vade mecum

Unabsorbed
Head Office
Overheads
and Loss of
Profit
By: David J Kelly
Unabsorbed Head Office Overheads and Loss of Profit

Contents
Table of Figures .......................................................................................................................................5
1 Introduction......................................................................................................................................7
2 Definitions .......................................................................................................................................8
2.1 Overheads ................................................................................................................................8
2.2 Head Office Overheads............................................................................................................9
2.3 Site Office Overheads ..............................................................................................................9
2.4 Unabsorbed Head Office Overheads .......................................................................................9
2.5 Extended Office Overheads .....................................................................................................9
2.6 Allocated Head Office Overheads ...........................................................................................9
2.7 Unallocated Head Office Overheads .......................................................................................9
2.8 Under Recovery of Head Office Overheads ..........................................................................10
2.9 Company Profit ......................................................................................................................10
2.10 Project Profit ..........................................................................................................................10
2.11 Preliminaries ..........................................................................................................................10
2.12 Profit and Overheads .............................................................................................................10
2.13 Loss ........................................................................................................................................10
2.14 Expense ..................................................................................................................................10
2.15 Contracting Enterprise ...........................................................................................................10
3 Unabsorbed Head Office Overheads .............................................................................................11
4 Under Recovery of Head Office Overheads ..................................................................................20
5 Extended Head Office Overheads Differentiated ..........................................................................24
6 “Thickening” of Head Office Overheads.......................................................................................25
7 Site Office Overheads Differentiated ............................................................................................27
8 Accounting Principles....................................................................................................................28
9 Characterising the Damage ............................................................................................................31
9.1 Type of Loss ..........................................................................................................................31
9.2 Importance of Categorising the Loss .....................................................................................32
10 Loss of Profit .............................................................................................................................38
10.1 Company Profit ......................................................................................................................38
10.2 Project Profit ..........................................................................................................................40
10.3 Relationship between Profit and Fixed Overheads ................................................................40
11 Demonstrating a Loss ................................................................................................................43

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11.1 Anecdotal review of corporate accounts................................................................................45

11.2 Demonstrating inability to tender and/or secure additional or new work..............................46
11.3 Reduction of Capping of Bonding Capacity ..........................................................................47
11.4 Application of Formula..........................................................................................................48
12 Head Office and Regional Office and Joint Venture Relationships ..........................................52
13 Analysing Annual Reports.........................................................................................................53
13.1 Chart of Accounts ..................................................................................................................53
13.2 Balance Sheet.........................................................................................................................53
13.2.1 Assets .............................................................................................................................53
13.2.2 Liabilities .......................................................................................................................54
13.2.3 Shareholders’ Equity .....................................................................................................54
13.2.4 Translating a “Balance Sheet” .......................................................................................55
13.2.5 Importance of the Balance Sheet to assessing Unabsorbed Head Office Overheads....56
13.3 Profit and Loss (P&L) ...........................................................................................................56
13.3.1 Reading a “Profit and Loss Statement” or a P&L .........................................................56
13.3.2 Importance of the P&L to Assessing Unabsorbed Head Office Overheads..................57
13.4 Cash flow Statement ..............................................................................................................58
14 Actual Cost Methodologies .......................................................................................................60
15 Use of a Percentage Multiplier ..................................................................................................61
16 Delay versus Suspension and the American Approach .............................................................62
17 Formulae and Variables .............................................................................................................65
1.1 History of Formulae ...............................................................................................................67
1.2 Formula Variables .................................................................................................................69
1.3 Formulae ................................................................................................................................70
1.4 Definitions .............................................................................................................................70
17.1.1 Project Variables:...........................................................................................................70
17.1.2 Company Variables: ......................................................................................................71
18 Selection of Formula..................................................................................................................73
19 Hudson’s Formula .....................................................................................................................74
19.1 Variations on the theme .........................................................................................................81
19.2 Hudson’s Hybrids ..................................................................................................................83
20 Emden Formula .........................................................................................................................87
21 Eichleay Formula .......................................................................................................................91
21.1 Original Eichleay Formula ....................................................................................................91

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21.2 Modified Eichleay Formula – Variation No. 1 ....................................................................101

21.3 Modified Eichleay Formula – Variation No. 2 ....................................................................102
21.4 Modified Eichleay Formula – Variation No. 3 (Anderson’s Modification) ........................103
21.5 Eichleay Comparison ...........................................................................................................103
21.6 Apportionment of Project to Company’s Turnover .............................................................108
21.7 Determination of a Company’s Overheads..........................................................................108
21.8 Conversion to a Daily Rate ..................................................................................................108
21.9 Comparison with Hudson’s and Emden Formulae ..............................................................108
21.9.1 Apportioning the allocable Unabsorbed Head Office Overheads ...............................109
21.9.2 Step 1: Same Starting Point .........................................................................................111
21.9.3 Step 2: Different Time Frames ....................................................................................111
21.9.4 Step 3: Original Duration or Actual Duration .............................................................112
22 Manshul Fomula ......................................................................................................................115
23 Ernstrom Formula ....................................................................................................................118
24 Carteret Formula ......................................................................................................................119
25 Comparative Absorption Rate (CAR) Method ........................................................................121
26 Allegheny Formula or Burden Fluctuation Method (BFM) ....................................................123
27 Specific Base Allocation Method (SBAM) .............................................................................125
28 The Direct Method...................................................................................................................127
29 Total Direct Cost Allocation Method ......................................................................................128
30 Hank Laan Alternative Approach ............................................................................................129
31 Alternative Real Time Approach .............................................................................................129
32 Double Dipping .......................................................................................................................131
33 Calculating Loss of Profit ........................................................................................................132
34 Applications and Examples .....................................................................................................133
1.5 Application of variables to formula .....................................................................................135
34.1.1 Hudson’s Formula .......................................................................................................135
34.1.2 Emden’s Formula.........................................................................................................137
34.1.3 Eichleay Formula .........................................................................................................139
34.1.4 Eichleay Formula – Variation No. 1 ............................................................................140
34.1.5 Eichleay Formula – Variation No. 2 ............................................................................141
34.1.6 Eichleay Formula – Variation No. 3 ............................................................................143
34.1.7 Manshul Formula .........................................................................................................144
34.1.8 Ernstrom Formula ........................................................................................................145

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34.1.9 Carteret Formula ..........................................................................................................146

34.1.10 Comparative Absorption Rate (CAR) Method ........................................................148
34.1.11 Alegheny Formula or Burden Fluctuation Formula (BFM) ....................................150
34.1.12 Specific Base Allocation Method ............................................................................152
34.1.13 Hank Laan Alternative Approach ............................................................................153
34.2 Summary of results ..............................................................................................................154
Bibliography ........................................................................................................................................155
Books ...............................................................................................................................................155
Papers...............................................................................................................................................155
Cases ................................................................................................................................................157

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Table of Figures
Figure 1: Overheads Allocations .............................................................................................................8
Figure 2:Type of Overhead and Period Felt ..........................................................................................17
Figure 3 - Head Office Overheads and the Contribution from a Contracting Enterprises projects to the
Head Office Overheads in their normal or equilibrium state ................................................................18
Figure 4 - A shortfall in the contribution from a Contracting Enterprises projects as a result of the
delayed project after the original duration of the delayed project could be as a result of Unabsorbed
Head Office Overheads..........................................................................................................................19
Figure 5 Demonstration of Unabsorbed Head Office Overheads ..........................................................20
Figure 6 Blow-up showing under-recovery of head office overheads...................................................21
Figure 7: Interest Calculation for Under Recovery of Head Office Overheads ....................................22
Figure 8 - Head Office Overheads and the Contribution from a Contracting Enterprises projects to the
Head Office Overheads in their normal or equilibrium state ................................................................23
Figure 9 - a Shortfall in contribution from the delayed project due to delay during the original duration
of the delayed project could be an under recovery for Head Office Overheads ....................................23
Figure 10 - Head Office Overheads and the Contribution from a Contracting Enterprises projects to the
Head Office Overheads in their normal or equilibrium state ................................................................26
Figure 11 - During the duration of the delayed project the Contracting Enterprises incurs additional
expenses due to additional resources being reuired to manage a delayed project within its head office
could be as a result of "thinking" of Head Office expenses ..................................................................26
Figure 12: Direct Costing ......................................................................................................................28
Figure 13: Full Absorption Costing .......................................................................................................29
Figure 14: Absorption Costing at Budget ..............................................................................................30
Figure 15: Typical split of a Contracting Enterprise’s Expenditure ......................................................30
Figure 16: Type of Overhead and Direct or Indirect Loss.....................................................................37
Figure 17: Possible Effect on a Contracting Enterprise's Turnover ......................................................45
Figure 18: Possible Effect on a Contracting Enterprises Profitability ...................................................46
Figure 19: Balance Sheet High Level Summary ...................................................................................55
Figure 20: Balance Sheet Detailed Summary ........................................................................................55
Figure 21: P & L High Level Summary ................................................................................................57
Figure 22: Profit and Loss - Detailed Summary ....................................................................................57
Figure 23: Schedule of Formula ............................................................................................................68
Figure 24: Formulae Variables ..............................................................................................................70
Figure 25: Harmonised Original Hudson’s Formula .............................................................................77
Figure 26: Harmonised Variation of Hudson’s Formula .......................................................................78
Figure 27: Harmonised Emden’s Formula ............................................................................................88

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Figure 28: Harmonised Original Eichleay Formula ..............................................................................95

Figure 29: Harmonised Variation No. 1 of Eichleay Formula ............................................................101
Figure 30: Harmonised Variation No. 2 of Eichleay FormulaG.S. & L. Mechanical & Construction,
Inc., and Schindler Haughton Elevator Corp. similarly to the first variation to the Eichleay Formula,
except it goes further in that it into the mix the contract billings during the extended period to try and
account for the overheads being spread over a longer period of time. This is done to try and account
for loss and expense over a longer period of time presumably to try and derive a fairer figure. ........102
Figure 31: Harmonised Variation No. 3 of Eichleay Formula ............................................................103
Figure 32: Eichleay Variations ............................................................................................................108
Figure 33: Emden and Eichleay Time Comparison .............................................................................114
Figure 34: Harmonised Manshul Formula ...........................................................................................116
Figure 35: Harmonised Ernstrom Formula ..........................................................................................118
Figure 36: Harmonised Carteret Formula ............................................................................................120
Figure 37: Harmonised Comparative Absorption Rate Formula .........................................................122
Figure 38: Harmonised Allegheny Formula or Burden Fluctuation Method Formula ........................124
Figure 39: Harmonised Specific Base Allocation Method Formula....................................................126
Figure 40: Harmonised Direct Method Formula .................................................................................127
Figure 41: Sample Reallocation Table ................................................................................................128
Figure 42: Sample Allocation of Head Office Overheads ...................................................................128
Figure 43: Sample Result of Reallocation ...........................................................................................128
Figure 44: Sample Result after Reallocation Table .............................................................................128
Figure 45: Hank Laan Formula............................................................................................................129
Figure 46: Sample Enterprise P & L....................................................................................................134
Figure 48: Sample Project Results Summary ......................................................................................154
Figure 49: Samples Project Graph (average line shown as red) ..........................................................154

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1 Introduction
Unabsorbed Head Office Overheads as a time related claim in construction is often claimed as though
it is an automatic right upon the award of an Extension of Time. Unfortunately, this is not the case.
Like all forms of damage, a Contracting Enterprise may suffer because of a delay in a project the
Contracting Enterprise still has to be able to demonstrate that it suffered a loss and/or expense. The
nature of this head of claim is that it is a corporate rather than a project loss and also an indirect loss.
This makes it very challenging for a Contracting Enterprise to be able to demonstrate such a loss as it
has to effectively prove a negative. This therefore makes Unabsorbed Head Office Overheads, with
the use of formula, the easiest head of claim to calculate, however the most difficult to prove.

Loss of profit is often wrapped up with Unabsorbed Head Office Overhead claims.1 Like, Unabsorbed
Head Office Overheads, it is a loss of opportunity type damage and whilst in some ways different, it is
closely related to Unabsorbed Head Office Overheads as both heads rely upon a demonstration of an
inability for a Contracting Enterprise to be able to obtain more work.

A review of the background, reasoning and theory used within the numerous cases involving
Unabsorbed Head Office Overheads is required as there is a lot of confusion and misconceptions as to
what Unabsorbed Head Office Overheads actually is. It is frequently misquoted or referred to by courts,
arbitrators and many others involved in the assessment and calculation thereof often as some sort of
direct project related cost. The main reason for this it is suggested is that the concept of Unabsorbed
Head Office Overheads is not a simple one to grasp, many who claim to be experts on this and
knowledgeable have their own misunderstandings which have permeated throughout the construction
industry as a result.

A difference in approach around the world has also added to this confusion. There are many similarities,
but some key differences which need to be considered. There is no one size fits all approach, the
recovery of Unabsorbed Head Office Overheads can vary depending upon the circumstances and
jurisdiction.

It should be noted that in the United States of America, Unabsorbed Head Office Overheads if often
referred to as “burden” costs or “Home Office Overheads”. In this book, the author has used the terms
interchangeably where necessary, however has generally stuck to Unabsorbed Head Office Overheads
as the preferred terminology.

In writing this paper, frequent reference to the SCL Protocol reference has been made. The 2nd edition
from February 2017 has been used extensively as it is considered by the author to be an internationally
recognized standard frequently quoted in construction claims. It has also been recognized in many
jurisdictions as such. Furthermore, it is suggested that it is a convenient and appropriate starting point
for any discussion on construction claims.

1 It should be noted that the loss of profit referred to in this instance is a loss of profit associated with a Contracting
Enterprise being unable to secure new or additional work, not a loss of profit due to a cause such as a premature
termination of a contract. The former being a corporate type loss, the latter being a direct and project loss.

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2 Definitions
It has become obvious to the author during his research that principle issues with Unabsorbed Head
Office Overheads is the terminology used, not just with Unabsorbed Head Office Overheads, but Head
Office Overheads and other project Overheads in general. This is apparent not just in tribunals and
courts decisions, but also amongst seasoned practitioners.

The author has attempted to address this the confusion which has developed over the years on this
subject with definitions of particular types of Overheads and associated terms being incorrectly or
vaguely used or referred to. The following are some basic terms which will be used in this document
with basic definitions. Unless otherwise stated, the definitions are the authors based on his experience
and research. In many cases more detailed explanations of the terms are contained in this document,
however these terms hopefully will assist the reader in following the text.

The definitions of the variables used in the various formulae in this document have been defined
elsewhere in this document.

2.1 Overheads
An Overhead is an accounting term used to describe ongoing business expenses which are not directly
related to producing the product of the enterprise. That is, not directly associated with the provision of
labour, materials, plant or sub-contracts used for the delivery of the product.

Overheads are, however recovered through the income of an enterprise as an extra over expense over
the direct cost of the provision of the product which is the subject of the enterprise. Some accounting
texts refer to overheads as “burden” costs, particularly in jurisdictions such as the United States.

Typically, a Contracting Enterprise’s overheads can be split:

Establishment

Site Office
Time Related
Overheads

Disestablishment

Overheads
Non-time rated

Allocated

Time Related
Head Office
Overheads
Unabsorbed

Unallocated

Under Recovered

Figure 1: Overheads Allocations

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2.2 Head Office Overheads

“Head Office Overheads” are overheads associated with the running of a Contracting Enterprise as a
whole enterprise. They are sometimes referred to as “Home Office Overheads” in jurisdictions such as
the United States. The SCL Protocol defines “Head Office Overheads” as:

“Head office overheads are the incidental costs of running the Contractor’s business as a whole
and include indirect costs which cannot be directly allocated to production, as opposed to direct
costs which are the costs of production. Amongst other things, these overheads may include such
things as rent, rates, directors’ salaries, pension fund contributions and auditors’ fees. In
accountancy terms, head office overheads are generally referred to as administrative expenses,
whereas the direct costs of production are referred to as costs of sales.”2

2.3 Site Office Overheads

Site Office Overheads are costs associated with the management and running of a specific project site.
These can include elements such as site management costs, site accommodation and the like. They are
sometimes referred to as “Field Overheads” in jurisdictions such as the United States.

2.4 Unabsorbed Head Office Overheads

Due to an inability of a Contracting Enterprise in being able to secure work because of a delay on a
specific project, the Contracting Enterprise will have certain costs and expenses which are constant and
not variable as a result of a reduction in workload which they are still liable for. These costs are
considered to be “Unabsorbed”. Sometimes referred to as Unrecovered Head Office Overheads.3

2.5 Extended Office Overheads

Extended Office Overheads occur when the Contracting Enterprise is awarded an Extension of Time
and they may also be entitled to additional “site overheads” and “allocated overheads” to compensate
the Contracting Enterprise for any loss and expense which results from this Extension of Time.

2.6 Allocated Head Office Overheads

Allocated Head Office Overheads occur when Head Office Overheads specific to a given project/s and
can be identified as such. Through careful record keeping their value can be recorded and may form a
separate claim.

2.7 Unallocated Head Office Overheads

Unallocated Head Office Overheads occur when Head Office Overheads are incurred by a Contracting
Enterprise regardless of the volume of work it has on. They include costs such as office rent,
management salaries and the like.

2 Society of Construction Law, Delay and Disruption Protocol (2nd Edition, February 2017) Appendix A page 64
3 Sometimes Unrecovered Head Office Overheads is confused with Under Recovery of Head Office
Overheads – the terms are quite different, however they have resulted in some confusion.

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2.8 Under Recovery of Head Office Overheads

Under Recovery of Head office Overheads may occur during the course of the project, where a
Contracting Enterprise is delayed, its cash flow may also be reduced as a result of this delay which
would result in the Contracting Enterprise’s recovery of Head Office Overheads to occur over an
extended duration leading to an under recovery during the original Contract period.

2.9 Company Profit

The Company Profit” may be considered to be the resultant of income less expenses for the Contracting
enterprise as a whole.

2.10 Project Profit

Project Profit is when a Contracting enterprise includes within its projects a level of profit which will
be applied after considering the commercial position of the specific project. This profit does have an
element of risk in it though as should other expenses be under estimated then the project profit may be
affected.

2.11 Preliminaries
Preliminaries are often used interchangeably with the term Site Overheads, however it may include or
exclude certain elements. For instance, scaffolding may be a Site Overhead, however it may be priced
or included elsewhere in a Contract.

2.12 Profit and Overheads

Profit and Overheads are often expressed together as a phrase, the two terms are different and do not
necessarily occur together or uniformly.

Some Contracts include a Profit and Overheads percentage for use when assessing and pricing
Variations to the Works. Care needs to be take in understanding exactly what “profit” and what
“overheads” are included in such a percentage.

2.13 Loss
A Loss is a transactional resultant occurring where an income does not meet the needs or expectations
to cover an Expense.

2.14 Expense
An Expense is a cost associated with the earning of an income.

2.15 Contracting Enterprise

A Contracting Enterprise is the term used in this document to describe a business whose primary
function is construction and contracting. Terms such as Contractor, Builder and the like used in
quotations have been left as they appear in the original source material, however the abbreviation [CE]
has been inserted to denote that they have the same meaning as Contracting Enterprise.

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3 Unabsorbed Head Office Overheads

The fundamental basis of Unabsorbed Head Office Overheads and Loss of Profit is to compensate a
Contracting Enterprise’s corporate losses, not the loss for a said project.

With a Contracting Enterprise, Head Office Overheads (often referred to as “Home Office Overheads”
in the United States) can be defined as Costs and expenses incurred by a business whose primary source
of income is derived from construction related activities which cannot be specifically attributed to a
specific project, rather they are costs and expenses due to the operation of the business as a whole.
These may include:

• Executive and administrative salaries

• Head office rent and expenses
• Corporate insurances
• Utilities (telephone, electricity, water etc.)
• Travel and accommodation of head office staff
• Depreciation
• Professional fees
• Bid, tender and proposal costs
• Legal and accounting expenses
• Marketing, sales and advertising
• Recruitment costs
• Human resources costs
• Interest on company borrowings
• Bad debts
• Entertainment
• Contributions

One feature of Head Office Overheads is that they tend to be fairly uniform in expenditure, however if
the Contracting Enterprise has a disruption in its business cash flow due to a project being delayed and
as a result the Contractor is also unable to replace the missing cash flow through other projects then this
can have an impact on the ability of a Contracting Enterprise being able to meet its financial obligations.
Similarly the same delay on a project and the inability of a Contracting Enterprise to be able to secure
work to replace the head office contribution of the delayed project can impact on the profitability of the
Contracting Enterprise. It is furthermore unfortunate, that in many cases the solution to the Contracting
Enterprise of being able to reduce its head office costs by reducing staff levels or office space is
generally not open to them as these can firstly have a hidden cost in redundancy payments and the like
and secondly cannot be done overnight. These costs are therefore “unabsorbed”. These are sometimes
referred to as “burden” costs in jurisdictions such as the United States.

It therefore stands that Unabsorbed Head Office Overheads are those head office overhead costs which
are not able to be recovered by a business due to a shortfall in cash flow as a result of an a unexpected
event. The SCL Protocol states that:

“Where there is Employer Delay to Completion, a Contractor [CE] will often include a
claim for the lost contribution to head office overheads and the lost opportunity to earn

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profit (either on the project the subject of the claim or on other projects). This is on the
basis that its time-related resources have been prolonged on the project, rather than
earning revenue (including, importantly, contribution to head office overheads and profit)
on other projects from the contract completion date.”4

The SCL Protocol5 notes that head office overheads can be divided into two categories viz. “dedicated
overheads” being costs which can be directly attributed to a delay, and “unabsorbed overheads” being
overheads which cannot be directly attributable but are costs which are part of running a contracting
business. Being able to claim “unabsorbed overheads” are covered by the second arm of Hadley v
Baxendale6 as being foreseeable damages.

At first instance the Protocol states that:

“Unless terms of the contract say otherwise, a lost contribution to head office overheads is
generally recoverable as a foreseeable loss resulting from prolongation. It may be more
difficult for the Contractor [CE] to demonstrate that the lost opportunity to earn profit was a
foreseeable loss”7

It goes on to state that:

“The Contractor [CE] should make all reasonable efforts to demonstrate through records the
head office overheads that it has failed to recover and the profit it has been deprived of earning.
If it is not otherwise feasible to quantify the unabsorbed overheads and lost profit, formula may
be used (with caution) to quantify unabsorbed overheads and lost profit once it has been
successfully demonstrated that overheads have remained unabsorbed and there is a lost
opportunity to earn profit as a result of an Employer Risk Event. The burden of proving that it
has unabsorbed overheads and lost profit always rests with the Contractor. A formula just
serves as a tool for the quantification of the loss (also see paragraph 1.28 regarding Core
Principle 1 in Part B[sic.] A).”8

The Core Principles of the SCL Protocol further clarifies this and states:

“If the Contractor [CE] intends to rely on the application of a formula for the assessment of
lost profits and unabsorbed head office overheads, it will first need to produce evidence that it
was unable to undertake other work that was available to it because of the Employer Delay.
These records may include the Contractor’s [CE] business plans prior to the Employer Delay,
the Contractor’s [CE] tender history and records of acceptance or rejection of tender
opportunities depending upon resource availability. Also relevant will be minutes of any

4
Society of Construction Law, Delay and Disruption Protocol (2nd Edition, February 2017) at para 2.2 of Guidance
Part C: Other Financial Heads of Claim, page 55
5 Society of Construction Law, Delay and Disruption Protocol (2nd Edition, February 2017) at para 2.3 of Guidance
Part C: Other Financial Heads of Claim, page 55
6 Hadley v Baxendale [1854] EWHC K70; (1854) 156 ER 145, 9 ExCh 341, (1854) 23 LJ Ex 179, 18 Jur 358, [1843-
60] All ER Rep 461
7
Society of Construction Law, Delay and Disruption Protocol (2nd Edition, February 2017) at para 2.5 of Guidance
Part C: Other Financial Heads of Claim, page 55
8 Society of Construction Law, Delay and Disruption Protocol (2nd Edition, February 2017) at para 2.8 of Guidance
Part C: Other Financial Heads of Claim, page 55

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meetings to review future tendering opportunities and staff availability. The Contractor [CE]
will also need to produce the records that support the inputs into the formula used, in particular
the Contractor’s [CE] company accounts for the periods immediately preceding and
succeeding the Employer Delay as well as for the period when the Employer Delay occurred.”9

Keating describes head office overheads as:

“A Contractor’s [CE] overheads are commonly taken to be recovered out of the income from
his business as a whole and ordinarily where completion of one contract is delayed the
Contractor [CE] claims to have suffered a loss arising from the diminution of his income from
the job and hence the turnover of his business. But he continues to incur expenditure on
overheads which he cannot materially reduce or, in respect of the site, can only reduce, if at
all, to be limited extent. But for the delay, the workforce would have had the effect of
contributing to the overheads during the overrun period. There is some authority that a claim
on this basis is sustainable.”10

The first time head office overheads were looked at by a Commonwealth court appears to be in 1964 in
the Canadian case of Shore and Horwitz Construction Co. Ltd. v Franki of Canada11. In the appeal in
this case before the Court of Appeal for Ontario, Spencer J noted that:

“The Court of Appeal seemed to have cut out the $2,802 per month for 4¾ months allowed in
the overhead and allowed 4.99 per cent figuring it on $73,990.56 as the Court increased the
direct cost by addition of $1,819.50 “miscellaneous”.

In essence, therefore, the Court of Appeal has disallowed any compensation in overhead for
the 4¾ months’ delay. I have considered the argument made by counsel and I have read the
cases cited and I am of the opinion that this is not a proper deduction. The overhead in a year
is figured as a percentage of the direct cost and then that percentage is assigned to the direct
cost of each individual job. When the job here in question occupied 4¾ months more of the
plaintiff’s (appellant’s) time then during that 4¾ months the overhead costs were continuing to
run but it was obtaining no revenue from which to defray the overhead costs. The allowance of
4.99 per cent on the extra direct cost is not a compensation for this delay but is an allowance
of the same percentage rate on an item which would not normally have been in the year’s
operations, and I am therefore of the opinion that the Court of Appeal erred in taking this
amount from the Master’s assessment.”12

In the UK case of Peak Construction (Liverpool) v McKinney Foundations Ltd13 a similar finding to
Shore and Horwitz was made in that it looked at loss of profit which on the face of it may appear to be

9 Society of Construction Law, Delay and Disruption Protocol (2nd Edition, February 2017) at para 1.28 of Guidance
Part A: Delay, Disruption and Acceleration Concepts, page 16
10 Stephen Furst QC and Vivian Ramsey QC, Keating on Building Contracts (7th edition, Sweet & Maxwell, 2001)
267
11 Shore and Horwitz Construction Co. Ltd. v Franki of Canada (1964) SCR 589
12 Shore and Horwitz Construction Co. Ltd. v Franki of Canada (1964) SCR 589 at 591-592
13 Peak Construction (Liverpool) v McKinney Foundations Ltd (1970) 1 BLR 111

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different to Unabsorbed Head Office Overheads, except that Salmon LJ made reference to losses
suffered by the Contracting Enterprise’s head office staff and a loss of gross profit.

In Ellis-Don v Parking Authority of Toronto 14 O’Leary J reviewed Hudson’s Building and Engineering
Contracts, 10th Edition and noted that the Contracting Enterprise did not break up the percentage
between profit and overheads, however his Honour did not feel this was essential and applied the
Hudson’s Formula using the percentage contained within the Contract. His Honour noted that whilst
there was not claim for a loss of profit due on a specific project, he stated that:

“That is not to say that the plaintiff would have been entitled to claim the lost profit on a
contract it could otherwise have had if such a contract was lost by the 171/2 week delay. It is
one thing to say that the parties when the contract was entered into should have con-templated
that there was a real danger or serious possibility that staff tied up by the defendant’s fault
beyond what would have been the date of completion would be unable to earn normal profit
and overhead for the plaintiff elsewhere, it is quite another thing to say the parties should have
contemplated that the profit from a particular contract would be lost because of delay in
completion caused by the defendant. There is no claim in this case for loss of profit from any
particular contract that was lost, but I feel it worthwhile to point out the distinction.” 15

Tate & Lyle v Greater London Council (1983)16 the court accepted the markup of managerial time by
2.5% due to inefficiency caused by the delay. However, it was also held that managers had to have kept
records of the time they spent on the delayed project, which it had failed to do. In the Scottish case of
Euro Pools v Clydeside Steet Fabrications Ltd. [2003]17 the Contracting Enterprise proposed to add to
the hourly rates of their engineer a 350% markup and a 50% markup to their manager director’s salary
based on evidence that these markups were normal for the industry. The court accepted this principle
and that these markups would cover the contribution to maintaining the company’s fixed Head Office
Overheads. Lord Drummond Young explained:

“A managing director will normally be expected to devote the whole of his working time and
effort to the affairs of his employer… The tasks of a managing director are obviously very
variable, but they will almost invariably include the strategic planning of the company’s
business and, at a strategic level, the search for new markets and the development of new
products. Those tasks are critical to the development of the business; indeed, in modern
conditions, they are usually critical to its very survival… If one of the company’s suppliers
commits a breach of contract, and in consequence, the managing director requires to spend a
significant amount of time supervising remedial measures, that time is lost to the other tasks
that the managing director is obliged to perform. That in my opinion clearly represents a loss
to the company.”

When the defenders argued that the Contracting Enterprise’s claim fell foul of the second arm of Hadley
v Baxendale, Lord Drummond Young said that:

14 Ellis-Don v Parking Authority of Toronto (1978) 28 BLR 98

15 Ellis-Don v Parking Authority of Toronto (1978) 28 BLR 98 at 127
16 Tate & Lyle v Greater London Council [1983] 2 AC 509
17 Euro Pools v Clydeside Steet Fabrications Ltd. [2003] SC (D) 18/1

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“In a contract for the sale of goods where it is known that the purchaser will use those goods
to perform a contract with a third party, the fact that the purchaser may require to perform
remedial works under the latter contract is a matter arising “according to the usual course of
things” to use the words of Alderson J in Hadley v Baxendale.”

St Modwen Developments v Bowmer & Kirkland (1996)18 followed the general principle that the
Contactor was entitled to recover profit and overheads.

Babcock Energy v Lodge Sturtevant (1994)19 – Babcock kept detailed records of additional hours spent
by head office staff in connection with the delay event. It was also able to demonstrate that its order
book was full and that work had to be “farmed out” and also it had to use agency staff to supplement
its normal staff. The Court found that “the plaintiffs much have provided an alternative quantification
by reference to the additional cost to them of employing others, but I do not consider that they are
obliged to do so if they can satisfactorily demonstrate the cost to them of time unnecessarily spent and
therefore lost. It is for the defendants to show that the losses prima facie incurred are not the correct
measure of damage and this (the defendants) failed to do.”

Sir William Stubbs in J.F.Finnegan, Ltd. v Sheffield City Council re-iterated the principle:

“It is generally accepted that, on principle, a Contractor who is delayed in completing a

contract due to the default of his employer, may properly have a claim for head office or off—
site overheads during the period of delay, on the basis that the work-force, but for the delay,
might have had the opportunity of being employed on another contract which would have had
the effect of funding the overheads during the overrun period.”20

Walter Lilly & Company Ltd v Giles Patrick Cyril Mackey and DMW Developments Limited [2012]
EWHC 1773 (TCC)

In the United States, the courts looked at the question of Unabsorbed Head Office Overheads as far
back as 1933 in the case of Herbert M. Baruch and Milton Baruch v. United States,21 A Veterans
Administration construction contract in Fresno, California in which the US Court of Claims stated inter
alia:

“During the delay occasioned by the defendant’s stop order … the Contractor gave prompt
notice to the contracting officer that such delay was occurring, that damages therefor were
accumulating and that claim for such damages against the Government would be demanded…

Manifestly this delay was not in the contemplation of the parties at the time of the making of
the contract. … It was not the fault of the Contractor … He should be permitted to recover the
actual and necessary costs proximately flowing from the delay that was occasioned by this
action on the part of the defendant. …

18 St Modwen Developments Ltd v Bowmer & Kirkland Ltd [1996] CILL 1203
19 Babcock Energy v Lodge Sturtevant (1994) CILL 981
20 J.F.Finnegan, Ltd. v Sheffield City Council (1989) 43 BLR 124 at 134-135
21 Herbert M. Baruch and Milton Baruch v. United States(1933)

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As to the general office overhead, the evidence shows that the plaintiff company engaged in
other construction work at the time the contract work involved in this litigation was being done.
… We have therefore apportioned the general office overhead and allotted the proper part of
same to this particular contract. In turn, we have allotted the proper part of the net result thus
obtained to the unforeseen delay …”22

1945 in the case of Fred R. Comb Co. v United States23 which held that where a portion of a company’s
home office salaries which is attributed to a specific project is “wasted” due to a suspension then then
there is an obligation to reimburse the company for that “waste”. The court stated:

“Where the Contractor [CE], by negligence of the defendant amounting to a breach of the
contract, is delayed in the completion of the work, it is held that plaintiff is entitled to recover
a proper proportion of main office overhead for the period of delay, without any precise proof
of the amount by which plaintiff’s overhead was ultimately increased by the delay. Brand
Investment Co. v. United States, 102 C. Cls. 40, cited.”24

It has been said that in both Fred R. Comb Co., v. U.S25 and Eichleay Corp.,26 that these two cases
concerned the prolongation period and the effect of the delay to the fixed Head Office Overhead costs,
not the Unabsorbed Head Office Overheads.27 In Fred R. Comb Co., v. U.S, it was stated that:

“So the Contractor, instead of saving the salary of that proportion of his main office staff which
is attributable to the contract, is obliged, in effect, to waste it, and to spend a similar amount
at the end of the contract for the extra time necessitated by the delay.”

Whilst in Eichleay Corp., the Board stated that:

“While the overhead rate did not increase during the performance of these contracts, it is not
questioned that the main office expense continued during the periods of suspension. . . . It has,
however, been sufficiently demonstrated by the mere fact of prolongation of the time of
performance, and the continuation of main office expenses, that more of such expenses were
incurred during the period of performance than would have been except for the suspension . .
.”

There has been a lack of a clear understanding of what Unabsorbed Head Office Overheads actually
are and when they would occur. Confusion between this and Extended Head Office Overheads,
Allocated Head Office Overheads and Under Recovery of Head Office Overheads permeate the
literature and the cases.

