopher M. Rogers, Partner