22 Herbert M. Baruch and Milton Baruch v. United States, 93 Ct. Cl. 107; 1941 U.S. Ct. Cl. LEXIS 141, March 3,
1941, requoted in Navigant Paper; Practical Problems with Pricing Delay Using Eichleay, 2017
23 Fred R. Comb Co. v United States 103 Ct. Cl. 174 (1945)
24 Fred R. Comb Co. v United States 103 Ct. Cl. 174 (1945), quoted from Navigant Paper; Practical Problems with
Pricing Delay Using Eichleay, 2017
25
Fred R. Comb Co., v. U.S., 103 Ct.Cl. 174, (1945)
26 Eichleay Corp., ASBCA No. 5183, 60-2 BCA ¶ 2688, aff’d on recons’d, 61-1 BCA ¶ 2894
27 Howard N Kenyon Jr, Fixed Cost and Contract Delay; (This article first appeared in the National Contract
Management Journal, Vol. 27, Issue 2 (1996), National Contract Management Association)

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In summary, the time frame which each of these concepts are “felt”, using SCL Protocol terminology28
can be seen from this table:

Type of Head Office Overheads Period “felt”

Unabsorbed Head Office Overheads During the Extension of Time Period
Extended Head Office Overheads During the effect of the Delay Event on the
Critical Path
Allocated Head Office Overheads During the effect of the Delay Event on the
Critical Path
Under Recovery of Head Office Overheads During the Original Contract Duration
Figure 2:Type of Overhead and Period Felt

The term Unabsorbed Head Office Overheads in America was introduced in the case of Allegheny
Sportswear Co 29. It is not uncommon for the terms to be used interchangeably. This is not correct
and has been the source of much of the confusion. It has also been postulated that Extended Head Office
Overheads is a term unique to the construction industry whereas Unabsorbed Head Office Overheads
is a more general term, hence some of the confusion.30 It may also not have been helped by the Wickham
Contracting Co 31 case which held that the Eichleay Formula was the exclusive method for
compensating for Unabsorbed Head Office Overheads, at least at a federal level. [more UK examples?]

In the American circumstance where a suspension is occurring, this suspension during the original
contract period results in an Under Recovery of Head Office Overheads at the time of the suspension.
The subsequent delay which may result from this suspension may result in a loss in Unabsorbed Head
Office Overheads.

It is arguable that a relatively small delay may result in the Contracting Enterprise losing Unabsorbed
Head Office Overheads for a longer period than the delay as the inability to obtain work to supplement
the payment for Unabsorbed Head Office Overheads may not be able to be rectified by the Contracting
Enterprise immediately after the Extension of Time period and/or any project the Contracting Enterprise
may have required to assist in supplementing the payment of Unabsorbed Head Office Overheads may
have had a longer duration than the initial delay period of the subject project.

As Mr Kenyon in his article Fixed Cost and Contract Delay32expressed the confusion:

“The only thing that is clear from the record at this point is that the dance floor is covered with
chewing gum and string.”

28 Society of Construction Law, Delay and Disruption Protocol (2nd Edition, February 2017) at ???
29 Allegheny Sportswear Co., ASBCA 4163, 58-1 BCA 1684.
30 Capital Electric Co. v United States 729 F. 2d 743 (Fed.Cir., 1984), “Extended overhead is a concept
unique to construction contracting.”
31 Wickham Contracting Co., Inc. v Fischer (1994) 12 F.3d 1574, 39 Cont.Cas.Fed. (CCH) P 76,608, No. 93-1146,
“We hold that the Eichleay formula is the exclusive means for compensating a contractor for unabsorbed overhead
when it otherwise meets the Eichleay prerequisites.”
32 Howard N. Kenyon Jr., Fixed Cost and Contract Delay; (This article first appeared in the National Contract
Management Journal, Vol. 27, Issue 2 (1996), National Contract Management Association):

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This would seem to suggest that Head Office Overheads impact two periods in a Contract

Under recovery of Head Office Overheads and Unabsorbed Head Office Overheads viz. at the time a
delay event is felt by way of an under-recovery of Head Office Overheads and during the extended
period with a reduction in the ability to recover Head Office Overheads. It is suggested that they are in
fact one and the same failure to recover Head Office Overheads and the American position stated above
is in fact incorrect as the Head Office Overheads a project was meant to contribute to has in fact merely
moved as a result of the subject delay event.

It is suggested that whilst Under Recovery of Head Office Overheads can have a cash flow impact on a
Contracting Enterprise, the Contracting Enterprise eventually receives the allowance he has included
within the Contract Sum it has allowed for Head Office Overheads, albeit over a longer period of time.
However during the delay period of a Contract, it is postulated that the loss being assessed is the extra
over the Contract allowance for Unabsorbed Head Office Overheads which are considered.
Furthermore, Unabsorbed Head Office Overheads are a business in total expense representing the loss
to the business, not just a subject project.

As a generalization, Unabsorbed Head Office Overheads can be graphically shown as follows:

In equilibrium or normal state

12

10

0
Head Office Overheads (Expense) Contribution from Projects for Head Office
Overheads (Income)

Figure 3 - Head Office Overheads and the Contribution from a Contracting Enterprises projects to the Head Office
Overheads in their normal or equilibrium state

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Unabsorbed
12

10

0
Head Office Overheads (Expense) Contribution from Projects for Head Office
Overheads (Income)

Normal Unabsorbed

Figure 4 - A shortfall in the contribution from a Contracting Enterprises projects as a result of the delayed project after the
original duration of the delayed project could be as a result of Unabsorbed Head Office Overheads

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4 Under Recovery of Head Office Overheads

The under recovery of Head Office Overheads needs to be differentiated from unabsorbed head office
overheads. The under recovery of head office overheads has to do with the reduction or extended out
of a cash flow on a project which results in the Contracting Enterprise not recovering a full contribution
from the said project when they expect it. If you like, it is a cash flow issue. By way of illustration, the
following graph shows a theoretical company financial position:

Under-recovery of Head Office Turnover

Anticipated Cash flow

Actual Cash flow

Head office Overheads

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Month

Figure 5 Demonstration of Unabsorbed Head Office Overheads33

33 Based on graph in Reg Thomas, Construction Contract Claims (2nd edition, Palgave 2001) Page 129.

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Figure 6 Blow-up showing under-recovery of head office overheads

The graph shows a company which anticipates a 12% p.a. constant increase in turnover with a
corresponding 5% of that turnover being head office overheads.

The anticipated cash flow of a 12 month project is shown against the actual 18 month delayed cash
flow.

Due to the under-recovery of the anticipated cash flow and the constant head office expenses, there is a
shortfall in cash flow which correlates to an under-recovery of the head office overheads.

There is no corresponding over-recovery of head office overheads following the under-recovery as the
Contracting Enterprise can only operate to a maximum cash flow level based on workload before the
need to increase the head office overheads correspondingly. Of course this can be done, however it
assumes the company can take on additional projects at an increased rate.

The blow-up in Figure 3 shows the under recovery of head office overheads from Figure 2.

The key aspect to under recovery of head office overheads is that the Contracting Enterprise still
receives the head office overheads it included within its contract sum, however it receives them over an
extended duration. As such any claim for under recovery of head office overheads is a claim for the
cost of money or for the Contracting Enterprise having to finance for this shortfall.

For instance, a Contracting Enterprise has a 12 month contract and assumes a portion of the income
from the said project to go towards its head office overheads. The said project is delayed by 6 months
extending the period of recovery of the head office overheads contribution. As a result of this the
Contracting Enterprise has suffered a loss attributable to having to supplement its head office overheads
shortfall. This can be calculated as follows:

Interest (5%
Month Anticipated Actual Shortfall Cumulative
p.a.)
1 20,644.05 12,121.75 8,522.30 8,522.30 35.51
2 34,124.82 18,542.47 15,582.35 24,104.66 100.44
3 44,708.05 24,104.66 20,603.39 44,708.05 186.28
4 52,393.73 28,808.31 23,585.42 68,293.47 284.56
5 57,181.87 32,653.44 24,528.44 92,821.91 386.76
6 59,072.47 35,640.03 23,432.44 116,254.35 484.39

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Interest (5%
Month Anticipated Actual Shortfall Cumulative
p.a.)
7 58,065.53 37,768.09 20,297.43 136,551.78 568.97
8 54,161.04 39,037.63 15,123.41 151,675.19 631.98
9 47,359.01 39,448.63 7,910.38 159,585.58 664.94
10 37,659.44 39,001.10 (1,341.66) 158,243.92 659.35
11 25,062.32 37,695.03 (12,632.71) 145,611.21 606.71
12 9,567.66 35,530.44 (25,962.78) 119,648.43 498.54
13 - 32,507.32 (32,507.32) 87,141.12 363.09
14 - 28,625.66 (28,625.66) 58,515.46 243.81
15 - 23,885.47 (23,885.47) 34,629.98 144.29
16 - 18,286.75 (18,286.75) 16,343.23 68.10
17 - 11,829.50 (11,829.50) 4,513.72 18.81
18 - 4,513.72 (4,513.72) - -
TOTAL 5,946.52
Figure 7: Interest Calculation for Under Recovery of Head Office Overheads

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As a generalization, Unabsorbed Head Office Overheads can be graphically shown as follows:

In equilibrium or normal state

12

10

0
Head Office Overheads (Expense) Contribution from Projects for Head Office
Overheads (Income)

Figure 8 - Head Office Overheads and the Contribution from a Contracting Enterprises projects to the Head Office
Overheads in their normal or equilibrium state

Under Recovery
12

10

0
Head Office Overheads (Expense) Contribution from Projects for Head Office
Overheads (Income)

Normal Under Recovery

Figure 9 - a Shortfall in contribution from the delayed project due to delay during the original duration of the delayed
project could be an under recovery for Head Office Overheads

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5 Extended Head Office Overheads Differentiated

Unabsorbed Head Office Overheads and Extended Head Office Overheads are two terms often used
interchangeably, however it is suggested that they are not the same. The primary difference between
the two terms is the nature of the damage. Unabsorbed Head Office Overheads is an indirect or
consequential loss; however Extended Head Office Overheads is a direct loss. The reason for this is
the Extended Head Office Overheads occurs when a project’s duration is extended and specific
resources within a company’s head office which are directly linked to the subject project would have
their involvement also extended whereas Unabsorbed Head Office Overheads are not specifically
linked or there is no direct link to a subject project.

Extended Head Office Overheads are usually associated with what the SCL Protocol refers to as
allocated overheads in that whilst they may be located in a Contracting Enterprise’s head office and not
paid for directly by the subject project, they are nonetheless working on the subject project and their
costs can be extrapolated from for any potential claims due to a delay in a project.

The distinction between unabsorbed head office overheads and extended head office overheads needs
to be understood. Unlike an extended head office overhead expenses which is calculated as at the time
a delay actually occurs, there is American case law which suggests that Unabsorbed Head Office
Overheads is the recovery of loss and expense during the extended period. In West v All State Boiler
Inc.34 the court opined:

“It is not, however, the length of the suspension itself that justifies the recovery; rather, it is the
resulting uncertainty as to the additional time that will be necessary to complete the
performance of the contract that causes the injury for with the Eichleay formula is designed to
compensate the Contractor[CE].”

Extended head office overheads are a direct expense, however Unabsorbed Head Office Overheads is
a consequential and indirect loss.

34 West v All State Boiler Inc . (1998) 96-1093, 1094

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6 “Thickening” of Head Office Overheads

A resource “thickening” claim occurs when additional resources are required as a result of a
compensable delay event. They should be differentiated from unabsorbed head office overheads or
prolongation of site overheads claim as both of these heads of claim deal with existing overheads.

Like other heads of claim, the claimant needs to be able to demonstrate as a condition precedent that
but for the compensable delay event, the claimant would not have required the claimed resources.

“Thickening” claims can occur due to additional resources being required at either or both a site and
corporate level.

The English Queen’s Bench recently examined this in the case of Fluor Ltd v Shanghai Zhenhua Heavy
Industry Co, Ltd [2018].35 In this particular case the court looked at a claim for unabsorbed head office
overheads but noted that the Claimant still had to be able to demonstrate that it had actually suffered a
loss and been prevented from obtaining work to supplement any shortfall in head office overhead
recovery. In other words that the loss would not have been incurred in any event. Mr Justice Edwards-
Stuart also looked at the idea that additional resources may have been required as a result of the breach
of contract by the defendant, i.e. “thickening” and stated that:

“Suppose that in its head office a contractor employed six accountants, whose activities
concerned the administration of the business generally and were not project related. As a
result of the substantial extra administration required to deal with problems caused by a sub-
contractor's breach of contract, such as those with Shipment No 1 at Vlissingen, the
company's most experienced accountant, Mr Cruncher, is required to spend half his time
dealing with those problems. However, fortunately his five colleagues are not overworked
and are able to deal with the balance of Mr Cruncher's work in their ordinary working time.
But when further problems arise – such as those with Shipment No 2 – the contractor decides
that Mr Cruncher will be required to spend all his time dealing with those problems. Now his
colleagues are no longer able to cope with the balance of his work and so a new accountant,
Mr Bean-Counter, is taken on. Being inexperienced, Mr Bean-Counter is assigned relatively
menial tasks, none of which has anything to do with the breaches of contract. In those
circumstances, in spite of the fact that Mr Bean-Counter was not involved with the problems
caused by the breaches, it seems to me that the cost of employing him would have been a
direct consequence of those breaches and would therefore be recoverable as damages… It
represents a ‘thickening’ of the head office costs.”36

The court also recognised that in practice it may be very difficult for a claimant to be able to prove such
a claim, his honour noting:

“I suspect that Fluor may well have incurred increased head office costs, such as telephone
bills or IT costs, as a result of the breaches of contract by ZPMC, but I am not prepared to

35 EWHC 490 (TCC).

36 Fluor Ltd v Shanghai Zhenhua Heavy Industry Co, Ltd [2018] EWHC 490 (TCC) at paragraph 28

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pluck a figure out of the air. I appreciate that it may well be very difficult for Fluor to put
forward a precise figure, but in the absence of any figure there is little a court can do.” 37

In this particular instance, the Claimant was applying a straight 4% to the project cost to derive a figure
for their unabsorbed head office claim, however, the court was not able to determine how much, if any
of this was extra over what would have been incurred in any event, therefore the thickening claim failed.

As a generalization, “Thickening” of Head Office Overheads can be graphically shown as follows:

In equilibrium or normal state

12

10

0
Head Office Overheads (Expense) Contribution from Projects for Head Office
Overheads (Income)

Figure 10 - Head Office Overheads and the Contribution from a Contracting Enterprises projects to the Head Office
Overheads in their normal or equilibrium state

"Thickening"
14
12
10
8
6
4
2
0
Head Office Overheads (Expense) Contribution from Projects for Head Office
Overheads (Income)

Normal Thickening

Figure 11 - During the duration of the delayed project the Contracting Enterprises incurs additional expenses due to
additional resources being reuired to manage a delayed project within its head office could be as a result of "thinking" of
Head Office expenses

37 Fluor Ltd v Shanghai Zhenhua Heavy Industry Co, Ltd [2018] EWHC 490 (TCC) at paragraph 32

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7 Site Office Overheads Differentiated

Sometimes referred to as “Field Office Overheads” in the United States.

Site overheads are costs associated with the management and functioning of a project which occur on
site, however are not trade works related. This can include:

• Site accommodation;
• Site management staff;
• Site insurances;
• Materials handling;
• Site utilities
• Plant and small tools
• Temporary electrical supply;
• Scaffolding
• Stationary
• Office furniture;
• Etc.

Loss and expense associated with Site Office Overheads are a different head of claim to Unabsorbed
Head Office Overheads and should be treated as such. However, care needs to be taken to avoid double
counting of some cost elements when looking at unabsorbed head office overheads. Areas where
double counting can occur include:

• Insurances – whilst some insurance are project based and some are company umbrella policies,
the proportion associated with the said project is often included as part of an extended site
overheads or prolongation claim. They can also appear in the profit and loss statement for a
Contracting Enterprise as a company expense. Appropriate adjustments should be made to
avoid double counting.

• Depreciation – certain plant items can be deprecated as part of a particular project and as such
can be included as part of an extended site overheads or prolongation claim. These could also
be included in a Contracting Enterprise’s profit and loss as depreciation generally. Appropriate
adjustments should be made to avoid double counting.

• Interest and funding costs - certain interest and funding costs associated with the funding of
a particular project and as such can be included as part of an extended site overheads or
prolongation claim. These could also be included in a Contracting Enterprise’s profit and loss
as depreciation generally. Appropriate adjustments should be made to avoid double counting.

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8 Accounting Principles
To better understand Unabsorbed Head Office Overheads a basic understanding of the accounting
principles, reports and how a Construction Contracting Business works is useful.38 Accounting in its
simplest form is the recording of money; its primary goal is to show the gain or loss of an economic
position and the flow of money through a company. There are several reasons for this including for tax
purposes and for the management of the enterprise. Because of this the accounting of money for tax
purposes may be different than that for management purposes. Therefore it is desirable to understand
the background and purpose of accounting for a particular circumstance and situation. Whilst the
various forms of reports will be dealt with later, the basics of money movement is dealt with here.

To be able to seek business, a Contracting Enterprise needs to have invested into his Contracting
Enterprise to pay for expenses such as his head office salaries, rent, insurances and the like. These
expenses accrue whether the Contracting Enterprise is working on projects or not. However, obtaining
profitable projects defrays these costs. This project profit however is not the same as the Contracting
Enterprise’s profit. The Contracting Enterprise’s profit is the net effect of the Contracting Enterprise
as a whole after considering all project income and expenses along with the head office expenses.

The reason for being in business is to generate profit. Projects are performed, objects are made etc.
with the intention or expectation that it will generate a profit for the enterprise. To achieve this, the
enterprises income has to be greater than the sum of all its expenses including enough income to cover
the fixed overhead costs associated with the enterprise. Each individual project is expected to contribute
to the enterprise as a whole with its income to offset its variable expenses (project expenses) and
contribute to the fixed expenses, in the generation of this profit. A project profit however is the
difference between the project income and the expenses associated with this income. This can be
illustrated as:

No. of Projects 1 20 50

Project Income 1,000,000 20,000,000 50,000,000

Project Expenses (Direct Costs) 800,000 16,000,000 40,000,000

Contribution margin (Gross profit) 200,000 4,000,000 10,000,000

Fixed Expenses (Indirect Costs) 500,000 500,000 500,000

Net Profit or (loss) (300,000) 3,500,000 9,500,000

Figure 12: Direct Costing

Of course this is a theoretical analysis. This example assumes a fixed cost that is uniform regardless of
the number of projects being undertaken. Fixed costs for 1 project and fixed costs for 100 projects
would not necessarily be the same, however it is not a proportional increase, the value or cost of the
fixed costs compared to the income from an increasing number of projects does not increase uniformly.

38 Howard N. Kenyon Jr., Fixed Cost and Contract Delay; (This article first appeared in the National Contract
Management Journal, Vol. 27, Issue 2 (1996), National Contract Management Association)

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This example does demonstrate that fixed costs for undertaken 1 project which would have a positive
“gross profit”, however would show a loss after fixed costs are included for a “nett profit”. The same
enterprise would show a positive “nett profit” if 20 projects are undertaken. This approach is sometimes
referred to as a “direct costing” approach as only the direct costs are considered when determining the
profitability of the work being performed. This type of analysis, however can show how well an
enterprise has used its available resources over a period.

A different model is referred to as “absorption costing”. This can be shown thus:

No. of Projects 1 20 50

Project Income 1,000,000 20,000,000 50,000,000

Project Expenses (Direct Costs) 800,000 16,000,000 40,000,000

Fixed Overhead rate (absorption rate) 62.50% 3.13% 1.25%

Fixed Expenses (Indirect Costs) 500,000 500,000 500,000

Net Profit or (loss) (300,000) 3,500,000 9,500,000

Figure 13: Full Absorption Costing

The “absorption rate” is calculated as:

𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 (𝐷𝑖𝑟𝑒𝑐𝑡 𝐶𝑜𝑠𝑡𝑠)

%
𝐹𝑖𝑥𝑒𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 (𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝐶𝑜𝑠𝑡𝑠)

Using this method, the enterprises’ costs over a period are added to, or “absorbed” by the project
expenses. This method blurs the distinction between the project expenses and the enterprises fixed
capacity over the period. Adding this fixed cost to the product costs can be done in a variety of ways.

This method still shows that a single project is unprofitable; however, 20 or more are profitable. This
does not however mean the single project is in itself unprofitable, just that a single project makes the
enterprise unprofitable. At some point between 1 and 20 projects the enterprise becomes profitable.

In many instances, a contracting enterprise will establish rules or allocate fixed costs differently
depending upon the nature of the project and other circumstances. This affects the profitability of the
particular projects. This makes the company profitability subject to a series of possibilities based on
the methodology or rules established. There are several ways for an enterprise to do this depending on
how the enterprise views its fixed costs to its productivity levels.

Any variance in the planned fixed cost and the actual fixed cost is known as the under or over absorbed
overheads. From this comes the term “unabsorbed overheads” to describe the situation when the actual
fix cost or overheads exceeds the planned fixed cost or overhead. This is not a description of profit or
loss derived from the project incomes. The table below gives an example of the planned fixed cost and
actual fixed cost being compared. The 1 project shows that the project may make a “gross profit” but
the enterprise as a whole will make a “net loss” based on an assumed overhead rate of 20%. Somewhere
between 1 and 20 projects there is an over absorption when the enterprise goes from a loss to a profit.

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What this also demonstrates is that when the enterprise does not have sufficient projects, there is
“unabsorbed overheads” or fixed costs.

No. of Projects 1 20 50

Project Income 1,000,000 20,000,000 50,000,000

Project Expenses (Direct Costs) 800,000 16,000,000 40,000,000

Fixed Overhead Rate (at budget) 20% 20% 20%

Fixed Overhead Applied 160,000 3,200,000 8,000,000

Project profit or (loss) 40,000 800,000 2,000,000

Fixed Expenses (Indirect Costs) 500,000 500,000 500,000

Variance (under)over absorption

overhead (340,000) 2,700,000 7,500,000

Net Profit or (loss) (300,000) 3,500,000 9,500,000

Figure 14: Absorption Costing at Budget

Profit

Head office Costs

Off-site Overheads
Costs
Onsite Overheads
Costs
Direct Trade Costs

Figure 15: Typical split of a Contracting Enterprise’s Expenditure

One of the ironies with regards unabsorbed head office overheads and loss of profit, is that the larger
the company and the more projects it has underway at any particular time, the less likely it is that it has
suffered a loss as a result of a delay on a single project. This is due to the absorption rate required for
a smaller enterprise being lower whereas a larger enterprise requires a larger absorption.

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9 Characterising the Damage

9.1 Type of Loss
Before you can look at the quantum for loss and expense, an understanding of the nature of that loss
and expense needs to be had. The reasoning for this is that:

1. Exclusion provisions of a Contract may exclude the ability of a Contracting Enterprise from
recovering indirect and consequential losses;

2. The evidentiary burden can be different for indirect and consequential losses in that there is
also a requirement for demonstrating that the breach was “would reasonably contemplate,
would be the amount of injury which would ordinarily follow from a breach of contract under
these special circumstances so known and communicated”. 39; and

3. Some jurisdictions will not entertain consequential or indirect losses.40

The object or goal in the award of damages due to a breach of a contractual obligation is to return the
affected party to the position it would have been in had the event or circumstance that led to the
Extension of Time not occurred, or as Parke B sated in Robinson v Harmon:41

“the rule of the common law is, that where a party sustains loss by reason of a breach of
contract, he is, so far as money can do it to be placed in the same situation, with respect to
damages, as if the contract had been performed.”

Damages incurred as result of a loss of opportunity resulting in a loss attributable to unabsorbed head
office overheads is a compensatory form of damage.

Any loss and expenses therefore, is based on the actual loss and expense suffered and not subject to
profit or expense saved.42 Likewise care needs to be taken to prevent the aggrieved party from being
put in a better position than it would have been in had the events or circumstances not occurred.43

Furthermore, unabsorbed head office overheads as damages maybe sought as a loss of opportunity or
chance in that the Contracting Enterprise has lost the opportunity to obtain additional work or secure
additional projects to assist in funding the cost of operating a business.44

As pointed out in the SCL Protocol, head office overheads can be divided into dedicated overheads,
being those which are dedicated and identifiably associated with a specific project, and unabsorbed
overheads. It is the latter which we are concerned with in this paper.

39 Hadley v Baxendale [1854] EWHC K70; (1854) 156 ER 145, 9 ExCh 341, (1854) 23 LJ Ex 179, 18 Jur 358, [1843-
60] All ER Rep 461
40 Many Civil Law jurisdictions do not have provisions which allow for the claiming consequential or indirect losses.
41 Robinson v Harman (1848) 1 Ex Rep 850 at 885
42 Freeman v Niroomand (1996) 52 Con LR 116 at 120, per Millett LJ (CA).
43 Townsend v Stone Toms & Partners (1984) 27 BLR 32 at 56, per Waller LJ.
44 Chaplin v Hicks [1911] 2 KB 786

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As a result of a delay to the works, dedicated overheads can generally be specifically identified and
quarantined through diligent account methodologies. They are a direct loss and expense. However
unabsorbed overheads because they are part of the company’s overall financial position are not as
clearly identifiable. They are an indirect loss and expense and a consequential loss and expense.

The nature of unabsorbed overhead damages is also consequential losses. This it is suggested is covered
by the second limb of Hadley v Baxendale where Anderson B stated that:

“Now we think the proper rule in such a case as the present is this: Where two parties have
made a contract which one of them has broken, the damages which the other party ought to
receive in respect of such breach of contract should be such as may fairly and reasonably be
considered either arising naturally, i.e., according to the usual course of things, from such
breach of contract itself, or such as may reasonably be supposed to have been in the
contemplation of both parties, at the time they made the contract, as the probable result of the
breach of it. Now, if the special circumstances under which the contract was actually made
were communicated by the plaintiffs to the defendants, and thus known to both parties, the
damages resulting from the breach of such a contract, which they would reasonably
contemplate, would be the amount of injury which would ordinarily follow from a breach of
contract under these special circumstances so known and communicated. But, on the other
hand, if these special circumstances were wholly unknown to the party breaking the contract,
he, at the most, could only be supposed to have had in his contemplation the amount of injury
which would arise generally, and in the great multitude of cases not affected by any special
circumstances, from such a breach of contract. For, had the special circumstances been
known, the parties might have specially provided for the breach of contract by special terms as
to the damages in that case, and of this advantage it would be very unjust to deprive them. Now
the above principles are those by which we think the jury ought to be guided in estimating the
damages arising out of any breach of contract...

But it is obvious that, in the great multitude of cases of millers sending off broken shafts to third
persons by a carrier under ordinary circumstances, such consequences would not, in all
probability, have occurred, and these special circumstances were here never communicated by
the plaintiffs to the defendants. It follows, therefore, that the loss of profits here cannot
reasonably be considered such a consequence of the breach of contract as could have been
fairly and reasonably contemplated by both the parties when they made this contract.”45
[emphasis added]

9.2 Importance of Categorising the Loss

Discharge and wavier provisions.

“The Employer will not be liable for loss of profit, consequential or indirect damages howsoever
caused.”

The importance of being able to categorise the loss is due to having to consider the contractual terms
and damages which a contract may allow a Contracting Enterprise to recover. For instance, it is not

45 Hadley v Baxendale [1854] EWHC K70; (1854) 156 ER 145 p.152

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uncommon for contracts to specifically prevent the Contracting Enterprise from recovering loss of
profit. Similarly it is possible for contracts to prevent the recovery of indirect costs.

HHJ Bowsher QC stated in Pegler Ltd v. Wang (UK) Ltd46 that whether or not loss of profit was a direct
or consequential loss was a function of the facts of the case. In particular he stated inter alia:

“Moreover, clause 5.15.6 only excludes liability for "indirect, special or consequential loss,
howsoever arising (including but not limited to loss of anticipated profits or of data)". Counsel
for Pegler submits, and I agree, that those words, particularly when taken with the words, "even
if Wang shall have been advised of the possibility of such potential loss..." refer to loss under
the second limb of Hadley v. Baxendale (1854) 9 Ex 341 and the loss claimed by the claimants
is under the first limb of Hadley v. Baxendale: see Croudace Construction Limited v. Cawoods
[1978] 2 Lloyds Rep 55; Miller's Machinery Co. Limited v. David Wray & Son (1935) 40 Com
Cas 205; Deepak Fertilisers and Petrochemicals Corporation v. ICL [1999] 1 Lloyds Rep 387
at pages 402-403; British Sugar plc v. NEI Power Projects Limited and anr (1997) 87 BLR 45;
Saint Line Limited v. Richardsons Westgarth & Co. [1940] 2 KB 99, 104-105; and Wraight
Limited v. PH & T (Holdings) Limited (1968) 13 BLR 29 at 35. The reference by the words in
brackets to loss of anticipated profits does not mean that the exclusion effected by this clause
includes all loss of profits: it is plain from the context that only loss of profits which are of the
character of indirect, special or consequential loss are referred to. As was explained in Victoria
Laundry v. Newman Industries [1949] 2 KB 528 at 536, claims for loss of profits may fall into
either the first or the second rule in Hadley v. Baxendale, depending on the
circumstances.”[emphasis added]

However Chadwick LJ in Watford Electronics Ltd v Sanderson CFL Ltd47 suggested that loss of profit
was a consequential loss and hence only recoverable under the second limb of Hadley v Baxendale. He
stated inter alia:

“35. But, as section 53(3) of the 1979 Act makes clear, the difference in the value of the
goods is only a prima facie measure of the damages for breach of warranty of quality.
The buyer can claim loss of profits or other consequential losses where he can show
that the seller knew, or ought reasonably to have had in contemplation, that a breach
of the warranty would give rise to such losses – see Hadley v Baxendale (1854) 9 Exch
341, 354; Victoria Laundry (Windsor) Ltd v Newman Industries [1949] 2 KB 528, 539;
Cullinane v British “Rema” Manufacturing Co Ltd [1954] 1 QB 292, 301. It is
sufficient to identify the point by reference to a passage in the judgment of Lord
Evershed, Master of the Rolls, in the last of those three cases, at page 301:

"In the present case it is plain that to the knowledge of the defendants this
machine was required to perform a particular function, and the warranty given
shows what the function was that the machine was designed to perform. There
is, therefore, no doubt at all that the plaintiff is entitled to rely on [the second
limb of the rule in Hadley v Baxendale], and to claim as damages the business
loss which must reasonably be supposed to have been, in the contemplation of
both parties at the time when they made the contract, the probable result of
the breach. In other words, this plaintiff is not confined to the loss which might

46 Pegler Ltd v. Wang (UK) Ltd [2000] EWHC Technology 137 (25th February, 2000) at para 50
47 Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317

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be called the natural result of having a machine which turned out to be less
that the purchase he has paid for it."

36. The purpose of the first sentence of the clause is (at the least) to exclude contractual
claims for indirect and consequential losses; that is to say, to exclude liability in
contract for losses which could be recovered only under the second limb of the rule in
Hadley v Baxendale. Those are losses which do not result “directly and naturally”
from the breach; but which, nevertheless, were or must reasonably be supposed to have
been in the contemplation of both parties at the time when the contract was made.

37. The judge took the view that the purpose of the first sentence of the clause went beyond
the exclusion of contractual claims. He thought that the clause was intended to exclude
claims in respect of pre-contractual misrepresentations. That he took that view appears
from the answer which he gave to Issue 7. I think that he was wrong to reach that
conclusion.”

More recently whether or not a loss of profit is a direct or consequential loss and hence falling under
the first or second limb of Hadley v Baxendale depends of the facts of the case. For instance Rix LJ in
Regus (UK) Ltd v Epcot Solutions Ltd48:

“Clause 23(3) is the focus of contention. It excludes all liability (“in any circumstances”) for
certain kinds of losses, namely “loss of business, loss of profits, loss of anticipated savings, loss
of or damage to data, third party claims or any consequential loss”. In other words, even if
Regus has acted deliberately or negligently, those losses are excluded. The losses in question
are a mixture of direct and consequential loss. Loss of profits are often thought of as
consequential losses, but may well be direct. The point of the losses distinguished for exclusion
is nevertheless reasonably clear: the profitability of the customer is his own affair, as are its
data, and its liabilities to third parties. As clause 23(3) ends up: “We strongly advise you to
insure” against such potential losses.”

Similarly in Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd49 Coulson J stated:

“13.4 Exclusion Of Consequential/Indirect Damages (Clause 10)

Introduction

302. Clause 10 makes plain that the defendant “shall NOT be responsible for any
consequential, incidental or indirect damages.” The defendant contends that the
pleaded claim in this case, for loss of profit, is either a claim that is too remote in law
at all, or is a claim for consequential or indirect damage and is therefore excluded by
operation of this clause.

303. As is well known, a party seeking to recover damages for breach of contract can
recover under two broad categories of loss pursuant to the rule in Hadley v Baxendale
[1854] 9 EXCH 341. The first category, or limb, encompasses losses which are the
direct and natural consequence of the breach. The second category or limb
encompasses indirect losses which do not arise in the natural course of events, but

48 Regus (UK) Ltd v Epcot Solutions Ltd [2008] EWCA Civ 361 at [28]
49 Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd [2013] EWHC 1191 (TCC) at [302]–[307]

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which were nevertheless within the contemplation of the parties to the contract at the
time that the contract was entered into.

304. Traditionally, the cost of putting right the thing itself, such as the cost of remedial
works or the cost of replacement, was thought to fall within the first limb, whilst claims
which arise out of the contracting parties’ knowledge that any breach would have
particular consequences (because of separate arrangements and the like), came under
the second limb. A claim for loss of profit would usually fall into this category. But
ultimately it is a question of fact as to what, in every case, can be regarded as the direct
and natural consequence of the breach and what is recoverable only because of the
particular knowledge of the contracting parties at the time that the contract was made.

305. Cases both new and old demonstrate that loss of profit can sometimes be categorised
as direct loss. Recently, in McCain Foods Limited v Eco-Tec (Europe) Limited
[2011] EWHC 66 (TCC) the loss of profit was held to be direct loss because the system
which the claimant bought from the defendant did not work, and the judge concluded
(at paragraph 84 of his judgment) that, since the system would have resulted in
revenue, the loss of the revenue was the natural and direct loss caused by the inability
to commission the system. And in the older case of Victoria Laundry (Windsor) v
Newman Industries [1949] 2 KB 528, the loss of profit caused by the delay in
supplying the boiler was again found to be a direct and natural consequence of the
breach.

306. I agree with Ms Day that a helpful explanation as to what might otherwise look to be a
contradiction can be found in the judgment of Sedley LJ in Hotel Services Ltd v Hilton
International Hotels (UK) Ltd [2000] BLR 235 at page 239. He said:

“An example of consequential loss might be injury to the profitability of the

hotel itself. But when the contract is one of hire, the ‘thing itself’ is not the
equipment but the use of the equipment, and if through breach of contract it
becomes unusable and dangerous the natural or immediate loss is, it seems to
us, the profit (if any) which it would otherwise be yielding and the cost of
neutralising the danger.”

307. In other words, whether or not a loss of profit claim can properly be categorised as a
claim for consequential or indirect loss may depend on the nature of the contract
obligations.”

This was recognised in Alfred McAlpine Homes North Ltd v Property and Land Contractors Ltd Where
His Honour Judge Humphrey Lloyd QC stated that:

“In my judgment the arbitrator's conclusions of fact make it clear that PLC's fixed overheads
were peculiar to it and were therefore directly incurred by it in the situation in which it found
itself. Its unusual trading position, if known to McAlpine prior to contract, might have brought
its overhead expenditure on a delayed contract within the second limb of Hadley v Baxendale,
had the claim been one for breach of contract”50

50 Alfred McAlpine Homes North Ltd v Property and Land Contractors Ltd (1995) 76 BLR at 89

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An exclusion clause may be a positive clause or expressed in the negative, for instance it may exclude
liability for indirect loss or consequential loss or alternatively it may say that a party is only liable for
direct loss or damage.51 These exclusions need to be expressed clearly.52 Such exclusions clauses
depending upon the jurisdiction may or may not be valid under the local law.

As previously stated, there are in effect three different heads of claim for head office overheads:

1. A claim for extended head office overheads, sometimes called allocated head office overheads
in publications such as the SCL Protocol. In many ways these are an extension of a claim for
time related site overheads in that these are resources dedicated to the subject project, however
they are located in a Contracting Enterprises head office.

2. An under recovery of head office overheads is not a claim for head office overheads per se,
rather since the Contracting Enterprise receives the contribution for head office overheads
allocated within the subject contract, albeit over an extended period, it is a claim for interest on
having to fund the extended cash flow.

3. A claim for unabsorbed head office overheads is a claim for a Contracting Enterprise’s loss of
opportunity to secure new or additional work to contribute to the Contracting Enterprises
overall operating expenses due to the extended duration of the subject project i.e. its Head
Office Overheads. A claim for loss of profit is a claim for a Contracting Enterprise’s loss of
opportunity to secure new or additional work to contribute to the Contracting Enterprises ability
to generate profit due to the extended duration of the subject project. The link between
unabsorbed head office overheads and loss of profit is not the result, but the source of the claims
i.e. the inability of the Contracting Enterprises to secure new of additional work due to the
extended duration of the subject project.

There potential overlaps in damages between the three types of head office overheads, for instance
interest due to under recovery of head office overheads may also be included in unabsorbed head office
overheads claims, insurances may be included in unabsorbed head office overheads and site time related
overheads claims. If a formulaic approach is taken, then adjustments of the profit and loss data may be
used to accommodate for these overlaps.

In summary the types of Head Office Overhead claims are:

Head Office Overheads Direct/Indirect Loss/Expense

Unallocated or Unabsorbed Head Office Overheads Indirect Loss

Under Recovery of Head Office Overheads (interest) Indirect Expense

Allocated or Extended Head Office Overheads Direct Expense

51 Wessanen Foods Ltd v Jofson Ltd [2006] BLR 426 at [31]–[33], per HHJ Coulson QC.
52 P&M Kaye Ltd v Hosier & Dickinson Ltd [1972] 1 WLR 146 at 166

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Head Office Overheads Direct/Indirect Loss/Expense

Site Overheads Direct Expense

Figure 16: Type of Overhead and Direct or Indirect Loss

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10 Loss of Profit
10.1 Company Profit
The loss of profit a Contracting Enterprise may suffer as a result of the termination of a Contract which
is associated with the subject contract should be distinguished as a separate head of claim from the loss
a Contracting Enterprise may suffer as a result of a delay in the subject project which is associated with
the loss of profit of the business as a whole due to the Contracting Enterprise being unable to secure
additional work to supplement the profit of the business. Whilst loss of profit could be considered to
be a direct loss in some circumstances and hence be covered by the first limb of Hadley v Baxendale53
when it is associated with a delay as a result of an employer delay event, 54 it is suggested that it is more
likely to be an indirect loss and covered by the second limb of Hadley v Baxendale.55 For instance, a
loss of profit due to the termination of the Contract would be a loss as noted by the first limb of Hadley
v Baxendale, however a loss of profit due to a delay in the subject project would be akin to a loss under
the second limb of Hadley v Baxendale, however to distinguish them it would turn on the facts of the
case. In a loss of profit situation as a result of a delay in the subject project the actual loss would have
little in common with the profitability of the subject project. It is rather the loss suffered by the business
as a whole. It is closely related to Unabsorbed Head Office Overheads in that it is a loss of opportunity
loss. The SCL Protocol identifies this head of claim and states:

“Regarding the lost opportunity to earn profit, this is generally not recoverable under the
standard form. Instead, Contractors [CE] typically frame their claim for the lost opportunity
to earn profit as a claim for damages for breach of contract. An appropriate rate may be
arrived at from the Contractor’s [CE] audited accounts for the three previous financial years
closest to the Employer Risk Events for which audited accounts have been published. If the
contract does in fact allow the recovery of a profit element in addition to other compensation
for delay to the project subject of the claim, the amount of profit allowed should reflect the fact
that there is no risk involved in earning of that profit.”56

Loss of profit is an expectation loss arising by the imposition of a barrier for a party to pursue alternative
or other projects to generate a profit (or avoid a loss). In certain instances a Contracting Enterprise may
be able to simply demonstrate a loss of profit by showing that, for instance, the termination of a Contract
will result in a Contracting Enterprise being unable to realise a profit from it. In other instances it will
be far more difficult to demonstrate as it will require the Contactor to demonstrate

1. Was there a loss of profit; if yes

53 Hadley v Baxendale [1854] EWHC J70 at 152, (1854) 9 Ex Ch 341, 156 ER 145

54 Rumbelows Ltd v AMK (1980) 19 BLR 25 at 50–51, per Judge Fay QC. See also Wraight Ltd v PH&T (Holdings)
Ltd (1968) 13 BLR 26 at 33–34, per Megaw J; McCain Foods GB Ltd v Eco-Tec (Europe) Ltd [2011] EWHC 66
(TCC) at [34]–[84], per Mr Recorder Acton Davis QC. As to the rule in Hadley v Baxendale, see paragraph 13.112ff
55 Hadley v Baxendale [1854] EWHC J70 at 152, (1854) 9 Ex Ch 341, 156 ER 145 and Rumbelows Ltd v AMK (1980)
19 BLR 25 at 50–51, per Judge Fay QC. See also Wraight Ltd v PH&T (Holdings) Ltd (1968) 13 BLR 26 at 33–34,
per Megaw J; McCain Foods GB Ltd v Eco-Tec (Europe) Ltd [2011] EWHC 66 (TCC) at [34]–[84], per Mr Recorder
Acton Davis QC. As to the rule in Hadley v Baxendale, see paragraph 13.112ff

56 Society of Construction Law, Delay and Disruption Protocol (2nd Edition, February 2017) at paras 2.10 and 2.11 of
Guidance Part C: Other Financial Heads of Claim, page 55

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2. What was that loss?

This is not easy to determine. The courts, however will undertake various gymnastics to overcome this.
It is often sufficient for a claimant to demonstrate on the balance of probabilities that he has missed the
opportunity to make a profit (or avoid a loss). That is if a claimant can show that a breach by the
defendant on the balance of probabilities deprived the claimant from making a profit that is often
sufficient.

Courts may adjust any loss of profit based on the probability of making a profit. For instance if the
court finds that a claimant has a 20% chance of making a profit they may award 20% of the potential
profit as an award for damages.

Where a contract is suspended and/or terminated a Contracting Enterprise may be entitled to a loss of
profit as a result of this associated with the subject project. This may also include a loss due to not
being able to realise bonuses or other incentive payments, however in the case of a suspension, there is
also the issue of a loss of profit as a result of the Contracting Enterprise not being able to pursue other
works. This may be a loss of “pure” profit to the business as a whole.

When analyzing a Contracting Enterprises entitlement to loss of profit the principles of Robinson v
Harmon57 should be considered in that the Contract Enterprise should be put back into the same position
had the breach by the employer not occurred. It should not be put back into a better position.58 Similarly
the Contracting Enterprise should not be compensated just because there was a delay in the Contracting
Enterprise being able to obtain a profit on project/s as a result of the delay on the said project. However
the Contracting Enterprise may be able entitled to interest or other consequential loss and expense as a
result of the delay such as interest. 59

The Contracting Enterprise has to prove the loss of profit, similarly to proving unabsorbed head office
overheads, that the loss was as a result of an employer risk event. The mere application of a formula
without such proof is insufficient. 60 Furthermore, event when the Contracting Enterprise can prove that
the loss of profit was as a result of an employer risk event, any calculation should also include a
reduction due to the Contracting Enterprise not having to absorb the same risk. 61

When calculating the quantum for loss of profit, consideration should also be taken for the passage of
time and any award discounted as a result of this. 62 Consideration also has to be taken in any loss and
expense covered elsewhere including unabsorbed head office overheads in the calculation to avoid an
overestimation of the loss. 63

57 Robinson v Harman (1848) 1 Ex Rep 850

58 Castle Constructions Pty Ltd v Fekala Pty Ltd [2006] NSWCA 133 at [24], per Mason J
59 See, eg, Londsdale Investments Pty Ltd v OM (Manganese) Ltd (No 3) [2012] WASC 185 at [988]–[1012], per
Corboy J. See also Pickard Finlason Partnership Ltd v Lock [2014] EWHC 25 (TCC) at [358], per HHJ Stephen
Davies.
60 Lobster Group Ltd v Heidelberg Graphic Equipment Ltd [2009] EWHC 1919 (TCC) at [206], per Ramsey J.
61
See Eu Asia Engineering Ltd v Wing Hong Contractors Ltd [1991] HKCFI at [100]–[105], per Kaplan J; Ho Kuen
Fai v Kwok Yiu Kwong [2006] HKCFI 1079 at [47], per Recorder Anthony Chan SC.
62 Gilbert v British Waterways Board [2005] EWHC 3094 (TCC) at [68], per HHJ Kirkham.
63 Unaoil Ltd v Leighton Offshore Pte Ltd [2014] EWHC 2965 (Comm) at [80]–[81], per Eder J.

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10.2 Project Profit

A project profit is the profit or difference between income and expenditure specifically related to a
subject project. Depending on the accounting standards and rules, it may or may not account for head
office contributions and other expenditures. This is not usually a factor in any assessment for loss of
profit or unabsorbed head office overheads calculations as the basic tenant of these losses is to put the
Contracting Enterprise back into to the same position it would have been in had the employer delay
event not occurred. In this, so long as any damages calculations cover the loss and expense associated
with the employer delay event, then the profit level the Contracting Enterprise would have made had
the employer delay event not occurred should not change.

10.3 Relationship between Profit and Fixed Overheads64

Profit and fixed or head office overheads in many ways share similar attributes and can be linked,
however in many ways they are separate financial elements which may not be linked. When a Contactor
prices a job, whether as part of a competitively tender process or a negotiated process, they price the
value of the works first, then they take a commercial view on how much of a contribution to the running
of the business as a whole the project should make. Similarly they take a commercial view on what
margin or profit they should target on the project.

A large Contracting company may have a very complex and elaborate management structure with
numerous fixed or head office overheads to pay for including offices, head office salaries, storage yards
etc., they may also have costs which are not fixed in the traditional way, but could be considered fixed
for the purpose of analysing head office overheads such as pension funds, accounting and legal fees and
the like. However, a small building company may only have some basic fixed head office overhead
costs as they may be mobile and all costs are attributable to a particular project.

Profit for a larger building company with shareholder responsibility can often be clearly seen from an
analysis of the company’s accounts and may be “pure” profit, however with smaller building
companies, they may not have any profit as such with the owners of the company taking it in the form
of a salary.

In many ways the profit and head office overheads which are attributed to a particular job are looked at
as an extra-over cost to the undertaking of that particular job. That is after a Contracting Enterprise has
taken a position on the costs associated with undertaking the works in a particular project, the
Contracting Enterprise will then add to this a contribution of “pure” profit which would not only include
profit, but also a contribution to the company’s overheads. The combined attribution of all the jobs
being undertaken by the subject company would then go into the running of the company as a whole.
In the United States case of Vitex Manufacturing Corporation v Caribtex Corporation 65 it was found
that:

“Since the overhead element remains constant, in no way attributable to our affected by the
Caribtex contract, it would be improper to consider it as a cost of Vibtex’s performance to be
deducted from the gross proceeds of the (Caribtex)…contract.”

64 Duncan Wallace, Hudson’s on Building and Engineering Contracts (11th edition, Sweet & Maxwell, 1995) at paras
8-177 to 8-179
65 Vitex Manufacturing Corporation, Ltd. v. Caribtex Corporation 377 F.2d 795 (3d Cir. 1967)

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Because it may be useful for planning purposes to allocate a proportion of overheads to each
transaction, it does not follow that the allocated share of fixed overheads should be considered
a cost factor in the computation of loss of profit on the individual transactions.”66

Therefore a distinction needs to be drawn between projects which have been suspended and/or cancelled
and those that have been delayed. The Vibtex case would suggest that in cases where the works have
been suspended and/or cancelled that profit and head office overhead contributions would be dealt with
at the same time and combined. The principle reason for this is that the courts are only really concerned
in these instances with determining the extra-over the cost of undertaking the particular project as a
combined head of damage. This would on the face of it be in accordance with the first principle of
Hadley v Baxendale67 in that the damages sustained by the Contracting Enterprise would be “fairly and
reasonably be considered either arising naturally, i.e., according to the usual course of things, or such
as may be reasonably be supposed to have been in the contemplation of both parties, at the time they
made the contract, as the probably result of the breach of it.” However in cases of a delay in the project
where the loss is actually a loss to the company as a whole as a result of the Contracting Enterprise
being unable to secure additional work to assist in contributing to profit and/or head office overheads,
the two heads of claim should be considered separately insofar as the determination of if the Contracting
Enterprise has suffered and actual loss. This it is suggested is covered by the second limb of Hadley v
Baxendale where Anderson B stated that:

“Now, if the special circumstances under which the contract was actually made where
communicated by the plaintiffs to the defendants, and thus known to both parties, the damages
resulting from the breach of such a contract, which they would reasonably contemplate, would
be the amount of injury which would ordinarily follow from a breach of contract under these
special circumstances so known and communicated. But, on the other hand, if these special
circumstances were wholly unknown to the party breaking the contract, he, at the most, could
only be supposed to have had in his contemplation the amount of injury which would arise
generally, and in the great multitude of cases not affected by any special circumstances, from
such a breach of contract. For such loss would neither have flowed naturally from the breach
of this contract in the great multitude of such cases occurring under ordinary circumstances,
nor were the special circumstances, which, perhaps, would have made it a reasonable and
natural consequence of such breach of contract, communicated to or known by the defendants.
The Judge ought, therefore, to have told the jury, that, upon the fats then before them, they
ought not to take the loss of profits into consideration at all in estimating the damages. There
must therefore be a new trial in this case.”68

The use of formulae then is to derive a reasoned position using either the Contracting Enterprise’s own
financial data as a base or other information available (e.g. the profit and overhead percentage contained
within the Contract) to determine a financial loss figure.

Some contracts such as several FIDIC formats, allows for cost plus reasonable profit for many
entitlement provisions. However, a distinction has to be drawn that loss of profit is not a cost, but a

66 Vitex Manufacturing Corporation, Ltd. v. Caribtex Corporation 377 F.2d 795 (3d Cir. 1967) at 798-799
67
Hadley v Baxendale [1854] EWHC K70; (1854) 156 ER 145, 9 ExCh 341, (1854) 23 LJ Ex 179, 18 Jur 358, [1843-
60] All ER Rep 461
68 Hadley v Baxendale [1854] EWHC K70; (1854) 156 ER 145, 9 ExCh 341, (1854) 23 LJ Ex 179, 18 Jur 358, [1843-
60] All ER Rep 461

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loss. Similarly, unabsorbed head office overheads are a loss and not a cost so profit should not be added
to this head of claim.

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11 Demonstrating a Loss
It is a condition precedent for a Contracting Enterprise to be able to establish that it has actually suffered
loss and expense before being able to claim for Unabsorbed Head Office Overheads. For instance in
Williams v Strait69 the court found the Contracting Enterprise was able to recover Unabsorbed Head
Office Overheads, but only after it established actual damage. Similarly, in AEC Corporation Inc.70 it
was found that the “Contractor [CE] must show that actual damage was necessarily suffered.” In the
UK in Sunley v Cunard White Star71 similarly found that evidence of an actual loss was required for
Unabsorbed Head Office Overheads to be a recoverable loss.

In Alfred McAlpine Homes North Ltd v Property and Land Contractors Ltd, his Honour Judge
Humphrey Lloyd QC stated that:

“….a loss must be proved and not left to be a matter of speculation and that a loss in respect
of overheads in a period of delay must be caused by a reduction in turnover which in turn is
directly attributable to the delay.”72

His Honour used a quotation from Keating on Building Contracts (6th edn), at page 229, to illustrate
his point where Sir Anthony May says:

“"Overheads, This is another loose term referring to the costs of running the Contractor's [CE]
general business as distinct from the site costs of the particular contract. If particular head
office costs are proved to have been increased by a Contractor's delay, they are recoverable.
[Emphasis supplied.] Examples would be the cost of extra staff recruited because the particular
contract was in difficulties or the cost of extra telephone calls and postage in the period of
delay. But substantial claims of this kind are rarely made because most Contractors [CE] are
able to cope with delay on a particular contract with their existing resources whose cost is
reasonably constant. Accordingly claims for loss of overheads are usually made on a different
basis Contractor's [CE] overheads are commonly taken to be recovered out of the income from
his business as a whole and ordinarily where completion of one contract is delayed the
Contractor [CE] claims to have suffered a loss arising from the diminution of his income from
the job and hence the turnover of his business. But he continues to incur expenditure on
overheads which he cannot materially reduce or, in respect of the site, can only reduce, if at
all, to a limited extent. But for the delay, the workforce would have had the opportunity of being
employed on another contract which would have had the effect of contributing to the overheads
during the overrun period. There is some authority that a claim on this basis is sustainable. But
it is suggested that, in order to succeed, a Contractor [CE] has in principle to prove that there
was other work available which, but for the delay, he would have secured but which in fact
because of the delay he did not secure. He might do this by producing invitations to tender
which he declined with evidence that the reason for declining was that the delay in question left
him insufficient capacity to undertake other work. He might alternatively show from his
accounts a drop in turnover and establish that this resulted from the particular delay rather

69 Williams v Strait F Supp 12 (DDC 1990)

70 AEC Corporation Inc. ASBCA Nos 45,713 and 46,348
71 Sunley v Cunard White Star [1940] 1 KB 740
72 Alfred McAlpine Homes North Ltd v Property and Land Contractors Ltd (1995) 76 BLR 84

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than from extraneous causes. If loss of turnover resulting from delay is not established, the
effect of the delay is only that receipt of the money is delayed. It is not lost.

Loss of profit. Contractors [CE] commonly claim a loss of profit arising out of the diminution
in turnover, but it seems that to establish this claim he must show, as with overheads, that at
the time of the delay he could have used the lost turnover profitably. A claim for loss of profit
does not, it is submitted, fail merely because the contract in question was unprofitable. The
question is what the Contractor [CE] would have done with the money if he had received it at
the proper time. Even if, at that time, the Contractor's [CE] business was making a loss a sum
analogous to loss of profit is, it is submitted, recoverable if the loss of turnover increased the
loss of the business."” 73

Furthermore, His Honour Judge Humphrey Lloyd goes on to state that:

“All these observations, like those of Lord Lloyd in Ruxley, of Forbes J in Tate & Lyle, and of
Sir Anthony May in Keating suppose, either expressly or implicitly, that there may be some loss
as a result of the event complained of so that, in the case of delay to the completion of a
construction contract, there will be some "under recovery" towards the cost of fixed overheads
as a result of the reduced volume of work occasioned by the delay, but this state of affairs must
of course be established as a matter of fact. If the Contractor's [CE] overall business is not
diminished during the period of delay so that whether, for example, as a result of an increase
in the volume of work on the contract in question arising from variations etc or for other
reasons, there will be a commensurate contribution towards the overheads which offsets any
supposed loss, or if, as a result of other work, there is no reduction in overall turnover so that
the cost of the fixed overheads continues to be met from other sources, there will be no loss
attributable to the delay. Put another way, this aspect is brought out in the comparable
proposition that the Contractor [CE] has to show that there were no means of reducing the un-
recovered cost of the fixed overheads in the circumstances in which he found himself as a result
of the events giving rise to the delay. Where a Contractor [CE] is busy and is taking on work
all the time, it will probably not be possible to demonstrate the effect to which I have referred.
Furthermore, it has to be borne in mind that as certain overheads are incurred through thick
and thin, so a Contractor's [CE] head office staff may not always be constantly occupied
because of, for example, the seasonal or cyclical nature of business in the construction
industry.” 74

The ability of a Contracting Enterprise being able to take on new work of even if they should take on
new work was examined by the American courts in R.G.Beer Corp75 which identified several factors to
consider:

1) The amount of notice and any knowledge as to the duration of the delay period;

2) The tender market, geographic constraints associated with any other potential new work;

73
Keating on Building Contracts (6th ed.), at 229, requoted from Alfred McAlpine Homes North Ltd v Property and
Land Contractors Ltd (1995) 76 BLR 83 and 84
74 Alfred McAlpine Homes North Ltd v Property and Land Contractors Ltd (1995) 76 BLR 87
75 R.G.Beer Corp, ENGBCA No. 4885, 86-3 BCA(CCH) 19,012 (1986)

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3) The scale of capabilities, resources, project and expertise of the Contracting Enterprise; and

4) The volume of work remaining on the said project to be executed during the delayed period.

In essence there are three ways in which a loss may be demonstrated for both unabsorbed head office
overheads and loss of profit they are:
1) Anecdotal review of corporate accounts

2) Demonstrating inability to tender and/or secure additional or new work as a result of the said
projects delay

3) Reduction of capping of a Contracting Enterprises bonding capacity

11.1 Anecdotal review of corporate accounts

Whilst it should never be taken as definitive evidence, a review of a Contracting Enterprises corporate
account can indicate if the Contracting Enterprise has suffered a reduction in cash flow and/or profit
during a period of delay. For instance if we take Figure XX, below, as showing a Contracting
Enterprises turnover at particular phases or times:

Figure 17: Possible Effect on a Contracting Enterprise's Turnover

Pre Contract Period Contract Period EOT

Period

Scenario 1
Scenario 2

1 2 3 4 5

It can be seen that the Contracting Enterprise’s turnover was steadily increasing prior to the Contracting
Enterprise commencing the said project, thereafter its turnover under scenario 1 started to decrease
which could indicate the delay in progress on the said project was impacting the Contracting Enterprises
cash flow and possibly resulting in an under recovery of head office overheads and later during the
Extension of Time period suffering unabsorbed head office overheads. Similarly, Scenario 2 shows a
leveling out of turnover and a decline in turnover during an Extension of Time period; this could be a
sign that the Contracting Enterprise was unable to secure new work as a result of the delay to the said
project and was suffering from unabsorbed head office overheads. However, the above scenarios could
be the result of other factors as well such as a decline in the market or the Contracting Enterprise’s own
internal issues or management.

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Similarly, when a Contracting Enterprise’s profit is looked at over it may be shown as in Figure XX:

Pre Contract Period Contract Period EOT

Period

1 2 3 4 5

Figure 18: Possible Effect on a Contracting Enterprises Profitability

This figure shows a steady increase in profit prior to the Contracting Enterprise entering into the said
project with a leveling out during the said projects contract phase and a decline in profit during the
Contracting Enterprise’s Extension of Time phase. This could indicate that the Contracting Enterprise
was unable to secure additional works to maintain or make a profit. However, just as with unabsorbed
head office overheads, this may be the result of other factors was well including a slowdown in the
market and/or a change in corporate directions which have nothing to do with any delays in the said
project.

11.2 Demonstrating inability to tender and/or secure additional or new

work
For a Contracting Enterprise to demonstrate that it has suffered an actual loss i.e. it has not been able to
recover the costs for its head office overheads through its projects, it would normally have to
demonstrate that it was somehow unable to secure additional work or projects as a direct result of

having its resources tied up in a project which is the subject to an extension of time. This demonstration
is usually a financial demonstration. This may be seen through the company’s annual accounts over
the subject period as a decline in turnover or margin. However this could be attributed to many other
market factors. To demonstrate a loss by the company it would not unusual for a Contracting Enterprise
to show that:

1. It has not been able to tender or secure work due to its resources being utilised on a delayed
project; and/or

2. It has had its bonding or finance capacity reduced or tied up on a delayed project.

The SCL Protocol clarifies this and states:

“Before it can recover unabsorbed overheads and lost profit, the Contractor must be able to
demonstrate that it has:

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(a) failed to recover the overheads and earn the profit it could reasonably have expected
during the period of prolongation; and

(b) been unable to recover such overheads and earn such profit because its resources were
tied up by Employer Risk Events”76

And continues by stating:

“In order to succeed in such a claim, the Contractor [CE] must demonstrate that there was
other revenue and profit earning work available which, in the absence of the Employer Delay,
would have been secured by the Contractor [CE].”77

To demonstrate that a Contracting Enterprise has not been able to secure or pursue new work due to a
delayed project would mean the Contracting Enterprise would have to demonstrate three elements:

1) Works was available for it to pursue

2) They were not able to pursue it; and

3) What the likelihood of securing the work was.

To do this a Contracting Enterprise may need to be able to:

1) List the projects the Contracting Enterprise was invited to tender on;

2) Shoe the invitation was turned down due to the delay on the subject project;

3) Show evidence of success and strike rates on tenders;

4) Proof it was due to lack of resources due to delay

This often involves utilising board meeting minutes where it may be discussed what projects to pursue,
it could involve tender records and records of declining to tender. It could also be used to demonstrating
the success rate of a Contracting Enterprise when tendering or bidding for work.

11.3 Reduction of Capping of Bonding Capacity

A Contracting Enterprises bonding capacity or its ability to raise performance bonds or bank guarantees
for new work, or in some instances their financial institution will reduce and dictate to a Contracting
Enterprise the value of works it is able to pursue. This can be used as evidence of a loss for both
unabsorbed head office overheads and loss of profit.

The reduction of a Contracting Enterprise’s bonding capacity or reduction or its finance capacity is
often simpler to demonstrate for example as in Capital Electric Co. v United States78. Often it involves

76 Society of Construction Law, Delay and Disruption Protocol (2nd Edition, Society of Construction Law, February
2017) at para 2.6 of Guidance Part C: Other Financial Heads of Claim, page 55
77 Society of Construction Law, Delay and Disruption Protocol (2nd Edition, Society of Construction Law, February
2017) at 2.7 of Guidance Part C: Other Financial Heads of Claim, page 55
78 Capital Electric Co. v United States 729 F. 2d 743 (Fed.Cir., 1984)

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bank or finance company records reducing or refusing a Contracting Enterprise’s ability to secure bonds
or finance for new projects.

11.4 Application of Formula

In the English case of St Modwen Developments v Bowmer and Kirkland Ltd79, his Honour Judge Fox-
Andrews Q.C. seemed to accept the use of a formula without any evidence of the Contracting Enterprise
actually sustaining a loss, however this seems to have been as a result of an expert witness who included
a formula calculation which was accepted by his Honour without any real questioning. It is suggested
that this is an anomaly and unlikely to be followed in future.

Prior to the application of a formula, the following have to be satisfied80:

1) The loss in question must be proved to have occurred

2) The delay in question must be shown to have caused the Contracting Enterprise to
decline to take on other work which was available and which would have contributed
to its overhead recovery. Alternatively, it must have caused a reduction in the overhead
recovery in the relevant financial year and years which would have been earned by for
that delay.

3) The delay must have had associated with it a commensurate increase in turnover and
recovery towards overheads (e.g. a variation).

4) The overheads must not have been ones which would have been incurred in any event
without the Contracting Enterprise achieving turnover to pay for them.

5) There must have been no change in the market affecting the possibility of earning profit
elsewhere here and an alternative market must have been available. Furthermore, there
must have been no means for the Contracting Enterprise to deploy its resources
elsewhere despite the delay. In other words, there must not have been a constraint in
recovery of overheads elsewhere.

In Norwest Holst Construction Ltd v Co-operative Wholesale Society it was also stated that if the delay
was due to variations then the Contracting Enterprise may have recovered his unabsorbed head office
overheads through this. 81

Finally, for a head office overhead claim to have any chance to succeed, the Contracting Enterprise has
to be able to demonstrate that but for the delay the Contracting Enterprise would have obtained
sufficient work to cover the head office expenses being claimed.82

79 St Modwen Developments v Bowmer and Kirkland Ltd (1996) CLL 1203

80 Norwest Holst Construction Ltd v Co-operative Wholesale Society (1988)
81 Norwest Holst Construction Ltd v Co-operative Wholesale Society (1988)
82 Kansas City Bridge Co. v Kansas City Structural Sheet Co. 317 SW 2d. 370 (Mo 1980)

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In the UK case of Walter Lilly & Company Ltd v Giles Patrick Cyril Mackey and DMW Developments
Limited, Mr Justice Atkinhead in allowing a claim using the Emden Formula and after reviewing the
authorities noted that:

“Considering these various authorities, the following conclusions can be drawn:

(a) A Contractor can recover head office overheads and profit lost as a result of delay on a
construction project caused by factors which entitle it to loss and expense.

(b) It is necessary for the Contractor to prove on a balance of probabilities that if the delay had
not occurred it would have secured work or projects which would have produced a return (over
and above costs) representing a profit and/or a contribution to head office overheads.

(c) The use of a formula, such as Emden or Hudson, is a legitimate and indeed helpful way of
ascertaining, on a balance of probabilities, what that return can be calculated to be.

(d) The "ascertainment” process under Clause 26 does not mean that the Architect/Quantity
Surveyor or indeed the ultimate dispute resolution tribunal must be certain (that is sure beyond
reasonable doubt) that the overheads and profit have been lost. HHJ Lloyd QC was not saying
that assessment could not be part of the ascertainment process. What one has to do is to be able
to be confident that the loss or expense being allowed had actually been incurred as a result of
the Clause 26 delay or disruption causing factors.”83

His Honour went on to review the evidence presented with regards demonstrating the actual loss
sustained by the Contracting Enterprise and in particular, looked at the Contracting Enterprise’s
business model. He described the situation as:

“….Its Business Development Department was tasked to identify suitable contracts to tender
which would commence on site at a time when the appropriate staff become available, that is
following the completion of their current projects or when their expertise is no longer required
on a particular project. WLC’s directors assisted in this process by carrying out a review of
future tendering opportunities and staff availability on a weekly basis every Monday morning.
Thus the strategy was constantly under review and allowed the relevant director to accept or
reject tender opportunities depending upon resource availability ahead of their receipt in the
office. Between January 2006 and September 2008 WLC’s tender success rate was in the order
of 1 in 4 (explained in evidence to be based on tenders submitted). During that period WLC
had to and did decline a number of tendering opportunities: that was not said vaguely, or in a
vacuum of support: the opportunities received and declined were precisely detailed on a
comprehensive schedule attached to Mr Corless’ statement.” 84

It was also put forward that:

“…it is suggested that there was no disruption to WLC’s tendering opportunities in 2007
because Mr Howie said that in that year WLC had been able to recruit additional management

83
Walter Lilly & Company Ltd v Giles Patrick Cyril Mackey and DMW Developments Limited [2012] EWHC 1773
(TCC) at paragraph 543
84 Walter Lilly & Company Ltd v Giles Patrick Cyril Mackey and DMW Developments Limited [2012] EWHC 1773
(TCC) at paragraph 544

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staff to fulfil tender opportunities, that being supported by reference to an increase in

construction personnel in 2007. That however misses the point because, if the management
team from Unit C was available in 2007 to be deployed elsewhere yet more tendering projects
could have been embarked upon.” 85

In the US, there is a suggestion in cases such as Community Heating & Plumbing Co. v Kelso86 that if
a delay is as a result of a variation of the scope of works, then the Contracting Enterprise would not be
entitled to any addition Unabsorbed Head Office Overheads, however it was a result of a suspension
the Contracting Enterprise would be.

In Australia, McDougall J of the NSW Supreme Court in Banabelle Electrical v State of New South
Wales, found that:

“I think, it is in principle wrong to make an allowance for recovery of an offsite (or head office,
or fixed) overhead, or of loss of profit, unless there is a basis for concluding that they could
have been recovered or earned through the performance of other profitable work.” 87

And, furthermore

“The inference that the initial delay did not adversely affect turnover, and the absence of
evidence of “Banabelle’s tendering record”, between them show that the factual basis
necessary for recovery – loss of other profitable work – has not been made out.”88

It has stated that there is a paradox with the demonstration of a loss in that it is the smaller companies
which may find it easier to demonstrate a loss than larger organisations. Duncan I Wallace in the 11 th
edition of Hudson’s Building and Engineering Contracts stated that:

“Paradoxically, it may be the small local builder in constant demand who in more recent times
may be in a better position to establish this type of loss, although his fixed overheads may of
course be smaller.”89

It is ironic with claims for Unabsorbed Head Office Overheads that the scale of the Contracting
Enterprise will often count against the Contracting Enterprise.

[American cases??]

The use of formulae may be a viable option in common law jurisdiction, DAB’s or arbitrations, however
in civil law jurisdictions further care needs to be taken as there may be an additional requirement for
precision and to demonstrate any losses the enterprise is claiming.
Furthermore, using UNIDROIT principles any claim which can only be determined with difficulty or
without precise precision can be determined by the court at its discretion.

85 Walter Lilly & Company Ltd v Giles Patrick Cyril Mackey and DMW Developments Limited [2012] EWHC 1773
(TCC) at paragraph 547
86 Community Heating & Plumbing Co. v Kelso 87 F.2d 1575 (Fed. Ci. 1993)
87 Banabelle Electrical v State of New South Wales [2005] NSWSC 714 paragraph 142
88 Banabelle Electrical v State of New South Wales [2005] NSWSC 714 paragraph 145
89 Wallace, Duncan I; Hudson’s Building and Engineering Contracts, 11th edition, Sweet & Maxwell, 1995 at 1078

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There is a fiction with the demonstration of a loss and the use of a formulae in that the formula assumes
that the scale of project/s which the Contracting Enterprise is unable to pursue or secure to contribute
to the unabsorbed head office overheads and/or loss of profit claims are comparable to the subject
project which has been delayed. This may not always be the case. The delayed project may in fact be
preventing the securing of a significantly larger and more profitable project. In such a case, so long as
it can be shown it had a degree of foreseeability to it, the loss claim by the Contractor may in fact be
larger than any profit by an equivalent project to the subject project that suffered delay.

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12 Head Office and Regional Office and Joint Venture

Relationships

Another issue which arises is where a Contracting Enterprise has two or more sets of Unabsorbed Head
Office Overheads as they have a local office which a project may be allocated to in addition to a regional
office. How this is considered largely depends on how the offices are structured and who the contracting
party is.

If the subsidiary is an independent company and is also the contracting party then the ability of a parent
company to claim unabsorbed head office overheads is unlikely as unabsorbed head office overheads
is compensation for a breach of contract and the parent company is not a contracting party. However,
if the subsidiary company is expected to pay a certain amount per period to the parent company in
addition to a profit share then this periodic payment could form part of the data used to determine the
quantum of loss. Therefore the parent company loss may be included in this. Similarly if the subsidiary
company claims for a loss of profit, then this could also go towards compensating the parent company.

If you consider a branch office has a certain volume of work on at any particular time, however this
volume of work when filtered up to a head office would be diluted accordingly. It is therefore suggested
that whilst it is not impossible for a head office to suffer a loss due to Unabsorbed Head Office
Overheads, such a loss would be proportionally reduced.

With joint ventures, again it depends on the structure. If the joint venture is a new company with the
joint venture partners as owners of the joint venture company, then the joint venture company being the
contracting party would be the only party able to claim unabsorbed head office overheads and/or loss
of profit. On the other hand, of the joint venture companies are both contracting parties to the
construction contract, both parties may be able to claim unabsorbed head office overheads and/or loss
of profit. This would be subject to any joint venture agreement however.

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13 Analysing Annual Reports

An “Annual Report” is a report on a company’s financial position at a given point in time. They may
be annual or more regularly depending on company compliance requirements.

13.1 Chart of Accounts

Understanding an enterprise’s chart of accounts is useful when analysis its “annual reports”. The chart
of accounts is a list of the categories used to prepare the “annual reports” and the statements contained
therein. They are tailored to reflect the enterprise’s requirements be they regulatory, management or
other.

13.2 Balance Sheet

A “Balance Sheet” is a financial statement that summarizes a company's assets, liabilities and
shareholders' equity at a specific point in time. These three balance sheet segments give investors an
idea as to what the company owns and owes, as well as the amount invested by shareholders.

The premise behind a balance sheet is that:

𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦

The “assets” are the value of the enterprise whilst “liabilities” in this instance is a reference to taking
money e.g. by borrowing, or taking on a “liability” whilst “shareholders’ equity” is taking monies from
investors

13.2.1 Assets

An asset is an account with a value and can be converted into liquidity. They are usually ranked in
order of the ease they can be converted into cash that is current assets, which can be converted quickly
into cash or long-term assets which take longer to convert into cash.

Current Assets include:

• Cash;
• Accounts receivable;
• Inventory; and
• Prepaid expenses, etc.

Long-term assets include:

• Long term investments;

• Fixed assets including plant, machinery or property; and
• Intangible assets such as an enterprises intellectual property or goodwill

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13.2.2 Liabilities

Liabilities are moniues that an enterprise owes to third parties. This includes bills to suppliers, rent,
salaries and the like. Corrent liabilities are generally those that are due within a year whilst long-term
liabilities are due after a year.

Current liabilities include:

• Bank fees
• Interest
• Tax
• Utilities
• Rent
• Salaries
• Refunds
• Dividents
• Etc.

Long-term liabilities include:

• Maturing of bonds
• Term deposit interest
• Deferred tax obligations
• Etc.

13.2.3 Shareholders’ Equity

The third part of a balance sheet is shareholders’ equity. Shareholder’s equity is the money attributed
to the enterprise’s owners and shareholders. It is also known as “net assets” since it is total assets less
liabilities. In other words it is the debt owed by the enterprise to the shareholders. The most common
form of shareholder’s equity is in retained earnings which is the monies kept by the enterprise and not
distributed to the shareholders as dividends.

Reading a “Balance Sheet”

The “Balance Sheet” gets its name from the old ledgers which listed assets down one side of the page
and liabilities and shareholders’ equity down the other with the total being equal, or “balanced”. The
logic behind this is that for an enterprise to remain viable it has to have assets to cover its liabilities and
shareholders’ equity, or its liabilities and shareholders’ equity form the enterprises assets.

For example:

Assets Liabilities

Receipt of monies from Bank 10,000 Bank loan 10,000

Loan:

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Shareholders’ Equity

Receipt of monies from investors 5,000 Invested monies 5,000

Total 15,000 Total 15,000

Figure 19: Balance Sheet High Level Summary

When the enterprise generates income in excess of its liabilities, this income is an asset represented as
cash or inventory etc. and appears on the other side of the leger as Shareholders’ equity.

Example

Following is Amazon.com Inc.'s (AMZN) Balance Sheet for the quarter ended June 2017. All amounts
are in million of U.S. dollars.90

Assets: Liabilities:
Cash & Short Term Investments 21,451 Short Term Debt 6,136
Short Term Receivables 8,046 Accounts Payable 21,439
Inventories 11,510 Income Tax Payable -
Other Current Assets - Other Current Liabilities 12,945
Total Current Assets 41,007 Total Current Liabilities 40,520
Net Property, Plant & Equipment 37,083 Long Term Debt 17,483
Total Investments and Advances 1,377 Provision for Risks Charges -
Long Term Note Receivable - Deferred Tax Liabilities -
Intangible Assets 4,254 Other Liabilities 6,564
Other Assets 4,060 Total Liabilities 64,567

Equity:
Non-Equity Reserves -
Preferred Stock Carrying Value -
Total Common Equity 23,214
Total Shareholders’ Equity 23,214
Accumulated Minority Interest -
Total Equity 23,214

Total Assets 87,781 Total Liability + Equity 87,781

Figure 20: Balance Sheet Detailed Summary

13.2.4 Translating a “Balance Sheet”

A balance sheet gives the status of an enterprise at a specific point in time. They can be compared to
previous balance sheets to show trends. Ratios on the enterprises performance may also be derived

90 Example taken from https://www.investopedia.com/terms/b/balancesheet.asp accessed 5 December 2017

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from them such as debt:equity rations which can give an enterprises manager/s a picture of the
performance and financial health of their business.

13.2.5 Importance of the Balance Sheet to assessing Unabsorbed Head Office Overheads

The balance sheet itself is not used for the calculation of unabsorbed Head Office Overheads, however
when consecutive years are compared they may be useful as evidence of a loss. For instance, an increase
in debt with a corresponding decrease in receivables can be a sign of distress which may be a result of
a delay on a project and the under recovery of head office overheads or if during the delay period,
unabsorbed head office overheads. It is not conclusive and cannot be used in isolation but can be used
as part of other evidence to build up a picture of a loss.

13.3 Profit and Loss (P&L)

An enterprise’s P & L is a comparison of its income to its costs and expenditures for a defined period,
usually monthly, quarterly or annually. The resultant from this comparison is the enterprise’s profit or
loss, either gross or nett, depending on what costs and expenditures are included. It is sometimes
referred to as an “Income Statement”. These statements can be used to determine the income required
to produce a specific profit or to reduce a loss. Unlike the “Balance Sheet” which is more useful when
compared to previous points in time, the P&L may be compared to previous analysis to determine
trends, but a P&L can be read as a stand-alone.

13.3.1 Reading a “Profit and Loss Statement” or a P&L

The profit and loss statement is one of three statements issued regularly by an enterprise, usually
quarterly or annually. It is a snapshot of an enterprise for a period culminating to its position at a point
in time.

One aspect with profit and loss statements is to understand if the enterprise is working on a cash basis
i.e. recording transaction when cash changes hands an accrual basis, recording transactions as they
happen, not necessarily when cash changes hands.

The example below shows two forms which may appear in an annual report. The first is a high level
summary whilst the second is a more detailed summary. To aid in comparisons, an annual report often
has the previous year’s profit and loss next to the current year. This aids in determining changes in a
company’s finance and identifying issues. For instance, income may increase but profit may be down
which may highlight unusual expenses.

2013 2014

Contract Revenue 365,879,452 375,222,123

Contract Costs (325,689,785) (330,365,878)
40,189,667 44,856,245

General and administrative Expenses (35,897,521) (42,568,789)

Other Income 25,658,254 26,987,356

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Finance costs (8,654,389) (9,254,789)

Profit for the year 21,296,011 20,020,023
Figure 21: P & L High Level Summary

Which may be followed up with a more detailed summary:

2013 2014

CONTRACT COSTS
Sub-contract works 76,167,403 127,317,315
Materials cost 116,828,189 85,823,490
Staff costs and benefits 70,958,214 74,887,852
Equipment hire charges 14,622,462 11,558,151
Depreciation 7,557,712 6,790,667
Technical and business support fees 559,574 911,471
Other project costs such as consumables, scaffolding &
shipping costs 38,996,230 23,076,931
325,689,785 330,365,878

2013 2014

GENERAL AND ADMINISTRATIVE EXPENSE

Staff costs and benefits 16,586,601 20,459,642
Depreciation 4,245,740 5,036,609
Repairs and maintenance 3,832,336 4,229,071
Travelling and transportation 2,856,410 2,939,332
Rent 2,593,311 2,964,846
Provision for bad and doubtful debts 1,312,180 387,328
Professional and legal charges 1,173,101 1,287,492
Recruitment, visa and Immigration fee 573,786 639,434
Electricity and water 574,725 577,959
Communications 428,320 566,865
Business development expenses 46,572 340,529
Tendering expenses 62,126 159,685
Other expenses such as professional fees, license
renewals & permits 1,612,314 2,979,998
35,897,521 42,568,789
Figure 22: Profit and Loss - Detailed Summary

13.3.2 Importance of the P&L to Assessing Unabsorbed Head Office Overheads

It is from the P&L that the majority of corporate data is sourced for use in any of the formulaic
approaches to assessing unabsorbed head office overheads. However, care needs to be taken to account
for any possible double counting or changes in cost items. These include:

1. Interest – Interest on overdrafts or invoice financing or even general loans may be accounted
for as a separate head of claim. If this is the case the profit and loss statement may need to be

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adjusted prior to its use in a formulaic approach. However interest earned by investing cash
flow is a loss of opportunity in itself and should generally still be included within the profit and
loss data used in any formulaic approach.

2. Insurances – Insurances related to the subject project could be included as part of a time related
site office overheads claim, in which case the insurance within a profit and loss if expressed as
a corporate insurance policy may require adjustment prior to using this data in a formulaic
approach.

3. Tendering Expenses – if the genesis of a claim for unabsorbed head office overheads is s loss
of opportunity to undertake additional work, then the Contracting Enterprise’s tendering
expenses may be reduced as a result. Therefore any formulaic approach which uses historic
profit and loss data may need to be adjusted to account for this. Of course if the Contracting
Enterprise has maintained its tendering team of a portion thereof then this adjustment may not
be necessary.

4. Depreciation - depreciation of the Contracting Enterprise’s plant and equipment can be

claimed under both unabsorbed head office overheads or as an expense under a claim for time
related site office overheads. As such an adjustment may be required to the profit and loss
statement to account for this prior to its use in any formulaic approach.

5. Head office Staff – if the Contracting Enterprises has dedicated staff allocated to the said
project which are located within or claimed as part of extended head office overheads or part-
time head office staff claimed as extended head office overheads, the profit and loss figures
used in any formula need to be adjusted to reflect this previous accounting for these expenses.

13.4 Cash flow Statement

The expression “Cash is King” is a common statement used in business. Enterprises can show an
accrued profit, however if they do not have the cash flow to sustain its regular outgoings they can still
fail as an enterprise. A cash flow statement is a review of income and expenses on a period by period
basis, usually monthly. They show cash flow as it comes into the enterprise and as it goes out to pay
for the business activities of the enterprise.

Reading a “Cash Flow Statement”

As noted under profit and loss statements, an enterprises cash position may be different from its profit
and loss position due to the use of accrual based account. A good example of how this may affect an
enterprises cash flow, a progress claim may be made by a Contractor. This claim is entered into its
accrual accounts at the date of the claim, however the Contractor may not receive the monies until
sometime later. This delay in receiving the cash can impact the enterprises cash flow. This is an
example of cash flow from operations. A similar situation may occur with cash flow from investing or
cash flow from finance.

“Annual Reports” and Unabsorbed Head Office Overheads

For the purposes of assessing unabsorbed head office overheads, the key element of the report will be
the “Profit and Loss Statement”, sometimes referred to as the “Income Statement”.

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Behind every “Profit and Loss Statement” is a considerable quantity of data which may need to be
investigated as it pertains to unabsorbed head office overheads.

The value of head office overheads and profit included within a Contract is not only dependent upon an
accounting exercise, it is also a function of management decisions and policies which include
assessments on what the market may be able to sustain to keep a tender competitive. It can also be
subject to an assessment of the volume of work available and the desire to keep a company busy during
slow periods or to reduce workload when a company is overextended during busy periods.

The SCL Protocol further makes the following recommendation as to what company records may be
assessed for use in the formula:

“Regarding the lost opportunity to earn profit, this is generally not recoverable under the
standard form. Instead, Contractors [CE] typically frame their claim for the lost opportunity
to earn profit as a claim for damages for breach of contract. An appropriate rate may be
arrived at from the Contractor’s [CE] audited accounts for the three previous financial years
closest to the Employer Risk Events for which audited accounts have been published. If the
contract does in fact allow the recovery of a profit element in addition to other compensation
for delay to the project subject of the claim, the amount of profit allowed should reflect the fact
that there is no risk involved in earning of that profit.”91

When using audited accounts to derive the actual billings and company overheads, there has been some
suggestion that the periods immediately prior to the commencement of the contract may also be relevant
as they represent what a Contracting Enterprise would have expected the performance of the contract
to be. In the High Court of Hong Kong in the case of Hsin Chong Construction (Asia) v Henble92it was
stated:

“Here I accept Mr Molloy’s reasoning. He chose a 4 year average of head office

overhead/turnover percentages to obtain a more balanced overhead percentage. Mr Molloy
reasoned that, while the contract period was covered by the years 2003 and 2004, the
Contractor [CE] would have most likely based its tender on the 2 years preceding the contract
period.”

When analysing the corporate accounts, adjustments need to be made to items which are not related to
unabsorbed head office overheads. For instance, costs associated with other projects, costs associated
with a tender and bid department which would have been incurred in any event etc. [give examples]

All being this specifically referring to loss of profit, the same principles can be applied for unabsorbed
head office overheads, that is to use three years of audited accounts immediately prior to the Employer
Risk Event.

91 Society of Construction Law, Delay and Disruption Protocol (2nd Edition, Society of Construction Law, February
2017) at para 2.4 of Guidance Part C: Other Financial Heads of Claim, page 55
92 Hsin Chong Construction (Asia) v Henble [2006] HKCFI 9 at ¶ 21 (Hon. Reyes J).

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14 Actual Cost Methodologies

The preferred methodology to calculate or demonstrate the actual loss is to base the claim on actual
costs. The criticism of this method is, however that it may not capture the real costs or damages as
there are many costs which should be spread over a company as a whole and not easily related to the
volume of work or a company’s cash flow. As previously noted the SCL Protocol states that inter alia:

“The Contractor should make all reasonable efforts to demonstrate through records the head
office overheads that it has failed to recover and the profit it has been deprived of earning.” 93

Use of actual records often depends on the structure of the accounting system of a business. Emdens
Construction Law notes that:

“More accurate methods of assessment may involve, for example, an analysis of managerial
time which shows the amount of extra hours spent dealing with a particular disruption or
delay1, or a detailed analysis of the contractor's organisation and accounting systems which
will demonstrate how his overheads are covered by the work he undertakes. It is submitted that
use of one of the formulae is only appropriate (i) where there is no more accurate method, and
(ii) where the assumptions underlying the formula are, as far as is possible, shown to be correct
in the particular case at hand.”94

In Aerospace Publishing Ltd v Thames Water Utilities Ltd95 Wilson LJ stated the principles of
demonstrating an actual loss when he stated inter alia:

“a. The fact and, if so, the extent of the diversion of staff time have to be properly
established and, if in that regard evidence which it would have been reasonable for the
claimant to adduce is not adduced, he is at risk of a finding that they have not been
established.

b. The claimant also has to establish that the diversion caused significant disruption to
its business.

c. Even though it may well be that strictly the claim should be cast in terms of a loss of
revenue attributable to the diversion of staff time, nevertheless in the ordinary case,
and unless the defendant can establish the contrary, it is reasonable for the court to
infer from the disruption that, had their time not been thus diverted, staff would have
applied it to activities which would, directly or indirectly, have generated revenue for
the claimant in an amount at least equal to the costs of employing them during that
time.”

93
Society of Construction Law, Delay and Disruption Protocol (2nd Edition, Society of Construction Law, February
2017) at 2.8 of Guidance Part C: Other Financial Heads of Claim, page 55
94 Crown Office Chambers, Emdens Construction Law, (LexisNexis, 2016) at para 13.67
95 Aerospace Publishing Ltd v Thames Water Utilities Ltd (2007) 110 Con LR 1

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15 Use of a Percentage Multiplier

There have been instances where an Employer in acknowledgement that a Contract may be suffering as
a result of an Employer Delay Event, may add a percentage multiplier to any variation or change orders
to attempt to equitably compensation the Contracting Enterprise for the financial distress the Employer
believes the Contracting Enterprise to be suffering. This is often done to try and deal with the issue in
real time rather than wait until the completion of the Contract.96 There are similarities with the Direct
Method referred to elsewhere in this document.

96 Jeffery L. Ottesen and Jack L. Dignum, Alternative Estimation of Home Office Overhead (AACE International
Transactions CDR.09, 2003) at CDR.09.02.

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16 Delay versus Suspension and the American Approach

The position in the UK and other Commonwealth jurisdictions in general is that Unabsorbed Head
Office Overheads is a legitimate head of claim for a delay to completion to a project subject to the
conditions precedent noted elsewhere in this document. However in the United States, delay is
generally not sufficient. There has to be a suspension of the works which the Contracting Enterprise is
unable to determine its duration so therefore is unable to mitigate its potential losses. For instance in
an appeal to the Federal Court from the Veteran Affairs Board of Contract Appeals case of P.J.Dick
Incorp. V Anthony Principli,97 where the Contracting Enterprise was able to undertake works elsewhere
on the said project whilst being delayed on a specific area, the Federal Court noted that the Contracting
Enterprise needs to show they were on suspended by demonstrating that:

1) The Employer Delay Event:

a. Was substantial; and

b. Was if in indefinite period

2) The Contracting Enterprise was required during this period to remain on standby ready to
resume the works immediately and returning to pre-suspension efficiency; and

3) The Contracting Enterprise was unable to gradually re-mobilise

In the article Process Model for Identifying and Computing Allowanble Home Office Overhead Cost
Claims,98 the authors in examining D.J.Dick Incorp. V Anthony Principi99 drew out six questions a court
should ask themselves when looking at if the said project was in suspension, there were:

“1) Was there an owner-caused delay that was not concurrent with another delay caused
by another source?

2) Was the contractor [CE] able to prove that additional overhead was incurred?

3) Did the owner contracting officer issue a suspension?

4) If not, was there a delay of indefinite duration, and can the contractor [CE] prove that
if could not bill a substantial amount of work on the contract and was required to be
able to return to work at the end of the delay period immediately at full speed?

5) Can the owner demonstrate that it was not impractical for the contractor [CE] to take
on replacement work (owner’s burden of production)?

97 P.J.Dick Incorporated v Anthony Principi, 324 F.3d 1364, 2003 U.S. App. Lexis 6554 (April 7, 2003)
98 William Ibbs, Benjamin Baker and Fiona Burchhardt Process Model for Identifying and Computing Allowable Home
Office Overhead Cost Claims (Journal of Legal Affairs and Dispute Resolution in Engineering and Construction,
American Society of Civil Engineers, 2014)
99 P.J.Dick Incorporated v Anthony Principi, 324 F.3d 1364, 2003 U.S. App. Lexis 6554 (April 7, 2003)

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6) If the owner meets its burden of production, can the contactor [CE] show that it was
impractical for to (sic.) obtain sufficient replacement work (contractor’s [CE] burden
of persuasion)?”

Whilst not definitively ruling out the ability of a Contracting Enterprise from being able to claim for
unabsorbed head office overheads for periods of delay as a result of a variation or change, the American
Courts have made it more difficult as a Contracting Enterprise may need to also demonstrate that its
productivity rate suffered i.e. that it suffered some form of disruption. This may take the form of a
measured mile comparison/analysis. However notwithstanding this, the American Courts have also
noted that the Contractor may have received compensation as a result of the valuation of the subject
variation or change. 100

The author’s of Process Model for Identifying and Computing Allowanble Home Office Overhead Cost
Claims,101 summarized the American position with regards unabsorbed head office overheads a series
of principles:

“1. Exclusive means for calculating extended HOOH

a. Although the Federal Circuit has held that the Eichleay formula is the exclusive
means available for calculating extended HOOH on federal construction contracts
(Wickham Contracting Co. v. Fischer),102 it stated that the contractor might be able to
recover through "some other method of allocation."

b. The Ohio Court of Claims has ruled that the Eichleay formula can be used at the
state level but not necessarily exclusively (Complete General Construction Co. v. Ohio
Department of Transportation).103

c. The Armed Services Board of Contract Appeals (ASBCA) allowed other methods
(including measured mile) for calculating extended HOOH (P.J. Dick Incorporated v.
Anthony Principi).104

2. Work has been performed versus never has been performed

a. A contractor [CE] is entitled to recovery of extended HOOH using the Eichleay

formula, if the contractor can meet the four prerequisites discussed earlier.

100 William Ibbs, Benjamin Baker and Fiona Burchhardt Process Model for Identifying and Computing Allowable Home
Office Overhead Cost Claims (Journal of Legal Affairs and Dispute Resolution in Engineering and Construction,
American Society of Civil Engineers, 2014)
101 William Ibbs, Benjamin Baker and Fiona Burchhardt Process Model for Identifying and Computing Allowable Home
Office Overhead Cost Claims (Journal of Legal Affairs and Dispute Resolution in Engineering and Construction,
American Society of Civil Engineers, 2014)
102 Wickham Contracting Co Inc v J Fischer (1994) 12 F3d 1574
103 Complete General Construction Co. v. Ohio Department of Transportation, 94 Ohio St.3d 54 (2002)
104
P.J.Dick Incorporated v Anthony Principi, 324 F.3d 1364, 2003 U.S. App. Lexis 6554 (April 7, 2003)

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b. If the court allows the use of estimates in the Eichleay formula, use the Eichleay
formula. Otherwise, another method has to be implemented.

3. Contractor placed on standby

a. For a contractor [CE] to be on standby, it is required that the contractor prove that
the owner-caused delay was of indefinite duration, meaning there is no specified date
requiring the contractor [CE] to continue work.

4. Contractor [CE] performed replacement work

a. A contractor [CE] is not entitled to recover HOOH damages unless determined

otherwise by the board.

5. Change (nonsuspension)

a. Entitlement to Eichleay damage is not applicable. Prove HOOH damages by

showing the involvement of central staff (i.e., providing engineering or administrative
services).”

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17 Formulae and Variables

The demonstration of actual loss and expense associated with Unabsorbed Head Office Overheads
requires detailed records and a system designed to provide a level of detail and in a format which can
be used for such a purpose. Even when this is done, there can be disagreements between the parties on
what to include and what not to include. The avoidance of such positions can be of benefit for the
parties.

Ideally a formulaic approach should be:

1) Based on the Contractual entitlement with regards time

2) Based on the Contract sum
3) Consider the Contracting Enterprises overall corporate loss and position
4) Be as close to reality as possible
5) Produce as equitable and just result as possible

Where a Contractor is unable to demonstrate the actual loss, a formula may be able to be used. The
SCL Protocol goes on to state inter alia:

“If it is not otherwise feasible to quantify the unabsorbed overheads and lost profit, formula
may be used (with caution) to quantify unabsorbed overheads and lost profit once it has been
successfully demonstrated that overheads have remained unabsorbed and there is a lost
opportunity to earn profit as a result of an Employer Risk Event.”105

As stated above the use of a formula is one way to calculate compensation for the Contracting Enterprise
for losses to his business which is consequential to the damages which he may be claiming as part of a
specific prolongation claim.

In the Scottish case of Beechwood Development Company (Scotland) Limited v Stuart Mitchell (T/A
Discovery Land Surveys) Lord Hamilton noted that a formula was often the only practical means of
determining a value for Unabsorbed Head Office Overheads and loss of profit. He stated inter alia:

“The delay resulted in a reduction of the pursuers’ turnover which otherwise would have been
earned in the financial year to 31 March 1996. The pursuers did not generate turnover from
the resources devoted to the contract in the period of the delay. That turnover would have
contributed to recover of the pursuers’ head office overheads (which were incurred in any
event) and the generation of their profit in that financial year. In the over-run period for the
works for the development caused by the delay, the resources would otherwise have been able
to generate turnover form other activities namely works for a development at Thorntonhall the

105 Society of Construction Law, Delay and Disruption Protocol (2nd Edition, Society of Construction Law, February
2017) at para 2.8 of Guidance Part C: Other Financial Heads of Claim, page 55

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commencement of which was delayed as a result of that over-run. There is no practical means
of assessing this loss other than application of a formula utilising the percentage of the
pursuers’ turnover represented by overheads and profit.”106 [emphasis added]

It should be noted that in this case the Court found the Contracting Enterprise could recover in a situation
not just when the Contracting Enterprise was unable to obtain additional work, but when existing work
is delayed as a result.

The use of a formula can only ever be considered an approximation107 of the damages suffered as they
are produced in generalities based on overall data which varies from business to business. Whilst it
may be the most accurate method available for deriving a figure, it is as much an acknowledgement of
damage as it is compensatory.

In the Commentary in the Building Law Reports when it reported J.F.Finnegan, Ltd. v Sheffield City
Council, it was noted that the JCT form of Contract which was the subject in this particular matter used
the term “ascertainment” when referring to any potential loss. It was suggested that this term was very
precise and would not permit the use of a formula as a formula would be at best an estimate.108 It should
be noted that this was only in the commentary and not the reporting of the case so only represents the
author’s own opinion. [check Lloyd in Alfred McAlpine Homes North Ltd v Property and Land
Contractors Ltd (1995) 76 BLR at 70]

The issue of the appropriateness of using a formula to derive an estimate of damage and the degree of
certainty a formulaic approach may deliever has been looked at in a general sense in cases such as the
Canadian case of Wood v. Grand Valley Railway Company (1915)109 and Chaplin v. Hicks [1911]110
where Vaughan Williams LJ in the English Court of Appeal held:

“I do not agree with the contention that, if certainty is impossible of attainment, the damages
for a breach of contract are unassessable … I only wish to deny with emphasis that, because
precision cannot be arrived at, the jury has no function in the assessment of damages … In such
a case the jury must do the best they can, and it may be that the amount of their verdict will
really be a matter of guesswork. But the fact that damages cannot be assessed with certainty
does not relieve the wrongdoer of the necessity of paying damages for his breach of contract.”
The aim is to derive a fair and reasonable estimate of the loss of the Contractor for both loss of recovery
of head office overheads and loss of profit. A formula therefore needs to:

1. Assess the proportion of a Contractor’s overall business is associated with head office
overheads and/or profit; and

106 Beechwood Development Company (Scotland) Limited v Stuart Mitchell (T/A Discovery Land Surveys)(2001) CIIL
1727
107 Alfred McAlpine Homes North Ltd v Property and Land Contractors Ltd (1995) 76 BLR at 70
108
J.F.Finnegan, Ltd. v Sheffield City Council (1989) 43 BLR 124 at 127
109 Wood v. Grand Valley Railway Company (1915) 51 SCR
110 Chaplin v. Hicks [1911] 2 KB 786

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2. Determine what proportion of this that would be lost by the Contracting Enterprise as a result
of a compensable delay on the subject project.

With the Hudson’s., the Emden and the Eichleay Formulae, this comes down to three steps:

1. Determine the proportion of total head office overhead allocated to the subject project;
2. Convert this to a daily rate; and
3. Apply this daily rate to the compensable delay period.

The Manshul Formula goes a step further by incorporating an adjustment for the profit and overheads
already in the subject contract. Because of this, it does not readily give a daily rate, but an overall
assessment of the loss.

The Hudson’s and Emden formulae both try and compensate the Contracting Enterprise for the shortfall
in the head office overheads contribution the subject project is failing to provide due to it being
extended. However the Eichleay formula is broader looking at the loss a contracting enterprise may
suffer as a result of being unable to supplement or replace income it needs to pay for its head office
overheads from contributions from other projects. It is more companywide rather than project specific.
It is suggested that this is more akin to the true nature of such a loss.

1.1 History of Formulae

Formulae at best is an estimation of potential loss and expense. It is not a precise calculation. As stated
by Duncan Wallace:

“The object of all these formulae is to reach a fair estimate of a particular contract
organsiation’s [CE] profit and fixed overhead potential earning capacity at the beginning of
the period of delay.”111

Like any estimate, the level of accuracy and other limitations on the methodologies or data need to be
understood to determine the weight it should be given. Formula have been developed over many years
in several jurisdictions.

Formula Source Origin Year

Hudson’s Hudson’s Building Contracts, at page 599 UK Circa 1970
of the 10th edition and J.F.Finnegan, Ltd. v
Sheffield City Council112 1989
Emden Emden’s Building Contracts and USA? 1962
113
Practice

111 Ian Duncan Wallace, Construction Contracts Principles and Policies in Tort and Contract (Volume 1, Sweet and
Maxwell, 1986) 132
112 J.F.Finnegan, Ltd. v Sheffield City Council (Q.B. 1989) 43 Build. L.R. 124
113 William Gill, Emden’s Building Contracts and Practice (6th Edition, 1962, volume 2) page N/46

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Formula Source Origin Year

Eichleay (Original) Eichleay Corporation v United States114 USA 1960
Eichleay Variation No. Capital Electric Co. v United States115 1984
1
Eichleay Variation No. G.S. & L. Mechanical & Construction, USA 1980
2 Inc.116, and Schindler Haughton Elevator
Corp117
Eichleay Variation No. Anderson D.G., “Recovery of Indirect USA 1988
3 Costs in the Pricing of Equitable
Adjustments and Terminations for
Convenience”,118
Manshul Manshul Construction Corp v Dormitory USA 1981
Authority119
Ernstrom J. William Ernstrom and Karl S. Essler USA 1982
“Beyond the Eichleay Formula:
Resurrecting Home Office Overhead
Claims”.120
Carteret Carteret Work Uniforms, Inc.121 USA 1954
Allegheny Allegheny Sportsware Co.122 USA 1958
Specific Base
Allocation Method
Direct Cost Method Singh, Amarjit, “Techniques for USA 2009
Calculating Unabsorbed Overhead”123
Figure 23: Schedule of Formula

Duncan I Wallace in the 11th edition of Hudson’s Building and Engineering Contracts, looked at the
development of the Hudson and Eichleay Formulae and noted that:

“However, it is vital to appreciate that both these formulae were evolved during the 1960’s at a
time of high economic activity in construction. Both assume the existence of a favourable market
where an adequate profit and fixed overhead percentage will be available to be earned during
the delay period. Both also, very importantly, assume an element of constraint – that is to say,

114 Eichleay Corporation v United States ASBCA No. 5183, 60-2 BCA (CCH) ¶2688 (1960)
115
Capital Electric Co. v United States 729 F. 2d 743 (Fed.Cir., 1984)
116
G.S. & L. Mechanical & Construction, Inc. DOT CAB No. 1640, 86-3 BCA (CCH) ¶ 19,026 (1986)
117
Schindler Haughton Elevator Corp GSBCA No. 5390, 80-2 BCA (CCH) ¶ 14,871 (1980)
118 D.G. Anderson, Recovery of Indirect Costs in the Pricing of Equitable Adjustments and Terminations for
Convenience, (LL.M. Thesis, The National Law Center, George Washington University, Washington, D.C., May,
1988)
119 Manshul Construction Corp v Dormitory Authority 436 N.Y.S. 2d 724 (App. Div.) (1981)
120 The Construction Lawyer, Volume 3, Number 1, Winter, 1982
121 Carteret Work Uniforms, Inc. ASBCA No. 1647, 6 CCF § 61,651-1951 (1954)
122
Allegheny Sportsware Co.ASBCA No. 4163, 58-1 BCA (CCVH) ¶ 1684 (1958)
123 Amarjit Singh Techniques for Calculating Unabsorbed Overhead (Department of Civil Engineering, University of
Hawaii at Manoa, Thomas Taam, U.S. Army Corps of Engineers, Fort Shafter ASCE Construction Research
Congress 2009) pages 181 -190

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that the Contractor’s resources (principally of working capital and key personnel, it is suggested)
will be limited or stretched, so that he will be unable to take on work elsewhere, if it offers itself,
until his working capital and site organisation have been released from the delayed contract –
again a situation normally to be expected in times of relatively high economic activity. Moreover,
in the case of those types of main or management Contractor which operate principally through
sub-contacting without investing their own capital or personnel, this element of constraint may
well be lacking even in active times. For these reasons this type of claim may be difficult to
establish by evidence in the more recent recessionary climate in both the United States and
United Kingdom (where, in the latter case, for example it seems that few major Contractors could
have survived in the last decade had their purely construction activities not been subsidised by
property development building or by nominated sub-contract work). Paradoxically, it may be
the small local builder in constant demand who in more recent times may be in a better position
to establish this type of loss, although his fixed overheads may of course be much smaller.”

1.2 Formula Variables

The numerous formulae derive their data from different parts and aspects of a Contracting company
and a building project. By of comparison the variables used are:

Eichleay (Version 1)

Eichleay (Version 2)
Eichleay (original)

Variable

Allegheny
Ernstrom

Manshul

Carteret
Hudson

Emden
Unit

Project Variables:
Original Contract Sum $ X X

Day
Original Contract Duration s X X X X
Day
Actual Contract Duration s X
Day
Employer Delay Event Duration s X X X X X

Project Invoicing: Actual Period $ X X X

Project Invoicing: Delay Period $ X X X X

Company Variables:
Total Company Revenue: Actual Period $ X X
Total Company Revenue: Original Period $ X X

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Eichleay (Version 1)

Eichleay (Version 2)
Eichleay (original)
Variable

Allegheny
Ernstrom

Manshul

Carteret
Hudson

Emden
Unit
Company Overhead incl. Profit: Actual
Period $ X
Company Overheads: Original Period $ X X
Company Overheads: Actual $ X X

Total Labour Cost: Actual Period $ X

Labour Costs: During Delay Period $ X

Planned Head Office Overheads incl.

Profit as a % % X X
Normal Office Overheads % % X X
Actual Office Overheads %: Delay Period % X X
Actual Office Overheads % % X

Figure 24: Formulae Variables

1.3 Formulae

When expressing the various formulae, each author has used a variety of terminology to
describe the numerous variables. For the purpose of this document, the original expression has
been looked at and a harmonized version of the various formulae has been derived with the
variables being defined. The way the variables have been expressed is as follows:

Variable:Duration of Period of analysis (Actual, Original or Delay) or amount

This harmonization will assist in comparing the various formulae.

1.4 Definitions

The variables used in the various formulae have to a certain extent been harmonized and unified to
create a consistent set of defined terms:

17.1.1 Project Variables:

Actual Period – the Original contract duration plus the delay period.

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Delay Period – Any extensions of time the Contractor may be entitled to

Original Period – the original Contract period

Original Contract Sum - Contract sum as defined within the conditions of contract.

Original Contract Duration - Original contract duration as defined within the conditions
of contract.

Actual Contract Duration - The actual duration of the contract including the original
contract duration and any delays.

Employer Delay Event Duration - The duration of employer delay events only.

Project Invoicing: Actual Period - Value of progress valuations during the actual contract
duration

Project Invoicing: Delay Period - Value of progress valuations during the employer delay
event period only

17.1.2 Company Variables:

Total Company Revenue: Actual Period - Total company revenue from construction
activities during the actual contract duration. This can be taken as an average from audited
accounts for a period immediately prior to the Employer Risk Event.

Total Company Revenue: Original Period - Total company revenue from construction
activities during the original contract duration. This can be taken as an average from
audited accounts for a period immediately prior to the Employer Risk Event.

Company Overhead incl. Profit: Actual Period - Total cost of running an office including
head office salaries, rent and the like during the actual contract duration and including
profit. This can be taken as an average from audited accounts for a period immediately
prior to the Employer Risk Event.

Company Overheads: Original Period - Total cost of running an office including head
office salaries, rent and the like during the original contract duration. This can be taken as
an average from audited accounts for a period immediately prior to the Employer Risk
Event.

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Company Overheads: Actual - Total cost of running an office including head office
salaries, rent and the like during the actual contract duration. This can be taken as an
average from audited accounts for a period immediately prior to the Employer Risk Event.

Total Labour Cost: Actual Period - Labour costs during the actual contract period. This
can be taken as an average from audited accounts for a period immediately prior to the
Employer Risk Event.

Labour Costs: During Delay Period - Labour costs during the employer delay event
period. This can be taken as an average from audited accounts for a period immediately
prior to the Employer Risk Event.

Planned Head Office Overheads incl. Profit as a % - Percentage usually contained within
the contract for profit and overheads as it is planned by the Contractor.

Fair Annual Average Office Overheads incl. Profit as a % - An average derived from a
series of audited accounts over time, usually three years expressed as an average.

Normal Office Overheads % - Analysis of several years accounts to determine a normal

percentage of overheads in a Contractor's company.

Actual Office Overheads %: Delay Period - Analysis of the accounts to determine a

percentage of overheads in a Contractor's company during the employer delay event
period. This can be derived as an average from audited accounts for a period immediately
prior to the Employer Risk Event.

Actual Office Overheads % - Analysis of the accounts to determine a percentage of

overheads in a Contractor's company during actual contract duration. This can be derived
as an average from audited accounts for a period immediately prior to the Employer Risk
Event.

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18 Selection of Formula

Whilst there are many formula as noted above, generally only Hudson, Emden and the original Eichleay
formula are considered. The SCL Protocol notes that:

“2.10 The use of the Hudson formula is not supported. This is because it is dependent on the
adequacy or otherwise of the tender in question, and because the calculation is derived
from a number which in itself contains an element of head office overheads and profit,
so there is double counting.

2.11 In the limited circumstances where a formula is to be used, the Protocol prefers the use
of the Emden and Eichleay formula. However, in relation to the Eichleay formula, if a
significant proportion (more than, say, 10%) of the final contract valuation is made up
of the value of variations, then it will be necessary to make an adjustment to the input
into the formula, to take account of the fact that the variations themselves are likely to
contain a contribution to head office overheads and profit.”124

The selection of the most appropriate formula requires and understanding of the formulas as His Honour
Judge Humphrey Lloyd QC points out in Alfred McAlpine Homes North Ltd. v Property & Land
Contactors, Ltd 125:

“the Emden formula, in common with the Hudson formula (see Hudson on Building and
Engineering Contracts (11th edn), paragraphs 58.182 et seq) and with its American
counterpart the Eichleay formula, is dependent on various assumptions which are not always
present and which, if not present, will not justify the use of a formula. For example the Hudson
formula makes it clear that an element of constraint is required (see Hudson at paragraph
8.185) ie in relation to profit, that there was profit capable of being earned elsewhere and there
was no change in the market thereafter affecting profitability of the work. It must also be
established that the Contractor was unable to deploy resources elsewhere and had no
possibility of recovering cost of the overheads from other sources, eg from an increased volume
of the work. Thus such formulae are likely only to be of value if the event causing delay is (or
has the characteristics of) a breach of contract.”

In fact it is this inclusion of exclusion of loss of profit which is probably the most confusing with regards
the selection of the formula.

124 Society of Construction Law, Delay and Disruption Protocol (2nd Edition, Society of Construction Law, February
2017) at 2.4 of Guidance Part C: Other Financial Heads of Claim, page 56
125 Alfred McAlpine Homes North Ltd. v Property & Land Contactors, Ltd 76 BLR 59 (1995) at 71

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19 Hudson’s Formula
A building company who has been in business for any length of time should have a reasonably accurate
idea of what it needs to recover from particular projects to maintain its commercial model. It can
analyse its business and derive the percentage it needs to include for variations for profit and overhead.
It is this percentage that is often inserted into a contract, often after it is adjusted to reflect a commercial
position the company wants to take. It could be said the percentage represents an ideal position rather
than reality.

Some of this is a result of how the Hudson’s formula was developed. It came about in the UK in the
mid 1960’s, a time when economic prosperity was at a high. In this environment the impact of the
issues raised about the Hudson’s formula below are reduced. In a far more competitive environment
which building companies find themselves in today, the issues below are magnified.

Hudson’s formula is at best an approximation or estimate of a building company’s loss and expense and
loss of profit. As such it’s limited of accuracy need to be understood. It does not reflect a company’s
actual loss although it is theoretically derived from actual figures.

In the Canadian case of Ellis-Don v Parking Authority of Toronto126, O’Leary J, explored the Hudson
formula. This case involved a contract for the construction of a new car part at 50 Cumberland Street,
Toronto and was entered into in 1973. The original contract duration was 52 weeks, however as a result
of a delay in the Authority in obtaining an excavation permit the works were delayed by 17 ½ weeks.
The amount allowed for overheads and profit in the contract equated to 3.87%. His honour also quoted
extensively from Hudson’s Building and Engineering Contracts, 10th edition at page 596:

“The measure of damage as a legal problem gives little theoretical difficulty in cases of breach
of contract by the employer. It is obvious that builders work for a profit, and, apart from his
entitlement to the price, the damage to a builder caused by any breach of contract by the
employer will be assessed in the light of its impact upon his profits.

The employers’ breaches are of two kinds from the point of view of damages, depending upon
whether on the one hand they have the effect of bringing the work to an end, or preventing its
starting, in which case the builder will: be deprived of the right to his profits upon work never
actually carried out, or whether on the other hand they merely reduce his profits upon (or
increase the cost of) work done by him. In earlier editions of this work, these were described
somewhat inaccurately as cases of prevention and partial prevention.”

at p597:

“At this point it may assist if an indication is given of the types of consequential damage which
Contractors are likely to or may suffer when a contract is monetarily affected by an employer’s
breach, the heads of damage (apart from the direct damage immediately suffered on some
individual work process, which will obviously vary from case to case) are likely to be as follows:

(a) When delay in completion of the whole project results, a Contractor will usually suffer:

126 Ellis-Don v Parking Authority of Toronto (1978) 28 BLR 98

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(i) a loss owing to the fact that his off~site overheads, which will partly be independent of the
actual site expenditure or even the period the contract takes to complete (such as head- office
rents) and partly may be dependent (such as additional administrative expenditure in relation
to a dislocated and longer contract) will have either increased in the latter case, or need to be
recovered from a smaller annual turnover than that budgeted for in the former case;

(ii) a loss of the profit-earning capacity of the particular contract organisation affected, due to
its being retained longer on the contract in question without any corresponding increase in the
monetary benefit earned and without being free to move elsewhere to earn the profit which it
otherwise might do;”

at pp 598-599 :

“(a) ‘Head Office Overheads’ and profit Off-site overheads are usually known in the industry
as ‘Head Office Overheads’. It is convenient to deal with these together with profit, because it
is the practice of most Contractors [CE] of any substance in major contracts, after making their
best estimate of the prime cost of the whole project, to add a single percentage thereto for both
the above items. In bill contracts, the total sum calculated from prime cost may be distributed
across the bill rates, or the Contractors may have built up the tender sum by estimating bill
rates for particular processes, adding the same percentage to cost when calculating each rate,
and in really important contracts, two teams of estimators may each estimate separately by the
two-methods as a cross-check before finally producing the tender sum. Other things being
equal, the Contractor’s [CE] loss from an extended contract period must be a proportionate
extension of this percentage of his contract sum, and the loss calculated in this way is a real
loss (provided the true percentage used can be determined) and is quite independent of the
extent to which his contract prices may have been profitable or unprofitable, which depends on
the accuracy of his estimates of cast on that particular contract and not on the profit percentage
(this is not, of course, the case where an extended contract period is not involved, and the
Contractor [CE] sues for loss of profit on work which he has not done, as where the contract
has been wrongly terminated by the employer. There he must prove that he would have made a
profit in fact—ie that his contract prices were an accurate estimate, or an overestimate, of cost.)
The percentage used in the United Kingdom in pricing for head-office overheads and profit
obviously varies from Contractor [CE] to Contractor [CE], and is usually a closely guarded
secret, but evidence given in litigation on many occasions suggests that it is usually, in a major
contract subject to competitive tender on a national basis, between 3 per cent, and 7 per cent
of the total prime cost, including PC and provisional sum figures for nominated sub-
Contractors. It should be remembered that these percentages, which may seem small in relation
to turnover, in fact represent a return on capital employed of several times that percentage per
annum (it is, in effect, this very high “gearing” element in the pricing of building and
engineering contracts, due to the very high ratio between turnover and capital employed, that
means that a very small difference in pricing or estimating may produce very heavy losses or
very large profits). Some Contractors [CE] do consciously apply a breakdown of the percentage
as between head-office and profit, but for the purpose of assessing the loss due to delay in
completion, the division is not theoretically important. The formula usually used is as follows:

𝐻. 𝑂/ 𝑝𝑟𝑜𝑓𝑖𝑡 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚

×
100 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝑑𝑒𝑙𝑎𝑦 (𝑖𝑛 𝑤𝑒𝑒𝑘𝑠)

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× 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 (𝑒. 𝑔. 𝑖𝑛 𝑤𝑒𝑒𝑘𝑠)

A caveat should, however, be entered in regard to the profit element in the above formula. The
formula assumes that the profit budgeted for by the Contractor [CE] in his prices was in fact
capable of being earned by him elsewhere had the Contractor [CE] been free to leave the
delayed contract at the proper time. This itself involves two further assumptions, namely that
on average the Contractor [CE] did not habitually underestimate his costs when pricing, so
that the profit percentage was a realistic one at that time, and secondly that there was thereafter
no change in the market, so that work of at least the same general level of profitability would
have been available to him at the end of the contract period. There is no doubt that satisfactory
evidence on these matters is necessary …”127

His honour noted that he could not sustain a claim for loss of profit and stated that:

“Where a lump amount, in this case 3.87% of the total contract price, is included for profit and
overhead, I am aware of no reason why the plaintiff should not recover the full amount of it,
where the evidence indicates the staff tied up by the 17 ½ week delay would otherwise be
earning such an amount for the plaintiff.

That is not to say that the plaintiff would have been entitled to claim the lost profit on a contract
it could otherwise have had if such a contract was lost by the 171/2 week delay. It is one thing
to say that the parties when the contract was entered into should have contemplated that there
was a real danger or serious possibility that staff tied up by the defendant’s fault beyond what
would have been the date of completion would be unable to earn normal profit and overhead
for the plaintiff elsewhere, it is quite another thing to say the parties should have contemplated
that the profit from a particular contract would be lost because of delay in completion caused
by the defendant. There is no claim in this case for loss of profit from any particular contract
that was lost, but I feel it worthwhile to point out the distinction.” 128

Mr Recorder Percival QC in Whittal Builders Co. Ltd. v. Chester Le Street stated that:

“Lastly, I come to overheads and profit. What has to be calculated here is the contribution to
off-site overheads and profit which the contractor might reasonably have expected to earn with
these resources if not deprived of them. The percentage to be taken for overheads and profits
for this purpose is not therefore the percentage allowed by the contractor in compiling the price
for this particular contract, which may have been larger or smaller than his usual percentage
and may or may not have been realised.

It is not that percentage that one has to take for this purpose but the average percentage earned
by the contractor on his turnover as shown by the contractor's accounts.

On that basis it is clear to me that the calculation which I have to make is as follows. I start
with the figure of 14.15 agreed by the parties as the figure for overheads and profit as a
percentage of turnover, and l divide that by 100, then multiply by the contract figure of

127 Ellis-Don v Parking Authority of Toronto (1978) 28 BLR 98 at 124-126

128 Ellis-Don v Parking Authority of Toronto (1978) 28 BLR 98 at 127

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£404,759, divided by 78 to give the turnover per week, and then multiply by 30; and that gives
the figure of £22,028.

Mr Getz said that on the hypothesis advanced by him I should take the ' higher agreed figure
percentage, but he would, I think, agree that ‘in view of my findings so far it is correct that I
take the lower figure.

He also says that various deductions should be made from the contract price for the purposes
of doing this sum. With respect, I think that that is a misconception of the exercise. The figure
of 14.15% is the percentage of turnover representing a contribution to overheads from profit.
The nearest one can get to the addition to turnover which could be expected from these
resources is to take the contract figure, which is itself the addition to turnover which was to be
made by the use of these resources. ,

l have, however considered whether there might be any double counting in the method that l
have applied thus far and the conclusions to which I have come. I have considered whether
there might be any double counting because of the basis which I have taken in dealing with the
other items — ie 1 have approached them all on the potential earnings basis —— but I am
satisfied that there is not, because the prices on which I have worked, or the earning power on
which I have worked under the first two items, plant and scaffolding, are the prices which would
be used by the contractor in compiling his contract price before adding his percentage."129

The formula as expressed in Hudson’s Construction & Engineering Contracts 10th edition (1970)

𝐻. 𝑂./𝑃𝑟𝑜𝑓𝑖𝑡 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒
100

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚
×
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 (𝑒. 𝑔. 𝑖𝑛 𝑤𝑒𝑒𝑘𝑠)

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦 ( 𝑖𝑛 𝑤𝑒𝑒𝑘𝑠)

To harmonise this formula:

𝑃𝑙𝑎𝑛𝑛𝑒𝑑 𝐻𝑒𝑎𝑑 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑖𝑛𝑐𝑙. 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑠 𝑎 %: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

×
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦

Figure 25: Harmonised Original Hudson’s Formula

129 Whittal Builders Co. Ltd. v. Chester Le Street (1985) 12 Const. L.J. 356

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In Hudson’s Construction & Engineering Contracts 11th edition (1995) the author has used the same
formula, however has suggested that instead of “H.O./Profit Percentage” a “fair annual average” may
be more appropriate. On this basis it is suggested the formula may read:

𝐹𝑎𝑖𝑟 𝐴𝑛𝑛𝑢𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑖𝑛𝑐𝑙. 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑠 𝑎 %

100

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚
×
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 (𝑒. 𝑔. 𝑖𝑛 𝑤𝑒𝑒𝑘𝑠)

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦 ( 𝑖𝑛 𝑤𝑒𝑒𝑘𝑠)

To harmonise this formula:

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑖𝑛𝑐𝑙. 𝑃𝑟𝑜𝑓𝑖𝑡: 𝐻𝑖𝑠𝑡𝑜𝑟𝑖𝑐𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝐻𝑖𝑠𝑡𝑜𝑟𝑖𝑐𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

×
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦

Figure 26: Harmonised Variation of Hudson’s Formula

The criticism of Hudson’s formula over the years includes:

1) it does not reflect the ebbs and flows of the building industry so it cannot accurately reflect
a Contracting Enterprises true loss and expense or loss or profit. It assumes that the
financial and economic situation the Contracting Enterprise was in at the commencement
of the Contract will be the same financial and economic situation the Contracting Enterprise
will find itself in throughout the Contract.

2) the inclusion of profit is not profit on the loss and expense from the non-recovery of head
office overheads but an allowance for a loss of profit. Loss of profit which will be dealt
with in more detail later is an opportunity loss. That is the building company is alleging it
lost the opportunity as a result of a delay in a project to derive a profit elsewhere. This is
not necessarily connected to loss and expense from unrecovered head office overheads and
the blinking of the two may be misleading.

3) there is an assumption that all projects a company undertakes contributes proportionally to

recovering head office overheads and a company’s profit. This is not necessarily the case.
Certain procurement systems or clients or project types may contribute more or less to a
company’s recovery of head office overheads and profit.

4) Suggest the percentage a building company uses in its tender may be inflated as it is
generally not scrutinised to the same effect as the rest of a tender. The idea that the
percentage included in a tender is realistic or achievable is not considered. As a result this

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is a significant shortfall in the use of the Hudson’s formula. As noted in Whittal Builders
Co. Ltd. v. Chester Le Street:130

The percentage to be taken… is not the percentage allowed by [the Contractor[CE]]

in compiling the price for this particular contract, which may have been larger or
smaller than his usual percentage and may or may not have been realized… but the
average percentage earned by the Contractor [CE]on his turnover as shown by the
Contractor’s [CE]accounts.

5) the percentage used will include an allowance for loss of profit, this allowance assumes a
risk in the derivation (a risk assumption) of this profit rather than the risk free position
which recovery for loss of profit should assume. In doing so it could be artificially inflated.

6) when using a Hudson’s formula in circumstances where a Contracting Enterprise has

already recovered the percentage stated in a contract for profit and overheads care needs to
be taken to avoid double dipping or double recovery.

7) The formula makes no allowance for the status of the construction industry. O’Leary J in
the Canadian case of Ellis-Don v Parking Authority of Toronto131 made the observation that
the formula does not make any allowance or “no change in the market so that the work of
at least the same general level of profitability would have been made available….at the end
of the contract period.”

The percentage often used is the Contract percentage for profit and overheads for the adjustment of
variations or for adjustment of provisional sums. What many fail to realise the overheads included in
this percentage is for overheads specifically related to the variation or provisional sum and likewise for
profit is a recognition that the Contracting Enterprise is entitled to make a profit from its labours
undertaking the variation/s or provisional sums. It is not representative of the Contracting Enterprise’s
corporate losses of unabsorbed head office overheads or loss of profit.

Step 1 pro-rata the Original Contract Sum to the Original Contract Duration to arrive at a daily rate of
expenditure of the Original Contract Sum, shown in the formula as:

𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚

𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

Step 2 multiplies this factor by the percentage included in the Contract for Profit and Overheads, or
from Hudson’s Building and Engineering Contacts 11th edition onward, a “fair annual average” which
can be derived from an analysis of the Contracting Enterprise’s annual accounts.

The original formula can be shown as:

𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚

𝑃𝑙𝑎𝑛𝑛𝑒𝑑 𝐻𝑒𝑎𝑑 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑖𝑛𝑐𝑙. 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑠 𝑎 % ×
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

= 𝑅𝑎𝑡𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑

130 Whittal Builders Co. Ltd. v. Chester Le Street (1985) 12 Const. L.J. 356
131 Ellis-Don v Parking Authority of Toronto (1978) 28 BLR 98

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However, in Hudson’s Construction & Engineering Contracts 11th edition132 onward it is now
represented using a “Fair Annual Average”.133

A similar reference was made in Keating on Building Contracts which stated:

““Hudson formula”. This is a formula for calculating claims for loss- of overheads and profit
taken together, although with suitable data a similar formula could be devised for either
individually. It calculates the loss as the Contractor’s overhead and profit-percentage based
on a fair annual average multiplied by the contract sum and the period of delay-and divided
by the contract period.” 134 [emphasis mine]

This revised formula can now therefore be represented as:

𝐹𝑎𝑖𝑟 𝐴𝑛𝑛𝑢𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑖𝑛𝑐𝑙. 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑠 𝑎 %

𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚

× = 𝑅𝑎𝑡𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

In J.F.Finnegan, Ltd. v Sheffield City Council 135 Sir William Stabb Q.C. stated:

“it is generally accepted that, on principle, a Contractor who is delayed in completing a contact
due to the default of his employer, may properly have a claim for head office or off-site
overheads during the period of delay, on the basis that the work-force, but for the delay, might
have had the opportunity of being employed on another contract which would have had the
effect of funding the overheads during the overrun period. This principle was approved in the
Canadian case of Shore & Horwitz Construction Co Ltd v Franki of Canada (1967), and was
also applied by Mr Recorder Percival QC, in the unreported case of Whittall Builders Company
Limited v Chester le Street District Council. Furthermore, in Hudson’s Building Contracts, at
page 599 of the 10th edition, a simple formula is set out to determine the amount of the loss of
funding of overheads and profit during the period of overrun.”

When Hudson’s Formula was originally published in the 10th Editions of Hudson’s Building Contracts
it included a range of percentages which could be used in the absence or to compare stated percentages
against.

This formula has been criticised because of the assumption that the percentage allowed for in a
Contracting Enterprise’s tender for head office overheads and profit and the reality can be two very
different figures. More recently, the descriptions of Hudson’s Formula have changed the variable from

132 Ian Duncan Wallace, Hudson’s Construction & Engineering Contracts (11th edition, Sweet & Maxwell, 1995)
133 Ian Duncan Wallace, Hudson’s Construction & Engineering Contracts (11th edition, Sweet & Maxwell, 1995) page
1077, paragraph 8-184
134 Stephen Furst QC and Vivian Ramsey QC, Keating on Building Contracts (7th edition, Sweet & Maxwell, 2001)
Para 8-69 at 268
135 J.F.Finnegan, Ltd. v Sheffield City Council (Q.B. 1989) 43 Build. L.R. 124

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“Planned Head Office Overheads and Profit” to “a fair annual average” which seems to have
addressed the criticism at least partially.136

Justice Sir Willian Stabb in J.F.Finnegan, Ltd. v Sheffield City Council recognized this and stated:

“However, I confess that I consider the plaintiffs’ method of calculation of the overheads on
the basis of a notional contract valued by uplifting the value of the direct cost by the constant
of 3.51 as being too speculative and I infinitely prefer the Hudson formula which, in my
judgment, is the right one to apply in this case, that is to say, overhead and profit percentage
based upon “a fair annual average”, multiplied by the contract sum and the period of delay in
weeks, divided by the contract period.”137

“A fair annual average” using the SCL Protocol is suggest:

“… An appropriate rate may be arrived at from the Contractor’s audited accounts for the three
previous financial years closest to the Employer Risk Events for which audited accounts have
been published. If the contract does in fact allow the recovery of a profit element in addition
to other compensation for delay to the project subject of the claim, the amount of profit allowed
should reflect the fact that there is no risk involved in earning of that profit.”138

Sometimes referred to as the Canadian Methodology by the American Courts.139

The SCL Protocol has some strongly cautions about the use of the Hudson formula when it states:

“The use of Hudson’s formula is not supported. This is because it is dependent on the adequacy
or otherwise of the tender in question, and because the calculation is derived from a number
which in itself contains and element of head office overheads and profit, so there is double
counting.”140

19.1 Variations on the theme

The original version of the Hudson’s Formula referred to the H.O./Profit Percentage. From the 11th
Edition of Hudson’s onward this became “a fair annual average”. H.O./Profit Percentage was a
reference to a percentage contained within the Contract. This cause a certain amount of confusion as
the profit and overhead percentage contained within a Contract was usually included for the assessment
of variation to account for profit and site overheads or preliminaries. Obviously this is different to
Unabsorbed Head Office Overheads. Some commentators have tried to address this confusion, for

136 Ian Duncan Wallace, Hudson’s Construction & Engineering Contracts (11th edition, Sweet & Maxwell, 1995)
137 J.F.Finnegan, Ltd. v Sheffield City Council 43 Build. L.R. 124 (Q.B. 1989) at 136
138 Society of Construction Law, Delay and Disruption Protocol (2nd Edition, Society of Construction Law, February
2017) at 2.4 of Guidance Part C: Other Financial Heads of Claim, page 55
139
Theodore Trauner Jr., Construction Delays: Documenting Causes, Winning Claims, Recovering Costs. (R. S. Means
Co., Kingston, Mass., 1990)
140 Society of Construction Law, Delay and Disruption Protocol (2nd Edition, Society of Construction Law, February
2017) at 2.10 of Guidance Part C: Other Financial Heads of Claim, page 55

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instance in Australian in two papers by D.S.Jones,141 H.O./Profit Percentage became “Off-site

overheads Percentage”. Whilst closer to what the formula is trying to estimate, it:

1) Drops profit; and

2) May include allocated off-site overheads.

To explain this, Jones says that:

“In the preparation of the tender it is common practice for the Contractor to make the best
estimate of the prime costs of the whole project and to add a sum as representative of the
relevant portion of the off-site overheads. The Contractor’s loss relating to off-site overheads
consequent upon a delay is prima facie a proportionate increase in the portion so applied.”

This appears to be his understanding of what the 10th edition of Hudson’s stated. However, it is noted
that in Principles and Policies in Tort and Contract,142 Duncan Wallace was more cautious and stated
that “Head Office Overheads”:

“which are not incurred specifically and exclusively for the contract, and which will not be
increased or reduced by the course of events occurring on the contract, or by the course of
events occurring on the Contract, or by its profitability or internal economics…[e.g.] the
salaries of directors and head office personnel, the maintenance and service charges or rents
of head or area offices, higher management emoluments of all kinds, and company financing
and pension obligations…the fundamental characteristic is that this expenditure will neither
increase nor decrease as a consequence of delay, or anything else, occurring on the contract
in question.”

So far as “profit” is concerned, Duncan Wallace says that:

“….the profitability of a particular delayed contract will not be of direct relevance to the
calculation….It will be the hypothetical profit which the contract organization might have been
expected to earn elsewhere, had completion not been delayed.”143

In The Prolongation Costs Claim,144 Byrne QC he says of Hudson’s Formula:

“…in the Hudson Formula it is necessary to adopt a ratio representing the percentage that
head office overheads bear to total outgoings.”145

He goes on to state:

141 Jones, D.S.; Legal Basis for Extension of Time Claims and Quantification of Delay Costs, [1988] 8 ACLR 8 and 23
and Subcontractors’ Remedies and Liabilities for Delay, [1989] 5 BCL 16 at 42
142 Wallace, Ian Duncan; Construction Contracts Principles and Policies in Tort and Contract, Volume 1, Sweet and
Maxwell, 1986 at 116-117
143
Wallace, Ian Duncan; Construction Contracts Principles and Policies in Tort and Contract, Volume 1, Sweet and
Maxwell, 1986 at 118
144 Byrne, D. QC; The Prolongation Cost Claim [1988] 4 BCL 181
145 Byrne, D. QC; The Prolongation Cost Claim [1988] 4 BCL 181 at 187

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“..this article prefers to characterize the claim as one for the lost opportunity to earn a
contribution towards overheads from other projects.”146

And when looking at evidence of a loss:

“This will require proof. If the construction industry suffers such a down-turn that there is no
work available at the original completion date then clearly no loss is suffered.” 147

It is of course possible to modify the Hudson Formula by removing the reference to profit so it only
deals with unabsorbed head office overheads. In which case the formula may look like:

𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚

𝑃𝑙𝑎𝑛𝑛𝑒𝑑 𝐻𝑒𝑎𝑑 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑎𝑠 𝑎 % ×
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

= 𝑅𝑎𝑡𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑

Or using the modifications from the 11th edition of Hudson’s Building Contracts:

𝐹𝑎𝑖𝑟 𝐴𝑛𝑛𝑢𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑎𝑠 𝑎 %

𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚

× = 𝑅𝑎𝑡𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

Philip Davenport from Australia refers to this as the “Lost Chance Formula”, however he also looked
at Hudson’s Formula as an “Extra Cost Formula”.148 He highlights the confusion as to the purpose of
the Hudson’s or for that many the other formulae as well.

19.2 Hudson’s Hybrids

Some organisations have attempted to simplify the calculation of unrecovered head office overheads
by incorporating methodologies in Contracts or other manuals, an example of this is the State of Ohio,
Department of Transport Columbus, Ohio, Construction and Material Specifications which uses a
version of the Hudson’s Formula which the refer to as HOOP (Head office overhead payments). This
Construction and Material Specifications gives directions on how to apply HOOP including
predetermined percentages given as factors. In the specification states149:

“f. Home Office Overhead. The Department will pay the Contractor [CE] for home office
overhead, unabsorbed home office overhead, extended home office overhead, and all
other overhead costs for which payment is not provided for in 109.05.D.2.e, including
overhead costs that would otherwise be calculated using the Eichleay formula or some
other apportionment formula, provided all of the following criteria are met:

146 Byrne, D. QC; The Prolongation Cost Claim [1988] 4 BCL 181 at 189
147 Byrne, D. QC; The Prolongation Cost Claim [1988] 4 BCL 181 at 189
148
Davenport, Phillip; The Two Hudson Formulas, 18 ACLR 14
149 State of Ohio, Department of Transport Columbus, Ohio, Construction and Material Specifications, 1 January 2013,
Pages 79-81

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(1) The Contractor [CE] has incurred an excusable, compensable delay that
delays the Work at least 10 Calendar Days beyond the original Completion
Date. These days are cumulative throughout the project.

(2) The delay for which payment of home office overhead is sought is only due to
delays defined in 108.06.D.2, 108.06.D.3 and 108.06.D.5.

Any subcontractor that has approved C-92‟s for subcontracted work totaling $4,000,000 or
more is eligible for reimbursement of home office overhead provided the criteria set forth in
109.05.D.2.f.(1) and 109.05.D.2.f.(2) are met.

Payment will be made for every eligible day beyond the original contract completion date at
the rate determined by 109.05.D.2.f.i. Payment for eligible days occurring during an
unanticipated construction period will be calculated in accordance with 109.05.D.2.f.ii.
Payment for eligible days occurring during an unanticipated winter period will be calculated
in accordance with 109.05.D.2.f.iii.

(i) Home Office Overhead Daily Rate

Calculate the home office overhead daily rate using the following formula:

Daily HOOP = (A × C)/B

Where:

A = original contract amount

B = contract duration in Calendar Days

C = value from Table 109.05-5

TABLE 109.05-5

Original Contract Amount C

Up to $5,000,000 0.08

$5,000,001 to $25,000,000 0.06

Over $25,000,000 0.05

Daily HOOP = home office overhead daily rate

Contract duration term, B, includes every Calendar Day from the execution of the Contract,
unless otherwise specified by the Director, to the original Contract Completion Date.

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When the Contractor [CE] requests home office overhead compensation for a subContractor,
use the above formula to calculate the subContractor’s Daily HOOP; however, in the
subcontractor calculation, A is equal to the subContractor’s portion of the original contract
amount as determined by the sum of all approved C-92’s issued for the subcontracted work.

(ii) Home Office Overhead Payment for an Unanticipated Construction Period

Calculate the home office overhead payment for an unanticipated construction period
occurring between May 1 and November 30 using the following formula:

CP HOOP = Daily HOOP × D

Where:

D = sum of all excusable, compensable delays in Calendar Days minus the

sum of all delays due to 108.06.D.1 and 108.06.D.4 in Calendar Days

Daily HOOP = daily home office overhead rate

CP HOOP = home office overhead payment for an unanticipated construction

period occurring between May 1 and November 30

The excusable, compensable delay term, D, is the additional, unanticipated extended period for
work performed between May 1 and November 30 in Calendar Days.

(iii) Home Office Overhead Payment for an Unanticipated Winter Period

Calculate the payment for home office overhead for an unanticipated winter period occurring
between December 1 and April 30 using the following formula:

WP HOOP = Daily HOOP × F × D/E

Where:

D = sum of all excusable, compensable delays in Calendar Days minus the

sum of all delays due to 108.06.D.1 and 108.06.D.4 in Calendar Days

E = sum of all excusable, compensable delays in Calendar Days plus the sum
of all excusable, non-compensable delays in Calendar Days

F = 151 for a non leap year or 152 for a leap year

Daily HOOP = daily home office overhead rate

WP HOOP = home office overhead payment for an unanticipated winter period

occurring between December 1 and April 30

Payment for Home Office Overhead for an unanticipated winter period will not be made when
the value of the remaining work is below the lesser of $500,000.00 or 10 percent of the
estimated final contract value.

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(iv) Total Home Office Overhead Payment

Calculate the total home office overhead payment using the following formula:

Total HOOP = CP HOOP + WP HOOP

Where:

CP HOOP = home office overhead payment for an unanticipated

construction period occurring between May 1 and November
30

WP HOOP = home office overhead payment for an unanticipated winter

period occurring between December 1 and April 30

Total HOOP = total home office overhead payment.”

Another version of a Hudson’s type formula has sometimes been referred to as the “Florida Method”.150
This formula takes a constant predefined percentage (8%) as the profit and overheads percentage to use
within the formula. Therefore it can be represented as:

𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑉𝑎𝑙𝑢𝑒

8% × = 𝐻𝑂𝑂𝐻 𝐷𝑎𝑖𝑙𝑦 𝑅𝑎𝑡𝑒
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

Is an attempt to standardise and a formula for government contracts. It is a recognition that in the event
of a delay the Contracting Enterprise may be impacted beyond the subject project.

150
Navigant Paper; Practical Problems with Pricing Delay Using Eichleay, 2017, referring to Anderson D.G.,
“Recovery of Indirect Costs in the Pricing of Equitable Adjustments and Terminations for Convenience”, LL.M.
Thesis, The National Law Center, George Washington University, Washington, D.C., May, 1988.

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20 Emden Formula
The Emden formula has been seen as a development and improvement of the Hudson’s formula in that
because it seeks to derive the percentage used from a company’s actual accounts it avoids some of the
issues that plague the Hudson’s formula. It is very similar to the Hudson’s formula except it derives
the percentage it uses directly and demonstrably from a company’s accounts. The advantage of this is
that it reduces the impact of any commercial adjustment and the risk assumption a building company
may have made to its profit and overheads percentage. However the Emden formula still suffers from
all the other issues that plague the Hudson’s formula.

This makes the Emden formula more appropriate than the Hudson’s formula as recognised by the SCL
Protocol but it still has it’s downfalls.

Ironically, on many occasions a claim for unrecovered head office overheads starts by stating it is using
a Hudson’s formula only to analyse a building company’s account and apply an Emden formula when
the author of the claim does not understand the difference.

Step 1 uses the same apportionment as the Hudson’s formula:

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

Step 2 has been interpreted in two difference ways, it could be the same as the Hudson’s Formula using
this “fair annual average” and derived from an analysis of a series of the Contactor’s accounts as noted
in the SCL Protocol, or it could be the a percentage for Profit and Overheads for the Actual Contract
Period.

The SCL Protocol151 states the formula as:

𝑂&𝑃 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚

× × 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦
100 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑒𝑟𝑖𝑜𝑑

Where O & P is the Head Office Overheads and Profit percentage (Actual)

In Alfred McAlpine Homes v PLC, 152 the court looked compared the overhead and profit to the company
revenue over the actual period of the original contract. It looked specifically at the financial years
ending September 1990 and 1991:

FYE September 1990 19.21%

FYE September 1991 31.03%

Average: 25.12%

151 Society of Construction Law; Delay and Disruption Protocol, 2nd Edition, 2017 Appendix A, page ??
152
Alfred McAlpine Homes North Ltd. v Property & Land Contactors, Ltd 76 BLR 59 (1995)

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The original Contract sum was £ 12,226,760 over a 14 month construction period with a 9.5 month
delay. The resultant formula is thus:

25.12 12,226,760
× × 9.5 𝑚𝑜𝑛𝑡ℎ𝑠 = £ 208,413.85
100 14 𝑚𝑜𝑛𝑡ℎ𝑠

The formula originally in Emden’s Building Contracts and Practice 6th Edition, volume 2 at page N/46
however a copy of this has proven to be difficult to obtain. However, Emdens Construction Law of
2016 describes the Emden Formula:

“the 'Emden' formula. This is calculated by expressing the total overhead cost and profit of the
contractor's organisation as a percentage of the contractor's total turnover, and then
multiplying that by the contract sum, dividing by the contract period, and finally multiplying by
the period of delay, again in the same units as the contract period. This does much the same as
the Hudson formula, except that instead of using the percentage allocated by the contractor in
the contract, it looks at the contractor's actual overhead costs as a proportion of his turnover,
and extends that pro rata over the period of delay”153

𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡𝑜𝑟 ′ 𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚
×
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑒𝑟𝑖𝑜𝑑

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦

The reference to “actual” in the description has been interpreted as being a requirement to take the data
for the Contracting Enterprises overhead and profit and turnover from the actual period of the Contract,
being the original period plus the delay period. This appears to be supported by Alfred McAlpine Homes
North Ltd. v Property & Land Contactors, Ltd 154 where the data used in this case was for the actual
period of the contract. On this basis a harmonized version of this formula can be expressed as:

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑖𝑛𝑐𝑙. 𝑃𝑟𝑜𝑓𝑖𝑡: 𝐴𝑐𝑡𝑢𝑎𝑙

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝐴𝑐𝑡𝑢𝑎𝑙

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

×
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦

Figure 27: Harmonised Emden’s Formula

153
Crown Office Chambers; Emdens Construction Law, LexisNexis 2016 at paragraph 13.65

154 Alfred McAlpine Homes North Ltd. v Property & Land Contactors, Ltd 76 BLR 59 (1995)

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This formula was originally published in his Emden’s Building Contracts and Practice155. It is a
refinement of the Hudson’s Formula in that it uses the actual head office overheads and profit
percentages and ignores the specific profitability of the contract in question.

As previously noted in J.F.Finnegan, Ltd. v Sheffield City Council, the case of Whittall Builders Co Ltd
v Chester-le-Street District Council156adopted the use of a formula, however, unlike Finnegan, Mr
Recorder Percival QC in Whittall adopted the Emden Formula when he stated:

“Lastly, I come to overheads and profit. What has to be calculated here is the contribution to
off-site overheads and profit which the Contractor [CE] might reasonably have expected to
earn with these resources if not deprived of them. The percentage to be taken for overheads
and profits for this purpose is not therefore the percentage allowed by the Contractor [CE] in
compiling the price for this particular contract, which may have been larger or smaller than
his usual percentage and may or may not have been realised.

It is not that percentage that one has to take for this purpose but the average percentage earned
by the Contractor [CE] on his turnover as shown by the Contractor’s [CE] accounts.

On that basis it is clear to me that the calculation which I have to make is as follows. I start
with the figure 14.15 agreed by the parties as the figure for overheads and profit as a
percentage of turnover, and I divide that by 100, then multiply by the contract figure of £ 404
759 divided by 78 to give a turnover per week, and then multiply by 30; and that gives the figure
of £ 22 028.”

The SCL protocol expresses the Emden Formula157 as:

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 & 𝑝𝑟𝑜𝑓𝑖𝑡 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑠𝑢𝑚 × 𝑝𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝑑𝑒𝑙𝑎𝑦

×
100 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑝𝑒𝑟𝑖𝑜𝑑

Where Overheads and profit is defined as head office overheads and profit percentage (actual). This is
very similar to the modified version of Hudson’s Formula and slightly different to the original Emden
Formula. The difference being by actual it is a reference to the actual period of the Contract rather than
an analysis as used for the Hudson’s Formula of an average over a period of time (say three years). In
discussing the Emden Formula, HHJ Humphrey Lloyd QC when considering an appeal addressed the
Emden Formula in Alfred McAlpine Homes North Ltd v Property and Land Contractors Ltd and stated
that:

“...the Emden formula...is one of a number of methods conventionally applied in an attempt to

arrive at an approximation of the damages supposedly incurred by a Contractor where there
has been delay to the progress of the works whereby completion is similarly delayed. The
theory is that because the period of delay is uncertain and as the Contractor [CE] can take
no steps to reduce its head office expenditure and other overhead costs and cannot obtain

155 Emden’s Building Contracts and Practice 6th Edition, volume 2 at page N/46
156 Whittall Builders Co Ltd v Chester-le-Street District Council (1985)
157 SCL Delay and Disruption Protocol 2nd Edition: February 2017, Appendix A, page 65

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additional work there are no means whereby the Contractor [CE] can avoid incurring the
continuing head office expenditure, notwithstanding the reduction in turnover as a result of
the suspension of delay to the progress of the work. The reduced activity no longer therefore
pays its share towards the overhead costs. This type of loss (sometimes called a claim for
"unabsorbed overheads") is however to be contrasted with the loss that may occur if there is a
prolongation of the contract period which results in the Contractor [CE] allocating more
overhead expenditure to the project than was to have been contemplated at the date of the
contract. The latter might perhaps be best described as "additional overheads" and will, of
course, be subject to prove that additional expenditure was in fact incurred.

Furthermore the Emden formula, in common with the Hudson formula. . .and with its American
counterpart the Eichleay formula, is dependent on various assumptions which are not always
present and which, if not present, will not justify the use of a formula. For example the Hudson
formula makes it clear that an element of constraint is required...ie in relation to profit, that
there was profit capable of being earned elsewhere and there was no change in the market
thereafter affecting profitability of the work. It must also be established that the Contractor was
unable to deploy resources elsewhere and had no possibility of recovering costs of the
overheads from other sources, e. g. from an increased volume of the work. Thus such formulae
are likely only to be of value if the event is causing delay is (or has the characteristics of) a
breach of contract. . .” 158 [emphasis mine]

Similar to the Hudson’s Formula, Emden also allows for the recovery of loss of profit. In instances
where the Contracting Enterprise is not able to demonstrate a loss of profit the Emden Formula can be
modified to read:

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚

×
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

= 𝑅𝑎𝑡𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑

By using the period of the original contract period to obtain the data from it is suggested that this may
reduce one of the criticisms with the Hudson’s Formula and the “fair annual average” in that market
conditions considered when applying the formula would be a closer reflection of those being
compensated for rather than reflecting an average of a period (e.g. three years) prior.

158 Alfred McAlpine Homes North Ltd v Property and Land Contractors Ltd (1995) 76 BLR at 70 and 71

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21 Eichleay Formula
21.1 Original Eichleay Formula
The Eichleay Formula was developed almost parallel to the Hudson’s Formula but in The United States,
however it could also be argued that it is a development of the Hudson’s and Emden Formula lineage.

It has sometimes been said that the Eichleay Formula is more accurate than the Hudson’s or Emden
formulae, however this is not necessarily the case. The accuracy comes from the data used. It is
however suggested that the Eichleay may produce a result which is closer to the nature of the loss being
claimed.

The Eichleay case was a case before the Armed Services Board of Contract Appeals in the United States
of American in 1960 and was an appeal for works comprised the construction of Nike missile sites near
Pittsburgh, Pennsylvania. All issues had been settled by the parties with the exception of how to
calculate home office overheads. During the appeal Eichleay as the appellant proposed that they be
compensated using the following process:

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐵𝑖𝑙𝑙𝑖𝑛𝑔𝑠
“1. 𝑇𝑜𝑡𝑎𝑙 𝑏𝑖𝑙𝑙𝑖𝑛𝑔𝑠 𝑓𝑜𝑟 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑝𝑒𝑟𝑖𝑜𝑑
× 𝑇𝑜𝑡𝑎𝑙 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑓𝑜𝑟 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑝𝑒𝑟𝑖𝑜𝑑
= 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑎𝑙𝑙𝑜𝑐𝑎𝑏𝑙𝑒 𝑡𝑜 𝑡ℎ𝑒 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡
𝐴𝑙𝑙𝑜𝑐𝑎𝑏𝑙𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
2. = 𝐷𝑎𝑖𝑙𝑦 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑
𝐷𝑎𝑦𝑠 𝑜𝑓 𝑝𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒
3. 𝐷𝑎𝑖𝑙𝑦 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 × 𝑁𝑜. 𝑑𝑎𝑦𝑠 𝑑𝑒𝑙𝑎𝑦 = 𝐴𝑚𝑜𝑢𝑛𝑡 𝐶𝑙𝑎𝑖𝑚𝑒𝑑”

The Government on the other hand based its calculations on a ration of the direct excess costs allowed
on the suspension claim against the Contracting Enterprises direct costs for the full year the works were
being undertaken in.

It was noted by Colonel MacLeod that:

“The problem out of which this dispute arises is how to allocate home office overhead expenses
incurred during a period of suspension of work. These expenses continue during temporary or
partial suspensions, and it was in this case not practical for the contractor [CE] to undertake
the performance of other work which might absorb them. There is no exact method to determine
the amount of such expenses to be allocated to any particular contract or part of a contract. It
has been held a number of times that it is not necessary to prove a specific amount, but only to
determine a fair allocation for the purpose of compensating a contractor [CE] for delay by the
Government.”159

Colonel MacLeod went on the describe the methodology and how it was much older than this particular
case:

“Appellant has based its claim on an allocation of the total recorded main office expense to the
contract in the ratio of contract billings to total billings for the period of performance. The
resulting determination of a contract allocation is divided into a daily rate , which is multiplied
by the number of days of delay to arrive at the mount of the claim. This method of computation

159 Eichleay Corporation v United States ASBCA No. 5183, 60-2 BCA (CCH) ¶2688 (1960)at 10

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relies primarily on the duration of the suspension as the criterion for allocating the contract
expenses of the main office. The same formula has been used by the Court of Claims in Fred R.
Combs Co. v. United States, 103 C. 013. 1715181, 183-1816 (19555; Houston Ready-Cut
House Co. v. United States, (C. Cls. 1951) 96 Fed. Supp. 629, 119 C. Cls. 120, 172-173, 192-
193 (1951).”160

The Government challenged the methodology, firstly on the basis that there was no increase in overhead
rate proven to have been incurred during the suspension period and second, the allocation does not
reflect the facts. However Colonel MacLeod found that:

“It has, however, been sufficiently demonstrated by the mere fact of prolongation of the time of
performance, and the continuation of main office expenses, that more of such expenses were
incurred during the period of performance than would have been expected for the
suspension…..The principle question is, how much of the excess must be properly allocated to
these contracts.”161

Finally Colonel MacLeod concluded that:

“In accordance with these considerations, we conclude that the appellant’s method of
computation offers a realistic method of allocation of continuing home office expenses, which
has been approved in cases similar to this one.”162

The principle difference between the Emden Formula and the Eichleay Formula is that the Emden takes
an annual average percentage of overheads to turnover, whereas the Eichleay Formula looks at the
contract period as a whole by firstly deriving a percentage of the value of the subject project to the value
of all project billings during the project duration and then multiplying this by the value of the overheads
incurred during this same period. The other important difference is that the Eichleay Formula does not
include any assessment for loss of profit.

The Eichleay Formula is not an accounting formula as such and is based on six assumptions as identified
by David G Anderson in his Master Thesis and quoted in the in Navigant Paper; Practical Problems
with Pricing Delay Using Eichleay:

“1. That a proportional relationship exists between contract billings and fixed indirect costs.
This is a questionable presumption. Anderson notes that contract billings are rarely used as
the base for distribution of indirect costs because “contract billings” is the cost of sales plus
profit. As the amount of profit included in contract billings varies by contract they are not
necessarily directly proportionate between the contract billings and the indirect cost pool, as
is assumed in the Eichleay Formula.

2. That the indirect cost pool does not include any variable costs. Again, this is an assumption
that may or may not be correct. Even home office costs, which are typically fixed costs,
sometimes contain variable costs. “To the extent that a claim includes expenses that vary over

160 Eichleay Corporation v United States ASBCA No. 5183, 60-2 BCA (CCH) ¶2688 (1960)at 10
161 Eichleay Corporation v United States ASBCA No. 5183, 60-2 BCA (CCH) ¶2688 (1960)at 11
162 Eichleay Corporation v United States ASBCA No. 5183, 60-2 BCA (CCH) ¶2688 (1960)at 12

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time, the Eichleay Formula does not reliably measure the Contractor’s [CE] actual loss.”163
Home office costs and indirect cost pools should be carefully examined to identify and remove
such variable costs.

3. That the Contractor [CE] during delay period does not perform any substituted work. This
too should be closely examined. The fact that the Contractor[CE] cannot take on another
project the same size as the delayed or suspended contract does not necessarily mean that the
Contractor’s [CE] work force was idled entirely and provided no benefit to the Contractor[CE].
Substituted work mitigates the Contractor’s [CE] damages and is not accounted for in the
Eichleay Formula,

4. That the Contractor [CE] was working at full capacity during the entire period of contract
performance. This is an assumption that may or may not be true and which needs to be
examined carefully. If a Contractor [CE] has one large contract underway when a second,
government contract is awarded, and then, during performance of the second government
contract the larger contract completes, the Contractor [CE] does not win another contract to
replace it and the government contract is delayed or suspended, then the Contractor’s
compensation is increased. However, the increased compensation has nothing to do with the
government-caused delay.

5. That the effect of the delay on the Contractor [CE] is the same, regardless of when the delay
occurs. This may or may not be true and needs to be examined closely. If, in a northern climate,
the delay occurs during a winter period when the Contractor [CE] is less productive and has
fewer personnel in the field, may have less impact on the Contractor than a delay which occurs
during the summer when larger and more productive forces are in the field. The Eichleay
Formula, however, compensates the Contractor [CE] the same in both cases.

6. That the period of contract performance is an acceptable base period for accumulating fixed
indirect costs. That is, this period is representative of the Contractor’s [CE] fixed indirect costs.
This presumption is more likely to be accurate when a Contractor [CE] is operating under
normal and relatively stable business conditions. However, in times of economic turbulence the
degree to which costs may be fixed varies. The Eichleay Formula does not deal with this sort
of accounting sensitivity.”164

There is some suggestion that whilst particularly in the United States that this formula is only applicable
to government contracts, it has been suggested that it is useful for private contracts as well. For instance
the SCL Protocol165 states that:

“In the limited circumstances where a formula is to be used, the Protocol prefers the use of
the Emden and Eichleay formula. However, in relation to the Eichleay formula, if a significant
proportion (more than, say, 10%) of the final contract valuation is made up of the value of
variations, then it will be necessary to make an adjustment to the input into the formula, to take

163 Home Office Overhead as Damage for Construction Delays, 17 Georgia Law Review 761, 7904 (1983). See also,
Salt Lake City Contractors, VABCA 1362, 80-2 BCA 14713 at 72,559 (1980). Requoted in Navigant Paper;
Practical Problems with Pricing Delay Using Eichleay, 2017
164 Navigant Paper; Practical Problems with Pricing Delay Using Eichleay, 2017
165 Society of Construction Law, Delay and Disruption Protocol (2nd Edition, Society of Construction Law, February
2017) at 2.11 of Guidance Part C: Other Financial Heads of Claim, page 55

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account of the fact that the variations themselves are likely to contain a contribution to head
office overheads and profit.”

Appendix A of the SCL Protocol goes on to describe the Eichleay formula as:

Step 1: establish the head office overhead costs attributable to the contract as follows: divide
the final contract sum (excluding the claim for head office overhead) by the total revenue for
the contract period, then multiply the result by the total head office overhead costs incurred
during the actual period of performance of the contract.

Step 2: divide the figure resulting from Step 1 by the number of days of actual performance of
the contract, to establish a daily rate.

Step 3: Multiply the figure resulting from Step 2 by the number of days compensable delay.

Thus:

Step 1 involves the apportionment of the subject contract to the Contracting Enterprise as a whole. It
does this by determining the value of the subject contract to the income of the enterprise. This is
expressed as:

𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒

The period of assessment for the original formula is the actual period of the Contract being the original
period plus any Extensions of Time granted to the Contracting Enterprise.

Step 2 then apportions the value of the Contracting Enterprise’s overheads over a period by the
apportionment found in Step 1.

The resultant of Step 2 is then divided by the Contract Duration (Actual duration in the original formula)
to derive a daily rate to apply to the duration of the Extension of Time.

The formula was originally expressed in Eichleay Corporation v United States:166

1
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑏𝑖𝑙𝑙𝑖𝑛𝑔𝑠
× 𝑇𝑜𝑡𝑎𝑙 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑓𝑜𝑟 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑒𝑟𝑖𝑜𝑑
𝑇𝑜𝑡𝑎𝑙 𝐵𝑖𝑙𝑙𝑖𝑛𝑔𝑠 𝑓𝑜𝑟 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑒𝑟𝑖𝑜𝑑

= 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐴𝑙𝑙𝑜𝑐𝑎𝑏𝑙𝑒 𝑡𝑜 𝑡ℎ𝑒 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡

166 Eichleay Corporation v United States ASBCA No. 5183, 60-2 BCA (CCH) ¶2688 (1960) at page 5

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𝐴𝑙𝑙𝑜𝑐𝑎𝑏𝑙𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
= 𝐷𝑎𝑖𝑙𝑦 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑
𝐷𝑎𝑦𝑠 𝑜𝑓 𝑝𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒

3
𝐷𝑎𝑖𝑙𝑦 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑥 𝑁𝑜. 𝐷𝑎𝑦𝑠 𝐷𝑒𝑙𝑎𝑦 = 𝐴𝑚𝑜𝑢𝑛𝑡 𝑐𝑙𝑎𝑖𝑚𝑒𝑑

To harmonize this formula:

𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝐴𝑐𝑡𝑢𝑎𝑙

( ) × 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠: 𝐴𝑐𝑡𝑢𝑎𝑙
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝐴𝑐𝑡𝑢𝑎𝑙
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛: 𝐴𝑐𝑡𝑢𝑎𝑙

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦
Figure 28: Harmonised Original Eichleay Formula

This formula was developed in the United States by the Armed Services Board of Contract Appeals in
Eichleay Corporation v United States167. The formula is a three step process which was accepted by
the court as being a reasonable way of determining head office overheads as noted above in the SCL
Protocol.

In the UK, the formula has gained some use in cases such as Alfred McAlpine Homes North Ltd. v
Property & Land Contactors, Ltd.168. In this decision, J. Lloyd QC said:

“… that there may be some loss as a result of the event complained of so that, in the case of
delay to the completion of a construction contract, there will be some under recovery towards
the cost of fixed overheads as a result of the reduced volume of work occasioned by the delay,
but this state of affairs must of course be established as a matter of fact. If the Contractors
overall business is not diminished during the period of delay so that whether, for example, as
a result of an increase in the volume of work on the contract in question arising from variations
etc, … there will be a commensurate contribution towards the overheads which offsets any
supposed loss, or if, as a result of other work, there is no reduction in overall turnover so that
the cost of the fixed overheads continues to be met from other sources, there will be no loss
attributable to the delay … this aspect is brought out in the comparable proposition that [C]
has to show that there were no means of reducing the Unabsorbed cost of the fixed overheads
in the circumstances in which he found himself as a result of the events giving rise to the delay.
Where the Contractors is busy and is taking on work all the time it will probably not be possible
to demonstrate the effect to which I have referred. Furthermore, it has to be borne in mind that
as certain overheads are incurred through thick and thin, so the Contractors head office staff

167 Eichleay Corporation v United States ASBCA No. 5183, 60-2 BCA (CCH) ¶2688 (1960)
168 Alfred McAlpine Homes North Ltd. v Property & Land Contactors, Ltd.168. 76 BLR 59 (1995)

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may not always be constantly occupied because of, for example, the seasonal or cyclical nature
of business in the construction industry. 169”

The SCL Protocol says the following about the Eichleay Formula:

“In the limited circumstances where a head office overhead formula it so to be used, the
Protocol prefers the use of the Emden and Eichleay formula. However, in relation to the
Eichleay formula, if a significant proportion (more than, say, 10%) of the final contract
valuation is made up of the value of variations, then it would be necessary to make an
adjustment in the input into the formula, take account of the fact that the variations themselves
are likely to contain a contribution to head office overheads and profit.”170

This formula uses a two-step process viz. apportioning a Contracting Enterprise’s overheads over the
extended Contract duration by a pro-rata of the billings or payments received for the subject project
against the total billings or payments received by the Contracting Enterprise during the subject period.
The second stage is to divide this apportionment by the extended Contract Duration to derive a daily
rate.

The nature of the formula, however assumes that the Contract has been completed. It cannot be used
in a real time scenario as it requires the final figures and details to be able to apply it.171

The US Federal Courts have consistently come back to using the Eichleay formula for the calculation
of Unabsorbed Head Office Overheads, particularly in situations where a government body has
suspended the works.172 In doing this, the US Courts have developed two conditions precedent for this
to occur, the first being that the Contracting Enterprise must have been suspended and the second is that
due to this suspension and the possibility of having to resume the original Works, the Contracting
Enterprise was unable to obtain replacement projects able to support the Head Office Overheads.173

To demonstrate that for the Contracting Enterprise is on “standby”, the “standby” period needs to be
undetermined and not for a fixed period, however the Contracting Enterprise needs to be ready to
resume the Works with little notice.174

The second condition precedent for demonstrating an entitlement to use the Eichleay formula in this
jurisdiction of the inability to obtain replacement work is linked to the first in that the courts have found
that where a Contracting Enterprise has been suspended and is required to maintain a readiness to
resume there is a prima facie case for the recovery of Unabsorbed Head Office Overheads.175 However

169 Alfred McAlpine Homes North, Ltd. v Property & Land Contactors, Ltd 76 BLR 59 (1995) at 87
170 Society of Construction Law, Delay and Disruption Protocol (2nd Edition, Society of Construction Law, February
2017) at 2.11 of Guidance Part C: Other Financial Heads of Claim, page 55
171 Ottesen, Jeffery L and Dignum, Jack L; “Alternative Estimation of Home Office Overehead”, AACE International
Transactions CDR.09, 2003 at CDR.09.2
172 Holloway, Steve; “Construction Claims – Home Office Overhead Claims”, 1999, http://www.hcgexperts.com/home-
office-overhead-claims.php, retrieved 31 August 2017
173
Interstate Gen. Gov’t Contractors, Inc. v. West, 12 F.3d 1053, 1056 (Fed. Cir. 1993).
174 Daly Constr. Inc. v. Garrett, 5 F.3d 520, 522 (Fed. Cir. 1993), and Mech-Con Corp v. West, 61 F.3d 883, 887 (Fed.
Cir. 1995).
175 Mech-Con Corp v. West, 61 F.3d 883, 887 (Fed. Cir. 1995)

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this can be challenged by evidence and argument demonstrating that the Contracting Enterprise did not
actually suffer any loss because it was able to manage by reduction of replacement work any potential
loss and expense.

This position was reinforced in Satellite Elec. Co. v. Dalton,176 where the United States Court of
Appeal, Federal Circuit stated that:

“The three elements necessary to recover Eichleay damages are: (1) a government-imposed
delay occurred; (2) the government required the Contractor [CE] to "stand by" during the
delay; and (3) while "standing by," the Contractor [CE] was unable to take on additional work.
Interstate, 12 F.3d at 1056. In 1995, in Mech-Con Corp. v. West, 61 F.3d 883, 886
(Fed.Cir.1995), this court reaffirmed these elements but shifted the burden of production on the
third element to the government:

[W]hen a Contractor [CE] can show that the government required a Contractor [CE]
to remain on "standby" and the government imposed delay was "uncertain," the
Contractor [CE] has established a prima facie case of entitlement to Eichleay formula
damages. The burden then shifts to the government to present rebuttal evidence or
argument showing that the Contractor [CE] did not suffer or should not have suffered
any loss because it was able to either reduce its overhead or take on other work during
the delay.

Mech-Con, 61 F.3d at 886. Despite the shift in the burden of production, the Contractor [CE]
must nevertheless "establish ... (3) that it was unable to take on other work." Altmayer v.
Johnson, 79 F.3d 1129, 1133 (Fed.Cir. 1996).”

Considering the two conditions precedent as a whole then should the Government be able to
demonstrate that it was not impractical for the Contracting Enterprise to obtain replacement work then
they can avoid an entitlement. They key being the ability of the Contracting Enterprise to being able to
obtain replacement work and if it was not able to do so, then it was only as a result of the suspension.

Once a Contracting Enterprise has demonstrated the three conditions precedent, the burden of proof
then shifts to the defense to demonstrate “either: 1) that it was not impractical for the Contractor [CE]
to obtain replacement work during the delay, or 2) that the contactor’s inability to obtain such work,
or to perform it, was not caused by the government’s suspension.”177

The cornerstone to this is that the Contracting Enterprise is not able to predict the duration of the
suspension, but still has to maintain a condition of readiness to resume the works. Of course if the
duration of the suspension is known then the Contracting Enterprise has the ability to reallocate
resources and manage his workforce accordingly. In such an event then the Contracting Enterprise is
able to defray any Unabsorbed Head Office Overheads.

Whilst in the Federal courts in the US, the Eichleay Formula has been accepted almost exclusively in
Federal Contracts,178 the Eichleay formula is not without criticism. The criticism comes generally from

176 Satellite Elec. Co. v. Dalton, 105 F.3d 1418, 1421 (Fed. Cir. 1997)
177 Melka Marine Inc. v United States 187 F.3d 1370 (1999)
178 Melka Marine Inc. v United States 187 F.3d 1370 (1999)

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two areas, firstly, the formula presumes the Contracting Enterprise was actually damaged by incurring
Unabsorbed Head Office Overheads when a project is delayed and secondly the formula does not
provide a reliable estimate of any such damage. In particular in the New York courts, and Berley
Industries, the Court of Appeals of the State of New York found that inter alia:

“The mathematical formula did not fill the void. At not a single point in the equation which it
set up was there a component which represented an actual item of increased costs, whether
attributable to the delay on the city's job or not. The computation it essayed was therefore no
less speculative because it was cast in a mathematical milieu. And, insofar as it was offered as
a substitute for direct evidence of overhead damage, there was no accompanying foundation
from which it could be found that, because of the character of Berley's business, increased
overhead attributable to delay was impossible of proof without the aid of the formula. Nor was
there any attempt to prove that the formula was logically calculated to produce a fair estimate
of actual damages. Absent these preconditions, it was but an unsupported opinion. It did not
serve to expand Berley's ability to recover any more than the reasonable value of any additional
home office expenses it might have been able to prove by other means.”179

In the oft cited case of Berley Industries v City of New York, ,180 the Court of Appeals of the State of
New York raised several criticisms pertaining to the Eichleay Formula. The case concerned heating,
ventilation and airconditioning to the 28th precinct police station and firehouse. Due to several employer
delays the works were delayed by approximately a year over and above the contracted two year duration.
At the two year mark the Contractor had completed approximately 87% of the works, leaving only
approximately $ 60,000 worth of work. At this time the Contactor was also involved in another 11
contracts with a total value of approximately $ 5,800,000.

The matter was heard on appeal and part of the Contractor’s claim was for an increase in home or head
office overheads during the delay period.

Whilst it was acknowledged that when claiming damages it was the injured party that had the burden
of proof to demonstrate the extent of the damage, however recovery of damages will not necessarily be
denied where it is apparent that damages has occurred by the quantum is uncertain. As stated:

“It is relevant to the application of these principles that, in the case before us now, any increase
in home office overhead was not merely hard to measure, but was lacking altogether. True,
unlike job site overhead increases whose relationship to a particular job will usually be capable
of direct proof, the connection between home office overhead increases and delay in a
particular project will more often be indirect. But because proof is indirect does not mean it
does not exist.”181

In Berley, however the Contractor did not try and demonstrate that it had in fact suffered a loss, nor was
there any evidence that proof of the quantum of loss was not available. Instead the Contractor relied on
the use of the Eichleay Formula as evidence of both a loss and quantum. The court found that:

179
Berley Industries, Inc. v City of New York, Appellant. 45 N.Y.2d 683 (1978)
180 Berley Industries, Inc. v City of New York 45 N.Y.2d 683 (1978)
181 Berley Industries, Inc. v City of New York 45 N.Y.2d 683 (1978) at 687

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“The mathematical formula did not fill the void. At not a single point in the equation which it
set up was there a component which represented an actual item of increased costs, whether
attributable to the delay on the city's job or not. The computation it essayed was therefore no
less speculative because it was cast in a mathematical milieu. And, insofar as it was offered as
a substitute for direct evidence of overhead damage, there was no accompanying foundation
from which it could be found that, because of the character of Berley's business, increased
overhead attributable to delay was impossible of proof without the aid of the formula. Nor was
there any attempt to prove that the formula was logically calculated to produce a fair estimate
of actual damages. Absent these preconditions, it was but an unsupported opinion. It did not
serve to expand Berley's ability to recover any more than the reasonable value of any additional
home office expenses it might have been able to prove by other means.”182

The court also stated that the Eichleay Formula did not account for the stage the project was in at the
time, it could have had no work done or be all but completed and the formula would still arrive at the
same answer. The court said:

"The damages computed under the `Eichleay formula' would be the same in this case whether
the plaintiff had completed only 1% or 99% of the job on the scheduled completion date of May
7, 1971. This rather bizarre result is caused by the fact that the `Eichleay formula' focuses on
the length of the delay to the exclusion of many other important factors bearing on actual
damages.”183

It is suggested that this represents a misunderstanding by the court of the nature of the damage the
formula is designed to estimate. Since the formula is designed to estimate the damages to the
Contracting Enterprises business, rather than be project specific, the status of the project is not a factor
in this consideration. Notwithstanding this the court concluded that:

“I can only conclude that the mathematical computations under the `Eichleay formula' produce
a figure with, at best, a chance relationship to actual damages, and at worst, no relationship at
all". Neither at argument nor in its brief did plaintiff deny the implications of this critique.”184

The minority decission which generally agreed with the majority, however did not agree with this
position, Jones J stated that:

“I am in agreement with the majority as to the disposition of this appeal. I cannot concur,
however, in as broad an apparent condemnation of the so-called Eichleay formula as the
majority opinion might be read to express.

In my analysis the Eichleay formula may be a useful and acceptable tool in some cases for
measuring damages when there is an unavoidable inability precisely to allocate items of head-
office expense to a particular construction project. Indeed on the new trial that could prove to
be true in this case.”185

182
Berley Industries, Inc. v City of New York 45 N.Y.2d 683 (1978) at 688
183 Berley Industries, Inc. v City of New York 45 N.Y.2d 683 (1978) at 688
184 Berley Industries, Inc. v City of New York 45 N.Y.2d 683 (1978) at 689
185 Berley Industries, Inc. v City of New York 45 N.Y.2d 683 (1978) at 689-690

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The perception generated by Berley in that the formula would generate the same number regardless of
the status of the project has led to modifications of the formula, the first of which was in Capital Electric
Co. v United States186 which modified the Eichleay Formula on the assumption that the Head Office
Overheads for the original contract period will be consistent with the Head Office Overheads for the
extended period of delayed period. Another modified version was then used in G.S. & L. Mechanical
& Construction, Inc.187 in which the project revenue generated during an extended period was added to
the company revenue during the original contract period.

In the New York courts they went further and looked at what has become known as the Manshul
Formula, the main difference with this formula and the Eichleay family of formulae is the Manshul
Formula includes direct cost whereas the Eichleay formulae do not.

An examination of the decisions criticizing the Eichleay Formulae have, however generally
misunderstood the purpose of the formula in that it is to assess Unabsorbed Head Office Overheads,
not an increase in Head Office Overheads.

186 Capital Electric Co. v United States 729 F. 2d 743 (Fed.Cir., 1984)
187 G.S. & L. Mechanical & Construction, Inc. DOT CAB No. 1640, 86-3 BCA (CCH) ¶ 19,026 (1986)

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21.2 Modified Eichleay Formula – Variation No. 1

As a result of the criticisms in cases such as Berley Industries188, some American courts have sought to
modify the formula to try and address the issues raised.

In Capital Electric Co. v United States 189 and Gregory Construction, Inc.190 the Eichleay Formula was
altered to use the only original contract duration, not the revised contract duration. The American courts
looked at this as there was a feeling the original formula tends to underestimate the overhead rate.

This revision to the formula assumes that the loss and expense for Unabsorbed Head Office Overheads
will be consistent during the original contract duration and extend into the extended contract duration.

Capital Electric Co. v United States191 in this American case, the Contracting Enterprise was prevented
from obtaining further bonding so was unable to bid for additional work but for the delay. It was stated
that inter alia:

“Capital introduced unrebutted evidence that it could not have taken on any large construction
jobs during the various delay periods due to the uncertainty of the delays and (except after the
original contract period, when a major portion of the project had been completed and accepted)
due to the limitation on its bonding capacity.”

In Capital Electric Co. v United States192 it was pointed out that in situations where no work was being
undertaken due to suspension then the project invoicing for the original period may be zero and this
was seen as a flaw in the formula. For this reason the invoicing for the actual contract period was used.

The formula was originally expressed in

[Original formula needed]

To harmonize this formula:

𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠:

( ) ×( )
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦

Figure 29: Harmonised Variation No. 1 of Eichleay Formula

The court in Capital Electric Co. v United States193 when examining the alternative formula also noted
that:

188 Berley Industries, Inc. v City of New York, Appellant. 45 N.Y.2d 683 (1978)
189 Capital Electric Co. v United States 729 F. 2d 743 (Fed.Cir., 1984)
190 Gregory Construction, Inc. ASBCA No. 35,960, 88-3 BCA(CCH) ¶20,934 (1988)
191 Capital Electric Co. v United States 729 F. 2d 743 (Fed.Cir., 1984)
192 Capital Electric Co. v United States 729 F. 2d 743 (Fed.Cir., 1984)
193 Capital Electric Co. v United States 729 F. 2d 743 (Fed.Cir., 1984)

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“We are satisfied that the record does not support the use of the modified Eichleay formula
instead of the Eichleay formula.”

21.3 Modified Eichleay Formula – Variation No. 2

The formula was originally expressed in Capital Electric Co. v United States 729 F. 2d 743 (Fed.Cir.,
1984) as a three step process:

𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒

𝑇𝑜𝑡𝑎𝑙 𝐵𝑖𝑙𝑙𝑖𝑛𝑔𝑠 𝑓𝑜𝑟 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑝𝑒𝑟𝑖𝑜𝑑
+𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐵𝑖𝑙𝑙𝑖𝑛𝑔𝑠 𝑓𝑜𝑟 𝑒𝑥𝑡𝑒𝑛𝑑𝑒𝑑 𝑝𝑒𝑟𝑖𝑜𝑑

× 𝐹𝑖𝑥𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑓𝑜𝑟 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑝𝑒𝑟𝑖𝑜𝑑

= 𝐹𝑖𝑥𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑎𝑙𝑙𝑜𝑐𝑎𝑏𝑙𝑒 𝑡𝑜 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡

𝐹𝑖𝑥𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑎𝑙𝑙𝑜𝑐𝑎𝑏𝑙𝑒 𝑡𝑜 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡

= 𝐷𝑎𝑖𝑙𝑦 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑝𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒

𝐷𝑎𝑖𝑙𝑦 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑥 𝐷𝑎𝑦𝑠 𝐷𝑒𝑙𝑎𝑦 = 𝐴𝑚𝑜𝑢𝑛𝑡 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑎𝑏𝑙𝑒

To harmonize this formula:

𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠:

(𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙) × ( )
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙
+ 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦

Figure 30: Harmonised Variation No. 2 of Eichleay FormulaG.S. & L. Mechanical & Construction,
Inc.194, and Schindler Haughton Elevator Corp.195 similarly to the first variation to the Eichleay
Formula, except it goes further in that it into the mix the contract billings during the extended period to
try and account for the overheads being spread over a longer period of time. This is done to try and
account for loss and expense over a longer period of time presumably to try and derive a fairer figure.

194 G.S. & L. Mechanical & Construction, Inc. DOT CAB No. 1640, 86-3 BCA (CCH) ¶ 19,026 (1986)
195 Schindler Haughton Elevator Corp. GSBCA No. 5390, 80-2 BCA (CCH) ¶ 14,871 (1980)

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21.4 Modified Eichleay Formula – Variation No. 3 (Anderson’s

Modification)196
In Navigant Paper; Practical Problems with Pricing Delay Using Eichleay, 2017, referring to Anderson
D.G., “Recovery of Indirect Costs in the Pricing of Equitable Adjustments and Terminations for
Convenience”, LL.M. Thesis, The National Law Center, George Washington University, Washington,
D.C., May, 1988, suggested a further modification or version of the Eichleay Formula. He expressed
it as:

𝐷𝑒𝑙𝑎𝑦𝑒𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 ′ 𝑠𝑉𝑎𝑙𝑢𝑒 𝑓𝑜𝑟 𝑛𝑜𝑟𝑚𝑎𝑙 𝑝𝑒𝑟𝑖𝑜𝑑

𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑙𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡𝑠 𝑓𝑜𝑟 𝑁𝑜𝑟𝑚𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

× 𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 ℎ𝑜𝑚𝑒 𝑜𝑓𝑓𝑖𝑐𝑒 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠 𝑓𝑜𝑟 𝑑𝑒𝑙𝑎𝑦 𝑝𝑒𝑟𝑖𝑜𝑑

= 𝐴𝑙𝑙𝑜𝑐𝑎𝑏𝑙𝑒 𝐻𝑂𝑂𝐻
To harmonize this formula:

𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠:

( ) × ( )
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐷𝑒𝑙𝑎𝑦
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦
Figure 31: Harmonised Variation No. 3 of Eichleay Formula

21.5 Eichleay Comparison

It has been suggested that there may be more than nine different version of the Eichleay Formula. The
differences being the period over which the data used is calculated or whether the planned or actual
head office overheads should be used.197 It is also suggested that the original Eichleay Formula is
conservative in that it may under estimate the damages as it looks at the original contract duration and
also the delay period whereas many of the modified versions are more aggressive in that they look at
the original contract duration to divide the apportionment by to derive a daily rate.

Appendix A of the SCL Protocol goes on to describe the Eichleay formula as a three step process:

196 Navigant Paper; Practical Problems with Pricing Delay Using Eichleay, 2017, referring to Anderson D.G.,
“Recovery of Indirect Costs in the Pricing of Equitable Adjustments and Terminations for Convenience”, LL.M.
Thesis, The National Law Center, George Washington University, Washington, D.C., May, 1988.
197
Ibbs, William, Baker, Benjamin and Burchhardt, Fiona; Process Model for Identifying and Computing Allowable
Home Office Overhead Cost Claims, Journal of Legal Affairs and Dispute Resolution in Engineering and
Construction, American Society of Civil Engineers, 2014

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Step 1: establish the head office overhead costs attributable to the contract as follows:
divide the final contract sum (excluding the claim for head office overhead) by the total
revenue for the contract period, then multiply the result by the total head office
overhead costs incurred during the actual period of performance of the contract.

Step 2: divide the figure resulting from Step 1 by the number of days of actual
performance of the contract, to establish a daily rate.

Step 3: Multiply the figure resulting from Step 2 by the number of days compensable
delay.

Step 1 is really in itself two sub-steps being viz.:

Step 1a: establish the head office overhead costs attributable to the contract as follows:
divide the final contract sum (excluding the claim for head office overhead) by the total
revenue for the contract period.

Step 1b: multiply the result by the total head office overhead costs incurred during the
actual period of performance of the contract.

This reference is a clear reference to the Eichleay Formula in its original format. As it uses the actual
period, that is, the original Contract duration plus any Extension of Time awarded.

To use the Contract period invoices in Step 1a of the formula it has been suggested has an element of
hindsight and also ignores other variables which may distort such a comparison. 198 The other side of
the Atlantic must have heard Duncan Wallace QC as some jurisdictions have attempted to modify the
formula to account for these inconsistencies and issues. Wallace goes on to state, inter alia:

“It is suggested that comparison of delayed contract’s contract price with the contract prices
of all other current contracts at the time of tender (or at the beginning of the period of delay)
might be a somewhat more realistic assessment of the relative earning capacity of the particular
delayed contract’s organization. Again, though the use of total fixed overheads of the
enterprise during the contract period is the first stage of the formula implies a similar
possibility of distortion (and might also be difficult to abstract by comparison, for example,
with the average figures for the last three accounting years before tendering, adjusted to the
length of the contract period) the approach of this part of the fomula, particularly in a period
of inflation, will certainly represent more closely than the arbitrary figures suggested in
Hudson as the percentage return which the contract organization will need to earn at the end
of the contract period. These are, however relatively minor points of criticism.” 199

Some American courts have also criticized the formula, for instance in Berley Inds. v. City of NY200

198 Wallace, Ian Duncan; Construction Contracts Principles and Policies in Tort and Contract, Volume 1, Sweet and
Maxwell, 1986, Page 129, Paragraph 8-31
199 Wallace, Ian Duncan; Construction Contracts Principles and Policies in Tort and Contract, Volume 1, Sweet and
Maxwell, 1986, Page 129, Paragraph 8-31
200 Berley Inds. v. City of NY, 45 NY 2d 683 - NY: Court of Appeals 1978 45 N.Y.2d 683 (1978)

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“At not a single point in the equation which it set up was there a component which represented
an actual item of increased costs, whether attributable to the delay on the city's job or not. The
computation it essayed was therefore no less speculative because it was cast in a mathematical
milieu. And, insofar as it was offered as a substitute for direct evidence of overhead damage,
there was no accompanying foundation from which it could be found that, because of the
character of Berley's business, increased overhead attributable to delay was impossible of
proof without the aid of the formula. Nor was there any attempt to prove that the formula was
logically calculated to produce a fair estimate of actual damages. Absent these preconditions,
it was but an unsupported opinion. It did not serve to expand Berley's ability to recover any
more than the reasonable value of any additional home office expenses it might have been able
to prove by other means.

……

The case before us readily reveals how the mechanical imposition of a formula akin to the one
advanced by the plaintiff can all too easily bring a harsh daily penalty when only compensatory
damages are warranted or even when the doctrine of damnum absque injuria201 is in order. For
all practical purposes, it would completely ignore the safeguards against overreaching and
arbitrariness to which the law of evidence has long been committed. As Justice (now Presiding
Justice) MURPHY pointed out in his dissent below, "The damages computed under the
‘Eichleay formula’ would be the same in this case whether the plaintiff had completed only 1%
or 99% of the job on the scheduled completion date of May 7, 1971. This rather bizarre result
is caused by the fact that the ‘Eichleay formula’ focuses on the length of the delay to the
exclusion of many other important factors bearing on actual damages. If, on May 7, 1971, the
plaintiff was merely required to spend $100 to complete the job, the ‘Eichleay formula’ would
still require that the defendant pay $19,262 for the 335-day delay I can only conclude that the
mathematical computations under the ‘Eichleay formula’ produce a figure with, at best, a
chance relationship to actual damages, and at worst, no relationship at all". Neither at
argument nor in its brief did plaintiff deny the implications of this critique.”

It is suggested, however the issues raised here is due to a lack of understanding between the difference
of actual loss and loss of opportunity and this can be seen in other decisions.

In the American case of Berley Industries, the New York courts strongly criticized the use the Eichleay
Formula saying it was done so “largely without analysis and almost as a matter of administrative
convenience.”202 It went on to state that

It is fundamental to the law of damages that one complaining of injury has the burden of
proving the extent of the harm suffered…Speculation or conjecture will not suffice.203

201 Latin translation to “Loss without injury”

202 Berley Industries, Inc. v City of New York, Appellant. 45 N.Y.2d 683 (1978) at 283
203 Berley Industries, Inc. v City of New York, Appellant. 45 N.Y.2d 683 (1978) at 282-283

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In this particular case the court found that the Contractor had failed to establish “that the delay caused
an increase in home office activity or expense of any kind.”204 In particular the court was critical at the
apparent lack of consideration to the amount of work left under the contract, it stated that:

“damages computed under the ‘Eichleay formula’ would be the same in this case whether the
plaintiff had completed only 1% or 99% of the job on the scheduled completion date.”205

In Washington state in the case Golf Landscaping, Inc206 looked at the New York decision and criticized
it as being a complete misstatement of what unabsorbed head office overheads were and what the
Eichleay Formula was trying to achieve. According to this court the Berley Industries case looked at
the lack of proof of extended head office overheads rather than unabsorbed head office overheads. It
stated that:

“In a claim for unabsorbed overhead, the relevant inquiry is if the delay prevented the
Contractor from obtaining contracts during the delay period that would have ‘absorbed’ the
ongoing overhead expense. Whether any additional overhead expenses were incurred is
irrelevant.”207

On a similar basis, in the unpublished California Court of Appeals decision of W.B. Constr. v.
Mountains Comm. Hosp. Dist. 208 questioned the use of the Eichleay Formula in an appeal upon whether
or not the Contracting Enterprise had the right to present evidence of extended or unabsorbed head
office overheads.209 The court affirmed the decision of the lower court saying that the Contracting
Enterprise had failed to present evidence that it was placed on standby and that it was unable to obtain
additional work as a result of the delay.210 It was also noted that the Eichleay Formula had not been
adopted by any Californian court to date and questions whether it should be.211 In doing so the court
quoted a paper entitled Public Works Contracts: Disputes and Remedies212which stated that:

204 Berley Industries, Inc. v City of New York, Appellant. 45 N.Y.2d 683 (1978) at 283
205 Berley Industries, Inc. v City of New York, Appellant. 45 N.Y.2d 683 (1978) at 284
206 Golf Landscaping, Inc., 696 P.2d
207 Golf Landscaping, Inc., 696 P.2d at 593.
208 W.B. Constr. v. Mountains Comm. Hosp. Dist., 2005 Cal. App. Unpub. LEXIS 5124, at *1 (Cal. Ct. App. Jun. 13,
2005) cert. denied in W.B. Constr. v. Mountains Comm. Hosp. Dist., 2005 Cal. LEXIS 10642, at *1 (Sept. 21, 2005).
As reported in Estis, Dennis A., Hagan, Mary Beth, Terrell, Dorothy E.; Making Dollars & Sense of Construction
Damages, Delay Damages – What’s Hot, What’s Not, American Bar Association, Forum on the Construction
Industry, January 31 & February 1, 2013, Waldorf Astoria Naples Hotel, Naples, Florida
209 W.B. Constr. v. Mountains Comm. Hosp. Dist., 2005 Cal. App. Unpub. LEXIS 5124, at *1 (Cal. Ct. App. Jun. 13,
2005) cert. denied in W.B. Constr. v. Mountains Comm. Hosp. Dist., 2005 Cal. LEXIS 10642, at *1 (Sept. 21, 2005).
As reported in Estis, Dennis A., Hagan, Mary Beth, Terrell, Dorothy E.; Making Dollars & Sense of Construction
Damages, Delay Damages – What’s Hot, What’s Not, American Bar Association, Forum on the Construction
Industry, January 31 & February 1, 2013, Waldorf Astoria Naples Hotel, Naples, Florida
210 W.B. Constr. v. Mountains Comm. Hosp. Dist., 2005 Cal. App. Unpub. LEXIS 5124, at *1 (Cal. Ct. App. Jun. 13,
2005) cert. denied in W.B. Constr. v. Mountains Comm. Hosp. Dist., 2005 Cal. LEXIS 10642, at *1 (Sept. 21, 2005).
at 25-26
211 W.B. Constr. v. Mountains Comm. Hosp. Dist., 2005 Cal. App. Unpub. LEXIS 5124, at *1 (Cal. Ct. App. Jun. 13,
2005) cert. denied in W.B. Constr. v. Mountains Comm. Hosp. Dist., 2005 Cal. LEXIS 10642, at *1 (Sept. 21, 2005).
at 26
212 Id. at **26-27 (quoting 1 Acret, Cal. Constr. Contracts & Disputes (Cont. Ed. Bar 3d ed. 1999) Public Work
Contracts: Disputes and Remedies, § 4.67, p. 409).

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“Fundamentally, the Eichleay formula creates a rate for home office overhead and allocates
it to projects in a manner that is independent of causation. For example, Contractors having
a large amount of overhead and few projects will generally post a greater daily rate for home
office overhead under the formula than an efficiently run firm with many projects and
proportionately lower overhead. As a result, Contractors [CE] working under the formula
could be rewarded for inefficient or extravagant use of home office overhead.”213

Some criticism of the Eichleay Formula has led to some courts trying to modify it.

Notwithstanding this, there are now three versions of the Eichleay formulae, being the original and two
alternative versions, all contain three distinct sections which can be compared to steps 1 and 2 of what
is described in the SCL Protocol. These sections are:

1) Apportioning of the project to the company’s turnover;

2) Determination of the company’s overheads; and
3) Conversion to a daily rate

Where the three formulae differ is the period in which the variables are derived from as can be seen
from the table below:

Original Contract period

Extension of Time

Original Formula
Project Invoicing
Company Revenue
Company Overheads
Duration

Alternative Version 1 Formula

Project Invoicing
Company Revenue
Company Overheads
Duration

Alternative Version 2 Formula

Project Invoicing
Company Revenue
Project Invoicing +
Company Overheads
Duration

Alternative Version 3 Formula

Project Invoicing

213 Id. at **26-27 (quoting 1 Acret, Cal. Constr. Contracts & Disputes (Cont. Ed. Bar 3d ed. 1999) Public Work
Contracts: Disputes and Remedies, § 4.67, p. 409).

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Company Revenue
Company Overheads
Duration
Figure 32: Eichleay Variations

[double check table above]

21.6 Apportionment of Project to Company’s Turnover

The original Eichleay Formula apportions the project to the Company’s turnover by comparing the
project invoicing to the total company’s revenue for the actual period, or the original period plus any
employer delay event Extension of Time.

In Version 1 of the Eichleay Formula the apportionment is the projects invoicing to the actual period
compared to the company’s revenue during the original period. The reasoning for this appears to be
that whilst the project cash flow is effectively stretched as a result of an Extension of Time, you should
compare it to the period in which it should have occurred i.e. the original Contract duration.

The second new version of the Eichleay Formula again keeps the project turnover to the actual period,
however it is compared to the company’s revenue over the original period plus any invoicing for the
subject project during the Extension of Time period. This would appear to have been done to account
for the change in cash flow.

21.7 Determination of a Company’s Overheads

The original version of the formula uses the Company’s overheads incurred during the actual period,
being the original period of delay plus any Extension of Time awarded. In the two subsequent versions
of the formula, this has been changed to the original period. It is assumed this is because it accounts
closer to what should have happened rather than what actually occurred.

21.8 Conversion to a Daily Rate

The original formula divides the resultant by the actual contract period, whereas the revised versions us
the original contract versions. It is suggested this change was, as noted above, to more closely resemble
what should have happened on a project, rather than what did occur.

21.9 Comparison with Hudson’s and Emden Formulae

The Emden Formula assumes the whole subject project is contributing at a uniform rate during the
original duration of the Contract to the Enterprises overall Head Office Overheads. This rate is assumed
to be consistent with the allowance contained within the Contracting Enterprise’s original tender or bid
and is also assumed to be a typical contribution from all the Contracting Enterprise’s projects.

The Eichleay Formula is based on that assumption that a fictitious projects contribution is uniformly
being made to an enterprises Head Office Overheads during the whole performance of the contract
during a fictitious actual contract period. This is a situation that hardly ever mirrors reality and is a

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fiction on a fiction. This is one of the reasons why the Eichleay Formula was cast aside in Berley
Industries, Inc. v City of New York, Appellant.214

All basic structure of all three formulae have a two stage process, viz. step 1 determining the apportion
of overheads attributable to the subject project and step 2 applying this to the number of day’s Extension
of Time.

21.9.1 Apportioning the allocable Unabsorbed Head Office Overheads

The original Hudson’s Formula used the percentage in the contract and then a simple ratio of the
contract sum over the contract duration to get a daily rate, or:

𝑃𝑙𝑎𝑛𝑛𝑒𝑑 𝐻𝑒𝑎𝑑 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑖𝑛𝑐𝑙. 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑠 𝑎 %

𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚

×
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

The assumption was that the percentage would be contained within the contract. However the
percentage for profit and overheads contained within most contracts was for the adjustment of variations
or provisional sums. Consequently it was actually not appropriate to use this percentage.

Subsequently the Hudson’s Formula amended to use a “fair annual average” which presumably means
a ratio of head office overheads and profit over the enterprises turnover is:

𝐹𝑎𝑖𝑟 𝐴𝑛𝑛𝑢𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑖𝑛𝑐𝑙. 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑠 𝑎 %

𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚

×
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

Or for ease of comparison:

𝐹𝑎𝑖𝑟 𝐴𝑛𝑛𝑢𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑖𝑛𝑐𝑙. 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑠 𝑎 % × 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚

𝐻𝑒𝑎𝑑 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑜𝑓 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡

=
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

The Emden Formula is similar to the Hudson’s Formula in that it firstly calculates the ratio of profit
and overheads to revenue for the actual period of the Contract before using that ratio to multiply it
against the contract sum expressed as a value per day:

214 Berley Industries, Inc. v City of New York, Appellant. 45 N.Y.2d 683 (1978)

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Unabsorbed Head Office Overheads and Loss of Profit

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑖𝑛𝑐𝑙. 𝑃𝑟𝑜𝑓𝑖𝑡: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚

×
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

Or for ease of comparison:

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑖𝑛𝑐𝑙. 𝑃𝑟𝑜𝑓𝑖𝑡: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

× 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

𝐻𝑒𝑎𝑑 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑜𝑓 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡

=
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

The Eichleay Formula firstly does not look at the enterprises loss of profit, secondly it compares the
invoicing during the actual period to the company revenue over the actual period before apportioning
the company overheads for the actual period. Then this is divided by the actual contract duration to
derive a daily rate.

𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

( ) × 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑
𝐴𝑐𝑢𝑡𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

Or for ease of comparison:

𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

( ) × 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

𝐻𝑒𝑎𝑑 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑜𝑓 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡

=
𝐴𝑐𝑡𝑢𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

Which can also be expressed as:

𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

× 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

𝐻𝑒𝑎𝑑 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑜𝑓 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡

=
𝐴𝑐𝑡𝑢𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

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The Project Invoicing: Actual Period and the Original Contract Sum are, for the purpose of this analysis
the same thing. Therefore, as can be seen the three or four different formulae can be expressed as the
same with the difference being the Contract Duration period used to derive the daily rate.

If the Contractor’s Head Office Overheads are constant and the Contractor’s revenues were also
constant the duration used to undertake the analysis of what the ration of overheads to revenue would
not change. Therefore regardless of the formula used, the result should be the same regardless of
whether or not the Emden or Eichleay Formulae is being used.

21.9.2 Step 1: Same Starting Point

Hudson’s, Emden and Eichleay are the most common formulae put forward for the quantification of
unabsorbed head office overheads. The first step in both Hudson’s and Emden Formulae can be
expressed as unabsorbed head office overheads is:

𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑠𝑢𝑚 × 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 ℎ𝑒𝑎𝑑 𝑜𝑓𝑓𝑖𝑐𝑒 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 %

The average head office overhead % is obtained by either reference to the contract as with the original
Hudson’s Formula or by analysis of the Contracting Enterprises accounts. If by analysis of the
Contracting Enterprises accounts, the accounts for both overheads and revenues are for the same period,
an average in the case of Hudson’s for a selected period or for the contract period in the case of Emden’s.
In this case, the unabsorbed head office overheads formula is then:

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑠𝑢𝑚 ×
𝑅𝑒𝑣𝑒𝑛𝑢𝑒

The first step in the Eichleay formula is similarly time related in the it allocates a portion of the head
office overheads for the period of delay in relation to the delayed projects revenue and the Contracting
Enterprises revenue as a whole for the actual period of the works. Therefore the unabsorbed head office
overheads can be shown thus:

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚
𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 ×
𝑅𝑒𝑣𝑒𝑛𝑢𝑒

If we compare the formulae we can assume that the Contract Sum and the Contracting Enterprises
revenue for the subject period and on the same basis and will for all intensive purpose be the same
regardless of the formulae used.

As can be seen the formulae for Hundson’s, Emdens and Eichleay is therefore substantially the same
with respect to the first step.

21.9.3 Step 2: Different Time Frames

There are two timeframes included in the Hudson’s, Emden and Eichleay Formulae. The first being the
time frame for the ratios to be derived from which as can be seen above is the original contract duration.
The second is the duration used to derive the daily rate being the Original Contract Duration for the
Hudson’s and Emden Formulae and the Actual Contract Duration for the Eichley Formula

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The real differences to the Hudson’s, Emden and Eichleay Formulae is the time frame in which the data
is taken. This is what differentiates the formulae as shown in step 1, however mathematically they are
the same.

There are two time frames built into each formula. The first being the time frame for step 1 above and
the second being the period of analysis of the Contracting Enterprises records.

Emden analyses data from the original contract period, Hudson’s from a selected historical period and
Eichleay from the actual contract period.

With Emden and Hudson’s the formula is not influenced with events or circumstances that may occur
in the delay period. It could be said that there is a fiction in that the delay period is really time associated
with the project the Contracting Enterprise has not been able to secure as a result of the delay of the
subject project.

Eichleay also contains a fiction, although not the same as Emden or Hudson’s as Eichleay looks at the
project performance over the entire period of performance. In this case the fiction is that the project
which the Contracting Enterprise was not able to secure occurred over the entire period of the subject
project including the original time period of the subject project.

With Emden and Hudsons the daily contribution rate is calculated by dividing the project overhead by
the original time period. This, of course, assumes that the subject projects overhead occurs uniformly
across the original time period.

With Eichleay this distribution of overhead contribution occurs over the original contract period plus
the delay period on a uniform basis. It could be argued that this adds a fiction upon a fiction.215

21.9.4 Step 3: Original Duration or Actual Duration

The final step in all three formulae involves multiplying the daily rate by the delay period to arrive at
the estimated unabsorbed head office overheads amount.

Another flaw appears in the original Eichleay Formula in that as the delay period gets longer,
proportionally the award for unabsorbed head office overheads reduces when compared to the Emden
and Hudson’s formula. This can be demonstrated by mathematically comparing the Eichleay with the
Emden and Hudson formulae.

Assuming that the Contracting Enterprises project income remains constant and there are no variations
on the delayed project the project overhead should be the same regardless of if an Emden of Eichleay
Formula is used.

All formula multiply the project overheads by a ration to apportion the contribution against the delay
period, or of you prefer the unabsorbed head office overhead contribution is:

𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 × 𝐷𝑒𝑙𝑎𝑦 𝑝𝑒𝑟𝑖𝑜𝑑

𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛

215 Sandori, Paul; Contractor’s Head Office Overhead – What is the Right Formula?, the Revay Report Volume 22,
Number 2 June 2003

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Therefore the value of the unabsorbed head office overhead contribution is directly proportional to the
time factored ratio:

𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑
𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛

With the Emden and Hudson Formulae, these time factors can be shown:

𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛

With the Eichleay Formula the time factors can be shown:

𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 + 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑

If we tabulate the time factors against the delay as a %:

Delay as % Emden/
of time Hudson’s Eichleay
0 0.00 0.00
5% 0.05 0.05
10% 0.10 0.09
15% 0.15 0.13
20% 0.20 0.17
25% 0.25 0.20
30% 0.30 0.23
35% 0.35 0.26
40% 0.40 0.29
45% 0.45 0.31
50% 0.50 0.33
55% 0.55 0.35
60% 0.60 0.38
65% 0.65 0.39
70% 0.70 0.41
75% 0.75 0.43
80% 0.80 0.44
85% 0.85 0.46
90% 0.90 0.47
95% 0.95 0.49
100% 1.00 0.50

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If the table above is graphed:

1.00
0.90
0.80
Emden
0.70
Eichleay
0.60
0.50
0.40
0.30
0.20
0.10
0.00
30%

70%

95%
10%
15%
20%
25%

35%
40%
45%
50%
55%
60%
65%

75%
80%
85%
90%

100%
0
5%

Figure 33: Emden and Eichleay Time Comparison

The above graph shows how as the delay period increases, the potential unabsorbed head office
overheads recoverable by a Contracting Enterprise decreases. Conversely as the delay period increases,
the Emden and Hudson Formulae increases constantly and when the delay period equals the original
contract duration, the Contracting Enterprise should, in theory, receive the head office contribution
equal to that originally allowed for in the subject contract.

When the delay period matches the original contract duration then the value of the projected unabsorbed
head office overheads recoverable using the Eichleay Formula is only half that of using Emden’s or
Hudson’s. Therefore, using an Eichleay Formula the maximum award a Contracting Enterprise can
obtain is the original Head Office Overheads allowed for in the subject project.

With the three variations to the Eichleay Formula, this drop off does not occur as the duration assessed
is the original contract duration, not the extended duration.

Whilst the drop off in value over time associated with Eichleay Formula was one of the criticisms made
in Berley [get details] It could also be argued that firstly the “fixed” costs associated with unabsorbed
head office overheads are “fixed” from the point of view that they cannot be reduced quickly. However
over time a Contracting Enterprise can reduce its head office overheads, reducing staff, reducing rent
etc. The issue is that this takes time. Therefore the drop off shown in this analysis can be said to
account for this. The second issue is that the Emden and Hudson’s formula also includes for a loss of
profit. This is a loss of opportunity cost and should compensate the Contracting Enterprise for not being
able to obtain that profit regardless of time.

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22 Manshul Fomula
Manshul Construction Corp v Dormitory Authority,216 a case on appeal in the Supreme Court of the
State of New York which concerned work in connection with the La Guardia Community College, a
division of the City University of New York.

The first issue the court looked at with regards home office overheads was the burden of proof that there
was in fact an increase in home office overheads. The court found that:

“there was evidence in the present case that a delay precipitated engineering or design
problems that called for central staff consideration. We are inclined to accept the courts
finding that there was such damage.”217

described a formula as:

“The trial court arrived at its figure by taking the payment requisitions for the delay period as
indicating that in the delay period Manshul completed approximately 14% of the project, for
which it submitted payment requisitions totaling $895,785. The court said that pursuant to the
contract Manshul was allowed 15% for overhead and profit and an additional 1% for bond
premium. Multiplying the $895,785 by this 16% the court arrived at a figure of $143, 325 which
it awarded as damages for delay.”218

By using the value of the works completed the court noted that this avoided part of the criticism aimed
at the Eichleay Formula. The Court however criticized this formula because:

1) The 15% was for profit and overheads to be applied to variations and this appears to include an
allowance for the 1% bond premium; and

2) Whilst there is grounds for the application of a percentage to cost on a quantum meruit basis,
the $ 895,785 appears to be a contract price, rather than costs, in which case the figure already
includes for profit and overheads.

The court therefore, modified the court of first instances calculation by:

(i) Estimate the actual cost of the work done after the scheduled completion date by deducting
from the contract price the portion allocable to overhead and profit.

(ii) Allocate a percentage of this cost for overhead, and allow this as excess overhead due to delay.

(iii) Add to this a profit percentage based on this excess overhead.

(iv) Award 95% of the figure thus arrived at (the sum of [ii] and [iii]) to plaintiff as delay damages.

216 Manshul Construction Corp v Dormitory Authority 79 A.D.2d 383; 436 N.Y.S. 2d 724 (App. Div.) (1981) LEXIS
9718
217 Manshul Construction Corp v Dormitory Authority 79 A.D.2d 383; 436 N.Y.S. 2d 724 (App. Div.) (1981) LEXIS
9718 at 4
218 Manshul Construction Corp v Dormitory Authority 79 A.D.2d 383; 436 N.Y.S. 2d 724 (App. Div.) (1981) LEXIS
9718 at 5

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The application of the formula can be shown as:

Step 1 the ratio of the Contract Cost to the Contract Cost plus its mark-up or

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐶𝑜𝑠𝑡 %
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡𝑜𝑟 𝐶𝑜𝑠𝑡 + 𝑀𝑎𝑟𝑘 − 𝑢𝑝 %

This assumes that the Contract Cost percentage is 100% and the Contracting Enterprise’s Cost
is the 100% plus the mark-up percentage e.g. if the mark-up% is 8%, then the figure would be
108%. This determines the true mark-up, in the figures here this would be 0.925.

Step 2 the value of the invoicing during the delay period is modified by the factor calculated in
Step 1.

Step 3 the resultant of Step 2 is then multiplied by the normal office overheads percentage.

The resultant is the total apportioned amount for the Unabsorbed Head Office Overheads.

In the case of Manshul Construction Corp v Dormitory Authority,219 a new formula was postulated; it
has also been referred as the Direct Cost Allocation Method and described as:

“(i) Estimate the actual cost of the work done after the scheduled completion date by
deducting from the contract price the portion allocable to overhead and profit.

(ii) Allocate a percentage of this cost for overhead, and allow this as excess overhead due
to delay.

(iii) Add to this a profit percentage based on this excess overhead.”220

This can be shown harmonized as:

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐶𝑜𝑠𝑡 %
𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝐷𝑒𝑙𝑎𝑦 ×
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡𝑜𝑟 𝐶𝑜𝑠𝑡 + 𝑀𝑎𝑟𝑘 − 𝑢𝑝 %

× 𝑁𝑜𝑟𝑚𝑎𝑙 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 %

= 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝐷𝑒𝑙𝑎𝑦

Figure 34: Harmonised Manshul Formula

This is a simple formula which uses the overhead and profit allowance contained within a Contract
(similar to the Hudson’s Formula) whilst also recognizing that the Contract figures include an allowance
for profit and overheads already and this should be adjusted.

219 Manshul Construction Corp v Dormitory Authority 436 N.Y.S. 2d 724 (App. Div.) (1981)
220 Manshul Construction Corp v Dormitory Authority 436 N.Y.S. 2d 724 (App. Div.) (1981) at 391 and 392

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The Manshul Formula is also referred to as the Direct Cost Allocation Method. Unlike other methods,
it does not arrive at a daily rate, but uses ratios of the as-bid head office overheads rate to the cost of
performing the work and applies it to the extended period. In this case, the Appellate Division of the
Supreme Court of the State of New York noted that:

“Plaintiff urged that such damage should be calculated on the basis of the so-called Eichleay
formula (from Eichleay Corp. [60-2 Board of Contract Appeals Decisions, par 2688 (CCH)]).
But the propriety of that formula has been cast into serious doubt by the Court of Appeals
decision in the Berley case (supra). In any event, the trial court found that its application in the
present case resulted in a wholly unrealistic figure. Compare G.R.F., Inc. v Board of Assessors
of County of Nassau (41 N.Y.2d 512, 515): "Pragmatism, however, requires adjustment when
the economic realties prevent placing the properties in neat logical valuation boxes".221

The court also applied a final percentage to the resultant to accommodate for their view that the
Employer was responsible for 95% of the delay period however the Contractor was responsible for 5%,
so they only gave the Contracting Enterprise 95% of the resultant from the calculation.

This formula may be appropriate in cases where a head office is so engrossed in a single project they
are unable to undertake any other work or pursue other opportunities.

The formula does not consider any variances between a Contracting Enterprise’s numerous projects as
it assigns the same percentage to all projects rather the look at differences between a Contracting
Enterprise’s projects and the risk factors assigned to them.

221 Manshul Construction Corp v Dormitory Authority 79 A.D.2d 383; 436 N.Y.S. 2d 724 (App. Div.) (1981) LEXIS
9718 at 5

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23 Ernstrom Formula
This formula assumes that there is a special relationship between labour costs and overhead costs which
can be used to determine head office overhead costs. In essence it assumes that as labour costs increase,
head office overheads costs do so at the same rate. It was developed by J. William Ernstrom and Karl
S. Essler and first put forward in “Beyond the Eichleay Formula: Resurrecting Home Office Overhead
Claims”.222 The process is:

Step 1: Determine the ratio of head office overheads to the Contracting Enterprise’s total labour
costs for the actual period of construction, or:

𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

𝑇𝑜𝑡𝑎𝑙 𝐿𝑎𝑏𝑜𝑢𝑟 𝐶𝑜𝑠𝑡: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

Step 2: Apply this ratio to the labour costs during the delay period.

In The Construction Lawyer, Volume 3, Number 1, winter, 1982, J William Ernstrom and Karl S Essler
proposed an alternative to the Eichleay Formula. They expressed it as:

[Original formula needed]

This can be shown harmonized as:

𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠: 𝐴𝑐𝑢𝑡𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

× 𝐿𝑎𝑏𝑜𝑢𝑟 𝐶𝑜𝑠𝑡𝑠: 𝐷𝑢𝑟𝑖𝑛𝑔 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑
𝑇𝑜𝑡𝑎𝑙 𝐿𝑎𝑏𝑜𝑢𝑟 𝐶𝑜𝑠𝑡: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

= 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑑𝑒𝑙𝑎𝑦

Figure 35: Harmonised Ernstrom Formula

Because this formula looks at ratios, it does not give a daily rate, but an overall value of loss and
expense.

222 The Construction Lawyer, Volume 3, Number 1, Winter, 1982

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24 Carteret Formula
Carteret Work Uniforms, Inc.223 were engaged by the U.S. Army to manufacture overcoats for them
using material supplied by the Army, what was referred to as a “cut, make and trim” contract. A
previous case had settled that increased costs in cutting, stitching, manufacturing overhead and general
and administrative expenses were compensable. The principle contract in this instance was awarded in
March 1951 and included a schedule of when material would be supplied and when the overcoats were
to be delivered. The initial delivery of material occurred on 10 April 1951 and from this the Contracting
Enterprise commenced its manufacturing. Material was then meant to be delivered steadily every 15
days. However the government was not able to meet the supply dates it agreed to.

The Contracting Enterprise was a relatively small organization and this contract was the only contract
it was undertaking from the time it was awarded due to its scale for approximately 9 months. When the
supply of material was interrupted the Contracting Enterprise was able to downsize its workforce by
laying off nonproductive labour, however it kept on their head cutter and clerical staff on a salary basis.

The Contracting Enterprise was successful initially in claiming additional expenses for direct costs
associated with delays in the Army supplying the material, however Carteret later took action to recover
unabsorbed costs. As such this formula was not developed in the construction industry but
manufacturing, although some attempts have been made to apply it to construction. It assumes a
variance in the overhead rates during the delay period and calculates the difference. It then multiplies
this rate differential times the cost of work performed during the delay period. Similar to the Allegheny
Formula and is derived from a similar basis.

The Carteret Formula looks at the difference between the actual overheads during a delay period and
the normal overheads. This may work with manufacturing enterprises with relatively consistent cash
flows; however a Contracting Enterprise has varying cash flows which this methodology fails to
acknowledge. Demonstrating what a normal office overhead is may also be problematic, however it is
suggested that using three years of the enterprise’s accounts to determine an average may go some way
to demonstrating what “normal” may look like.

The case referred to the methodology used to determine the compensation as:

“The evidence shows that the manufacturing overhead rate for June was 38.25 per cent, the
total direct labor dollars for the month of August and September were $22,587.18. The normal
manufacturing overhead expense for these two months should have been ($22,587.18 x 38.25
per cent) $8,639.60. That amount then deducted from the actual total manufacturing overhead
expense incurred in those two months ($21,997.56) fixed the excess manufacturing overhead
expense due to the shut down caused by the Government’s delay to be $13,357.96.

The general and administrative expense for June was 24.55 per cent. By applying that rate to
the total direct labor dollars for the months of August and September ($22,587.18), we have
$5,499.98 as being the normal general and administrative expense for those two months. That
amount then deducted from the actual general and administrative expense for those two months

223 Carteret Work Uniforms, Inc. ASBCA No. 1647, 6 CCF § 61,651-1951 (1954)

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($14,583.88) fixes the excess of general and administrative expense due to the shut down cause
by the Government’s delay to be $9,083.90.” 224

The process is somewhat akin to a measured mile and can be summarized as:

Step 1: Determine the difference between the Actual Office Overheads percentage during the
delay period and the Normal Office Overheads or:

(𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 %: 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑 − 𝑁𝑜𝑟𝑚𝑎𝑙 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 %)

Step 2: Multiply this difference by the Project Invoicing during the delay period

In Carteret Work Uniforms, Inc.225 the chairman of the Armed Services Board of Contract Appeals, Mr
Gilbert Cuneo expressed a new formula:

“The evidence shows that the manufacturing overhead rate for June was 38.25 per cent. The
total direct labor dollars for the months of August and September were $ 22,587.18. The
normal manufacturing overhead expenses for those two months should have been ($22,587.18
x 38.25 per cent) $8,639.60. That amount then deducted from the actual total manufacturing
overhead expense incurred in those two months ($21,997.56) fixed the excess of manufacturing
overhead expense due to the shut down caused by the Government’s delay to be $13,357.96.

The general and administrative expense rate for June was 24.55 per cent. By applying the rate
to the total direct labor dollars for the months of August and September ($22,587.18), we have
$5,499.98 as being the normal general and administrative expense for those two months. That
amount then deducted from the actual general administrative expense for those two months
($14,583.88) fixed the excess of general and administrative expense due to the shut down
caused by the Government’s delay to be $9,083.90.”226

This can be shown harmonized as:

(𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 %: 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑 − 𝑁𝑜𝑟𝑚𝑎𝑙 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 %)

× 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑

= 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑑𝑒𝑙𝑎𝑦

Figure 36: Harmonised Carteret Formula

224 Carteret Work Uniforms, Inc. ASBCA No. 1647, 6 CCF § 61,651-1951 (1954) at 8
225 Carteret Work Uniforms, Inc. ASBCA No. 1647, 6 CCF § 61,651-1951 (1954)
226 Carteret Work Uniforms, Inc. ASBCA No. 1647, 6 CCF § 61,651-1951 (1954) at page 8

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25 Comparative Absorption Rate (CAR) Method

Absorption rate formulas calculate under-absorption by comparing a potential or reasonable overhead
absorption rate against the actual absorption rate for the purpose of calculating the effect of the delay
on the Contractor’s head office overheads absorption.

After the Capital Electric227 and the Berley Industry Inc.228 cases, there have been continued challenges
as to the appropriateness or otherwise to the use of the Eichleay Formula. This has led to the
introduction of two additional alternatives, the Comparative Absorption Rate (CAR) method and the
Allegheny Formula or Burden Fluctuation Method (BFM). The Comparative Absorption Rate method
compares the actual overhead rate incurred by the Contracting Enterprise to what may be a reasonable
overhead rate during the projects impacted duration. Any difference is then applied to the total revenues
of the enterprise for all projects during the same period. The Allegheny Formula or Burden Fluctuation
Method looks at the unabsorbed overheads by calculating the increase in the absorption rates, similar
to the Comparative Absorption Rate method, however it then allocates this increase only on the
remaining projects of the enterprise, not the subject project.229

Accounts and auditors generally understand these methodologies; however several courts have found
that they may be more appropriate for manufacturing enterprises rather than construction enterprises.230

The process for the Comparative Absorption Rate Method is:

Step 1: Calculate the ratio of Potential Total Overheads to the Potential Total Billings or

𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑇𝑜𝑡𝑎𝑙 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠

𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑇𝑜𝑡𝑎𝑙 𝐵𝑖𝑙𝑙𝑖𝑛𝑔𝑠

Step 2: Multiply the ratio found in Step 1 by the Actual Total Billings

Step 3: Deduction the resultant form Step 2 from the Actual Total Overheads

Introduced in

[Original formula needed]

This can be shown harmonized as:

𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑇𝑜𝑡𝑎𝑙 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠

𝐴𝑐𝑡𝑢𝑎𝑙 𝑇𝑜𝑡𝑎𝑙 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 − ( × 𝐴𝑐𝑡𝑢𝑎𝑙 𝑇𝑜𝑡𝑎𝑙 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑)
𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑇𝑜𝑡𝑎𝑙 𝐵𝑖𝑙𝑙𝑖𝑛𝑔𝑠

227 Capital Electric Co. v United States 729 F. 2d 743 (Fed.Cir., 1984)
228 Berley Industries, Inc. v City of New York, Appellant. 45 N.Y.2d 683 (1978)
229
(CAR and BFM). Just, Michael R and Grdgon, Michael J, Home Office Overhead-Recovery in Construction Delay
Claims AACE Transactions, 1992
230 Navigant Paper; Practical Problems with Pricing Delay Using Eichleay, 2017

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= 𝑈𝑛𝑎𝑏𝑠𝑜𝑟𝑏𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑

Figure 37: Harmonised Comparative Absorption Rate Formula

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26 Allegheny Formula or Burden Fluctuation Method (BFM)

Allegheny Sportsware Co., 231, like the Carteret Formula, comes from the manufacturing industry and is
cost based, rather than time. In this particular case, the Contracting Enterprise was engaged on 30 June
1951 to manufacture 35,000 field jackets for the United States Army with delivery scheduled for
September, October and November 1951. The Government was required to furnish the Contracting
Enterprise with material for the manufacture in five batches at 15 day intervals. None of the material
lots were in fact delivered in accordance with the schedule. The Contracting Enterprise had a factory
divided into two sections, a Government section and a non-Government sections. The Contracting
Enterprise did attempt to mitigate the time lost due to the Government’s failure to deliver the materials
on schedule by transferring some non-Government manufacturing to the Government manufacturing
part of the plant, however it was unable to fully untilise the option as the Contracting Enterprise felt it
had to keep the Government section available to fulfil this contract.

This case was heard in the Armed Services Board of Contract Appeals court which found that they:

“agree with the original Government auditor that as stated by him in his report of 19 January
1955, ‘the protraction of contract performance overa longer period, although without change
in direct costs, may occasion a greater overhead allocation to the contract than would
otherwise have been incurred’ and that in this case it did. We are of the opinion that such
increased overhead costs are a proper element of an equitable adjustment under the contract
clauses involved….”232

In America, office overhead costs are sometimes referred to as burden costs, hence the alternate name
applied to this methodology. It is in many ways similar to the Cartaret Methodology in that it attempts
to compare the percentage overheads the business normally applies to the overheads they are forced to
apply to maintain their breakeven point as a result of the subject project. This is then adjusted to an
invoicing comparison between the total company invoicing and the invoicing of the subject project.

In Allegheny the process was described as:

“This figure is predicted on the difference in overhead rates between the actual period of
performance and the original expected period of performance. It does not include any
increases in direct cost, such as costs of training replacement operators or make-up pay
originally included….”233

The process can be summarized as:

Step 1: Calculate the difference between the Actual Office Overheads percentage during the
delay period and the Actual Office Overheads percentage:

(𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 %: 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑 − 𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 %: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑)

Step 2: Multiply this by the Original Contract sum.

231 Allegheny Sportsware Co.ASBCA No. 4163, 58-1 BCA (CCVH) ¶ 1684 (1958)
232 Allegheny Sportsware Co.ASBCA No. 4163, 58-1 BCA (CCVH) ¶ 1684 (1958) at 6
233 Allegheny Sportsware Co.ASBCA No. 4163, 58-1 BCA (CCVH) ¶ 1684 (1958) at pages 4 and 5

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Introduced in Allegheny Sportsware Co.,234 the Armed Services Board of Contract Appeals expressed
a new formula as:

“…figure is predicted on the difference in overhead rates between the actual period of
performance and the original expected period of performance. It does not include any
increases in direct cost, such as costs of training replacement operators or make-up pay
originally included…”235

This can be shown harmonized as:

(𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 %: 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑 − 𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 %: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑)

× 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑠𝑢𝑚

= 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑑𝑒𝑙𝑎𝑦

Figure 38: Harmonised Allegheny Formula or Burden Fluctuation Method Formula

As noted in the Comparative Absorption Rate Method above, this method calculates under-absorption
by comparing a potential or reasonable overhead absorption rate against the actual absorption rate for
the purpose of calculating the effect of the delay on the Contracting Enterprise’s head office overheads
absorption.

This methodology has similar flaws to the Cartaret Methodology in that determining if there is a
difference between normal overheads applicable to the overheads required to be applied can be difficult
to demonstrate, particular with a construction company which a varying cash flow and workload.

234 Allegheny Sportsware Co.ASBCA No. 4163, 58-1 BCA (CCVH) ¶ 1684 (1958)
235 Allegheny Sportsware Co.ASBCA No. 4163, 58-1 BCA (CCVH) ¶ 1684 (1958) at pages 6 and 7

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27 Specific Base Allocation Method (SBAM)

The Specific Base Allocation Method has been said to be the most accurate method of determining
Unabsorbed Head Office Overheads and also the most expensive.236 The key aspect of this method is
that it looks at the unique characteristics of a project and compares them to the various overhead cost
elements.

The principle issue with this method is that it assumes the Contracting Enterprise is collecting the data
in a format required or can afford to reconstruct the data as this is an expensive methodology.

The first step in using this methodology is to create an indirect cost pool which requires the comparison
of the cost relationships of all associated elements.

Overhead items are allocated on a project by project basis on the basis of established percentages of the
overall cost of the overhead costs on the following basis: 237

The process for the Specific Base Allocation Method is:

Step 1: Determine the ratio between the Allocated Item Cost on the subject projects and the
Allocated Item total cost on all projects.

Step 2: Multiple this ratio by the pool account cost

Step 3: Divide this figure by the total number of Contract days

Step 4: Multiple the figure derived in step 3 by the Delay Period.

In their paper Techniques for Calculating Unabsorbed Overhead, 238 Singh and Taam put forward the
Specific Base Allocation Method or SBAM as follows:

𝐴𝑙𝑙𝑐𝑜𝑎𝑡𝑖𝑜𝑛 𝐵𝑎𝑠𝑒 (𝐴𝐵)

= 𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑖𝑜𝑛 𝐼𝑡𝑒𝑚 𝐶𝑜𝑠𝑡 𝑜𝑛 𝐷𝑖𝑠𝑝𝑢𝑡𝑒𝑑 𝐽𝑜𝑏𝑠 ÷ 𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑖𝑜𝑛 𝐼𝑡𝑒𝑚 𝐶𝑜𝑠𝑡 𝑜𝑛 𝐴𝑙𝑙 𝐽𝑜𝑏𝑠

𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑖𝑜𝑛 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑜𝑓 𝑃𝑜𝑜𝑙 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 (𝐴𝐻) = 𝑃𝑜𝑜𝑙 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝐶𝑜𝑠𝑡 × 𝐴𝐵

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 (𝐴𝐷𝑂𝐻) = 𝐴𝐻 ÷ 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑎𝑦𝑠

236 Singh, Amarjit, “Techniques for Calculating Unabsorbed Overhead”, Department of Civil Engineering, University
of Hawaii at Manoa, Thomas Taam, U.S. Army Corps of Engineers, Fort Shafter ASCE Construction Research
Congress 2009 pages 181 -190

237 Recovery of Contractors Head Office Overheads - https://www.lawteacher.net/free-law-essays/contract-

law/recovery-of-contractors-head-office-overheads-contract-law-essay.php accessed 8/8/2017
238
Singh, Amarjit, “Techniques for Calculating Unabsorbed Overhead”, Department of Civil Engineering, University
of Hawaii at Manoa, Thomas Taam, U.S. Army Corps of Engineers, Fort Shafter ASCE Construction Research
Congress 2009 pages 181 -190 – referring to Hewitt R Winning Contract Disputes: Strategiv Planning for Major
Litication, Arthuir Young, Sacramento, CA 1986.

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𝐶𝑙𝑎𝑖𝑚𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡𝑠 = 𝐴𝐷𝑂𝐻 × 𝐷𝑎𝑦𝑠 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦

This can be shown harmonized as:

𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑖𝑜𝑛 𝐼𝑡𝑒𝑚 𝐶𝑜𝑠𝑡 𝑜𝑛 𝐷𝑖𝑠𝑢𝑝𝑡𝑒 𝐽𝑜𝑏𝑠

( ) × 𝑃𝑜𝑜𝑙 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝐶𝑜𝑠𝑡
𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑖𝑜𝑛 𝐼𝑡𝑒𝑚 𝐶𝑜𝑠𝑡 𝑜𝑛 𝐴𝑙𝑙 𝐽𝑜𝑏𝑠
× 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑎𝑦𝑠

Figure 39: Harmonised Specific Base Allocation Method Formula

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28 The Direct Method

In their paper Techniques for Calculating Unabsorbed Overhead,239 Singh and Taam proposed a new
methodology which they refer to as the Direct Method. It is:

𝑃𝑙𝑎𝑛𝑛𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑅𝑎𝑡𝑒 × 𝑃𝑙𝑎𝑛𝑛𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑑𝑒𝑙𝑎𝑦 𝑝𝑒𝑟𝑖𝑜𝑑

= 𝑈𝑛𝑎𝑏𝑠𝑜𝑟𝑏𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠

To harmonize this:

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑟𝑎𝑡𝑒 % × 𝑃𝑙𝑎𝑛𝑛𝑒𝑑 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟: 𝑑𝑒𝑙𝑎𝑦

Figure 40: Harmonised Direct Method Formula

The authors of this paper noted that:

“The calculation of unabsorbed overhead should really not be more complex than this, and this
reflects exactly what the Contractor [CE] would have earned on the home office overhead had
there been no delay or standby. The expected (i.e. planned) production during period of delay can
be known from client-approved Contractor [CE] schedules, the information for which should be
readily available. On complex, high-volume projects, especially those of the Department of
Defense, earned value reports are mandatory, so the expected earnings should be available and
easily acquired. For this particular example, the result of the Direct Method agrees with the
Canadian, Comparative Absorption Rate, the Carteret, and Specific Base Allocation Methods. The
important factor in the “Direct Method” is that the planned earnings are based on the latest
updated schedule. There needn’t be any interference from Total Billings in the calculation of
unabsorbed overhead for a specific project, and the Direct Method has taken this into account.
The Direct Method is much less convoluted than the other methods presented. It consequently
appears evident that attorneys and judges, in their ignorance of construction engineering and
management, have made a simple process as complicated as possible.” 240

239 Singh, Amarjit, “Techniques for Calculating Unabsorbed Overhead”, Department of Civil Engineering, University
of Hawaii at Manoa, Thomas Taam, U.S. Army Corps of Engineers, Fort Shafter ASCE Construction Research
Congress 2009 pages 181 -190

240
Singh, Amarjit, “Techniques for Calculating Unabsorbed Overhead”, Department of Civil Engineering, University
of Hawaii at Manoa, Thomas Taam, U.S. Army Corps of Engineers, Fort Shafter ASCE Construction Research
Congress 2009 pages 181 -190

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29 Total Direct Cost Allocation Method

This methodology is an accounting tool commonly used to allocate a department’s overhead costs to a
production department.

This method could also be used where you have situation with a local office and a regional office you
need to cover. However its accuracy is affected as it ignores the relationship between the two offices
and any assistance the office may give each other so it is not recommended that it be used in this
instance.

By way of an example, if a Contracting Enterprise has 4 projects (a, b, c & d) supported by a head office
(HO) the overheads for these before any reallocation may be:

a 50,000
b 120,000
c 20,000
d 60,000
HO 30,000
Figure 41: Sample Reallocation Table

The allocation of the HO overheads may be:

a b C d HO
HO 15% 50% 20% 10% 5%
Figure 42: Sample Allocation of Head Office Overheads

So the allocation would be:

a b c d
HO 25+50+20+10=95 15/95 50/95 20/95 10/95
Figure 43: Sample Result of Reallocation

Therefore, the allocation would be:

a b c d
Calculation 15/95 x 30,000 50/95 x 30,000 20/95 x 30,000 10/95 x
30,000
Allocation 4,737 15,789 6,316 3,158
Figure 44: Sample Result after Reallocation Table

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30 Hank Laan Alternative Approach

This method appeared in the Australian Construction Law Review241 and was proposed by Hank Laan
of HCL Associates. Mr Laan notes that:

“The underlying premise to the proposed method of calculating company overheads for the
extended period of a contract is that, when a contractor tenders for a project, it allocates an
amount for company overheads to be recovered by that Contract during the “Contract Period”

When the contract period is extended or prolonged, that contract again has to bear its fair
share of the company’s overheads costs during the extended period. Hence, if and to the extent
that the extension of the contract period is due to circumstances for which the contractor is
entitled to claim ‘costs’, and as company overheads by definition constitute a ‘cost’, then it is
necessary to find a means of calculating the appropriate level of company overheads
attributable to the compensable extended contract period.”

This method appeared in the Australian Construction Law Review 242 and was proposed by hank Laan
of HCL Associates. Mr Laan’s formula is:

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐵𝑖𝑙𝑙𝑖𝑛𝑔𝑠
× 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝐵𝑖𝑙𝑙𝑖𝑛𝑔𝑠

= 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑡𝑜 𝑏𝑒 𝐶ℎ𝑎𝑟𝑔𝑒𝑑 𝐴𝑔𝑎𝑖𝑛𝑠𝑡 𝐸𝑥𝑡𝑛𝑑𝑒𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑒𝑟𝑖𝑜𝑑

To harmonize this:

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐵𝑖𝑙𝑙𝑖𝑛𝑔𝑠: 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑

× 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑: 𝐸𝑥𝑡𝑒𝑛𝑑𝑒𝑑 𝑃𝑒𝑟𝑖𝑜𝑑
𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝐵𝑖𝑙𝑙𝑖𝑛𝑔𝑠: 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑

Figure 45: Hank Laan Formula

31 Alternative Real Time Approach

The Alternative Real Time Approach or ARTA is a methodology put forward by Jefferey L Ottesen
and Jack L Dignum in a paper for the AACE in 2003. 243 It was partly in a response to a study being
prepared by the Port of Seattle and the Nielsen-Wurster Group Inc. The genesis seems to be an attempt
to be able to make an equitable assessment of Unabsorbed Head Office Overheads during the progress
of a Contract rather than wait until the completion of a Contract and try and apply an Eichleay Formula.
It still requires the Contracting Enterprise to be able to demonstrate the conditions precedent for an

241 Laan, Hank C, Delay Claims - An Alternative Approach to Calculating Head Office Overheads, 14 ACLR 23-26
242
Laan, Hank C, Delay Claims - An Alternative Approach to Calculating Head Office Overheads, 14 ACLR 23-26
243 Ottesen, Jeffery L and Dignum, Jack L; “Alternative Estimation of Home Office Overehead”, AACE International
Transactions CDR.09, 2003 at CDR.09

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Unabsorbed Head Office Overheads claim including that the Contracting Enterprise has actually
suffered a loss. It is represented by the following formula:

𝐶𝑃(𝑛+30)
𝐻𝑂𝑂𝐻𝐷𝑒𝑙𝑎𝑦 = 𝑥 𝐻𝑂𝑂𝐻𝑤% 𝑥 𝐷𝐷𝑒𝑙𝑎𝑦
𝐷𝑛

Where:

“HOOHDelay = Home office overhead during delay period

CP(n+30) = cumulative subtotal of payments made to the Contracting Enterprise as of a

day of delay (n) plus 30 days (considers a common General Condition that specifies
progress payments will be made within 30 days of becoming due. Thus, payments
made to the Contracting Entperprise up to 30 days after the start day of the owner-
caused delay period would better represent actual payment for progress achieved on
the project)

Dn = number of days lapsed since Contract commenced until the start of delay (cal
days.)

HOOHw% = weighted percentage for allowable HOOH and profit (percentage

established at time of Contract award) including labor, onsite equipment, and
subContractors.

Ddelay = owner-caused delay (in calendar days) to the critical path.”244

244 Ottesen, Jeffery L and Dignum, Jack L; “Alternative Estimation of Home Office Overehead”, AACE International
Transactions CDR.09, 2003 at DCR.09.5

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32 Double Dipping

Once a head office calculation has been made, care needs to be taken so as not to double dip if variations
had already had head office overheads included in their assessment.

In Alfred McAlpine Homes North Ltd v Property and Land Contractors Ltd, HHJ Humphrey Lloyd QC
noted that:

“It must also be established that the Contractor [CE] was unable to deploy resources elsewhere
and had no possibility of recovering costs of the overheads from other sources, e. g. from an
increased volume of the work. Thus such formulae are likely only to be of value if the event is
causing delay is (or has the characteristics of) a breach of contract. . .” 245

245 Alfred McAlpine Homes North Ltd v Property and Land Contractors Ltd (1995) 76 BLR at 71

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33 Calculating Loss of Profit

If the Hudson’s or Emden Formulae are used and include profit, then the loss of profit is accounted for,
however with most of the other formulaic methodologies, loss of profit is not necessarily accounted for.
[methodology]

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34 Applications and Examples

There are a series of factors which can alter the result given by any given formulaic methodology
ranging from the market to the way a Contracting Enterprise structures is company and operates.
However for the purpose of comparison, the following is an example to demonstrate the range of
answers that can result from the different formulae.

α alpha Contracting

Alpha Contractor has entered into a Contract with an, Beta Employer, and suffered a series of delays
resulting in the Contract being as follows:

Original Contract Sum 30,000,000

Variations 2,000,000
Adjusted Contract Sum 32,000,000

Contract Commencement 1 January 2016

Original Duration 366 days
EOT 183 days
Revised Contract Duration 549

Mark-ups
Profit 5%
Overheads 4%
Total 9%

Payments during Original Contract Duration 22,400,000

Payments during EOT 9,600,000
32,000,000
Alpha Contractor also provided the following labour costs:

Enterprise Labour Cost: Actual Period 402,213,236

Project Labour Costs: Delay Period 7,465,326

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Alpha Contractor’s P&L both historically and over the period of the Contract can be summarized as:

Contract
Historical Delay Period
Period
First half of
2013 2014 2015 2016 2017 2017

Contract Revenue 365,879,452 375,222,123 372,524,687 368,987,987 435,658,987 217,829,493

Contract Costs (325,689,785) (330,365,878) (334,897,652) (323,368,772) (388,972,521) (194,486,260)
40,189,667 44,856,245 37,627,035 45,619,215 46,686,466 23,343,233

General and
administrative Expenses (35,897,521) (42,568,789) (48,542,365) (42,336,225) (52,920,281) (26,460,140)
Other Income 25,658,254 26,987,356 28,789,245 32,156,989 33,568,745 16,784,372
Finance costs (8,654,389) (9,254,789) (8,796,542) (11,256,898) (15,659,897) (7,829,948)
Profit for the year 21,296,011 20,020,023 9,077,373 24,183,081 11,675,033 5,837,516
Figure 46: Sample Enterprise P & L

For the purposes of these examples, no adjustments have been made to the profit and loss statement to
account for any potential double claiming of interest or depreciation or other costs which may have
been claimed under other heads of claim. The figures used for the actual delay period or the contract
where these periods do not fit exactly into the profit and loss period can be either a pro-rata of the profit
and loss periods involved or where more detailed accounts are available can be the actual figures from
the Contracting Enterprises accounts. However even where actual figures from the Contracting
Enterprise accounts are used, there may still be a requirement for a pro-rata of the figures to break down,
for instance, a monthly figure into a number of days. There is no preferred way of obtaining the figures
per se, however it should be clear what has been done.

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1.5 Application of variables to formula

34.1.1 Hudson’s Formula

As expressed in Hudson’s Construction & Engineering Contracts 10th edition (1970)

𝑃𝑙𝑎𝑛𝑛𝑒𝑑 𝐻𝑒𝑎𝑑 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑖𝑛𝑐𝑙. 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑠 𝑎 %: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

×
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦

Based on the sample P&L and contract details:

30,000,000
9% × × 183 𝑑𝑎𝑦𝑠
366 𝑑𝑎𝑦𝑠

= 1,350,000

As expressed in Hudson’s Construction & Engineering Contracts 11th edition (1995)

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑖𝑛𝑐𝑙. 𝑃𝑟𝑜𝑓𝑖𝑡: 𝐻𝑖𝑠𝑡𝑜𝑟𝑖𝑐𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝐻𝑖𝑠𝑡𝑜𝑟𝑖𝑐𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

×
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦

Based on the sample P&L and contract details being the average of the three years, 2013, 2014 and
2015, preceding the said project:

Historic
Hudson's 2013 2014 2015 Average

Contract Revenue 365,879,452 375,222,123 372,524,687 371,208,754

Contract Costs (325,689,785) (330,365,878) (334,897,652) (330,317,772)
40,189,667 44,856,245 37,627,035 40,890,982

General and administrative Expenses (35,897,521) (42,568,789) (48,542,365) (42,336,225)

Other Income 25,658,254 26,987,356 28,789,245 27,144,952
Finance costs (8,654,389) (9,254,789) (8,796,542) (8,901,907)
Profit for the year 21,296,011 20,020,023 9,077,373 16,797,802

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Therefore:

Overhead incl. Profit:Historical Average

General and administrative Expenses 42,336,225
Finance costs 8,901,907
Profit for the year 16,797,802
Overhead incl. Profit:Historical
Average 68,035,934

Total Company Revenue:Historical Average

Contract Revenue 371,208,754
Other Income 27,144,952
Total Company Revenue:Historical Average 398,353,706

Contract Sum: Original 30,000,000

Contract Duration:Original Period 366 days
Period of Delay 183 days

Therefore:

68,035,934 30,000,000
× × 183 𝑑𝑎𝑦𝑠
398,353,706 366 𝑑𝑎𝑦𝑠

= 2,561,892

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34.1.2 Emden’s Formula

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑖𝑛𝑐𝑙. 𝑃𝑟𝑜𝑓𝑖𝑡: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑢𝑚: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

×
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦

Based on the sample P&L and contract details being the results of 2016 and the first half of 2017:

First half of
2016 TOTAL
2017

Contract Revenue 368,987,987 217,829,493.50 586,817,481

Contract Costs (323,368,772) (194,486,260.30) (517,855,032)
45,619,215 23,343,233.20 68,962,448

General and administrative Expenses (42,336,225) (26,460,140.63) (68,796,366)

Other Income 32,156,989 16,784,372.50 48,941,362
Finance costs (11,256,898) (7,829,948.50) (19,086,847)
Profit for the year 24,183,081 5,837,516.58 30,020,598

Therefore:

Overhead incl. Profit:Actual

General and administrative
Expenses 68,796,366
Finance costs 19,086,847
Profit for the year 30,020,598
Overhead incl. Profit:Actual 117,903,810

Total Company Revenue:Actual

Contract Revenue 586,817,481
Other Income 48,941,362
Total Company
Revenue:Actual 635,758,842

Contract Sum: Original 30,000,000

Contract Duration:Original Period 366 days
Period of Delay 183 days

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117,903,810 30,000,000
× × 183 𝑑𝑎𝑦𝑠
635,758,842 366 𝑑𝑎𝑦𝑠

= 2, ,781,805

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34.1.3 Eichleay Formula

𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

( ) × 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦
Based on the sample P&L and contract details:

First half of
2016 TOTAL
2017

Contract Revenue 368,987,987 217,829,494 586,817,481

Contract Costs (323,368,772) (194,486,260) (517,855,032)
45,619,215 23,343,233 68,962,448

General and administrative Expenses (42,336,225) (26,460,141) (68,796,366)

Other Income 32,156,989 16,784,373 48,941,362
Finance costs (11,256,898) (7,829,949) (19,086,847)
Profit for the year 24,183,081 5,837,517 30,020,598

Total Company Revenue:Actual Period

Contract Revenue 586,817,481

Other Income 48,941,362
Total Company Revenue:Actual Period 635,758,842

Company Overheads:Actual
General and administrative Expenses 68,796,366
Finance costs 19,086,847
Project Invoicing:Actual Period 87,883,212

Project Invoicing:Actual Period 32,000,000

Contract Duration: Actual Period 549 days
Period of Delay 183 days

Therefore:
32,000,000
( ) × 87,883,212
635,758,842
× 183 𝑑𝑎𝑦𝑠
549 𝑑𝑎𝑦𝑠

= 1,474,491

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34.1.4 Eichleay Formula – Variation No. 1

𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠:

( ) ×( )
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦

Based on the sample P&L and contract details:

2016

Contract Revenue 368,987,987

Contract Costs (323,368,772)
45,619,215

General and administrative Expenses (42,336,225)

Other Income 32,156,989
Finance costs (11,256,898)
Profit for the year 24,183,081

Total Company Revenue:Original Period

Contract Revenue 368,987,987
Other Income 32,156,989
Total Company Revenue:Original Period 401,144,976

Company Overheads:Original Period

General and administrative Expenses 42,336,225
Finance costs 11,256,898
Project Invoicing:Original Period 53,593,123

Project Invoicing:Original Period 22,400,000

Contract Duration:Original Period 365 days
Period of Delay 183 days

Therefore:

22,400,000
(401,144,976) × 53,593,123
× 183 𝑑𝑎𝑦𝑠
366 𝑑𝑎𝑦𝑠

= 2,137,606

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34.1.5 Eichleay Formula – Variation No. 2

𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠:

(𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙) × ( )
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙
+ 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦

Based on the sample P&L and contract details:

2016

Contract Revenue 368,987,987

Contract Costs (323,368,772)
45,619,215

General and administrative Expenses (42,336,225)

Other Income 32,156,989
Finance costs (11,256,898)
Profit for the year 24,183,081

Total Company Revenue:Original Period

Contract Revenue 368,987,987
Other Income 32,156,989
Total Company Revenue:Original
Period 401,144,976

Company Overheads:Original Period

General and administrative Expenses 42,336,225
Finance costs 11,256,898
Project Invoicing:Original Period 53,593,123

Project Invoicing:Original Period 22,400,000

Project Invoicing:Delay Period 9,600,000
Contract Duration:Original Period 365 days
Period of Delay 183 days
Therefore:

22,400,000
(401,144,976 + 9,600,000) × 53,593,123
× 183 𝑑𝑎𝑦𝑠
366 𝑑𝑎𝑦𝑠

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= 1,461,352

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34.1.6 Eichleay Formula – Variation No. 3

𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠:

( ) × ( )
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑅𝑒𝑣𝑒𝑛𝑢𝑒: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

× 𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝐷𝑒𝑙𝑎𝑦
Based on the sample P&L and contract details:

First half of
2016
2017

Contract Revenue 368,987,987 217,829,494

Contract Costs (323,368,772) (194,486,260)
45,619,215 23,343,233

General and administrative Expenses (42,336,225) (26,460,141)

Other Income 32,156,989 16,784,373
Finance costs (11,256,898) (7,829,949)
Profit for the year 24,183,081 5,837,517

Total Company Revenue:Original Period

Contract Revenue 368,987,987
Other Income 32,156,989
Total Company Revenue:Original
Period 401,144,976

Company Overheads:Delay Period

General and administrative Expenses 26,460,141
Finance costs 7,829,949
Project Invoicing:Delay Period 34,290,089

Project Invoicing:Original Period 22,400,000

Contract Duration:Original Period 365 days
Period of Delay 183 days
Therefore:

22,400,000
(401,144,976) × 34,290,089
× 183 𝑑𝑎𝑦𝑠
366 𝑑𝑎𝑦𝑠

= 957,382

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34.1.7 Manshul Formula

𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐶𝑜𝑠𝑡 %
𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑 ×
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐶𝑜𝑠𝑡 + 𝑀𝑎𝑟𝑘 − 𝑢𝑝 %

× 𝑁𝑜𝑟𝑚𝑎𝑙 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 %

= 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝐷𝑒𝑙𝑎𝑦

To determine the Normal Office Overheads %, analysis the previous 3 years:

Historic
Hudson's 2013 2014 2015 Average

Contract Revenue 365,879,452 375,222,123 372,524,687 371,208,754

Contract Costs (325,689,785) (330,365,878) (334,897,652) (330,317,772)
40,189,667 44,856,245 37,627,035 40,890,982

General and administrative Expenses (35,897,521) (42,568,789) (48,542,365) (42,336,225)

Other Income 25,658,254 26,987,356 28,789,245 27,144,952
Finance costs (8,654,389) (9,254,789) (8,796,542) (8,901,907)
Profit for the year 21,296,011 20,020,023 9,077,373 16,797,802

Project Invoicing: Delay: 9,600,000

Contract Cost %: 100%
Mark-up%: 4% Overheads only

To apply the formula thus:

Normal Office Overheads %:

(42,336,225 + 8,901,907) 100
× = 12.9%
371,208,754 + 27,144,952 1

Application to Normal Office Overheads % to formula:

100 %
9,600,000 ×
100 + 4 %

× 12.9 %

= 1,189,305

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34.1.8 Ernstrom Formula

𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠: 𝐴𝑐𝑢𝑡𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

× 𝐿𝑎𝑏𝑜𝑢𝑟 𝐶𝑜𝑠𝑡𝑠: 𝐷𝑢𝑟𝑖𝑛𝑔 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑
𝑇𝑜𝑡𝑎𝑙 𝐿𝑎𝑏𝑜𝑢𝑟 𝐶𝑜𝑠𝑡: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

= 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑑𝑒𝑙𝑎𝑦

Company Overheads:Actual Period

First half of
2016 TOTAL
2017

Contract Revenue 368,987,987 217,829,493.50 586,817,481

Contract Costs (323,368,772) (194,486,260.30) (517,855,032)

45,619,215 23,343,233.20 68,962,448

General and administrative

Expenses (42,336,225) (26,460,140.63) (68,796,366)
Other Income 32,156,989 16,784,372.50 48,941,362
Finance costs (11,256,898) (7,829,948.50) (19,086,847)
Profit for the year 24,183,081 5,837,516.58 30,020,598

Company Overhead:Actual Period

General and administrative Expenses 68,796,366
Finance costs 19,086,847
Company Overhead:Actual Period 87,883,212

Enterprise Labour Cost: Actual Period: 402,213,236

Project Labour Costs: Delay Period: 7,465,326

To apply this formula to the variables:

87,883,212
× 7,465,326
402,213,236

= 1,631,167

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34.1.9 Carteret Formula

(𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 %: 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑 − 𝑁𝑜𝑟𝑚𝑎𝑙 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 %)

× 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑜𝑖𝑐𝑖𝑛𝑔: 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑

= 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑑𝑒𝑙𝑎𝑦

Actual Office Overheads:Delay Period:

First half of 2017

Contract Revenue 217,829,494

Contract Costs (194,486,260)
23,343,233
-
General and administrative
Expenses (26,460,141)
Other Income 16,784,373
Finance costs (7,829,949)
Profit for the year 5,837,517

(26,460,141 + 7,829,949) 100

× = 14.6%
217,829,494 + 16,784,373 1

Normal Office Overheads %:

2013 2014 2015 Historic Average

Contract Revenue 365,879,452 375,222,123 372,524,687 371,208,754

Contract Costs (325,689,785) (330,365,878) (334,897,652) (330,317,772)
40,189,667 44,856,245 37,627,035 40,890,982

General and administrative

Expenses (35,897,521) (42,568,789) (48,542,365) (42,336,225)
Other Income 25,658,254 26,987,356 28,789,245 27,144,952
Finance costs (8,654,389) (9,254,789) (8,796,542) (8,901,907)
Profit for the year 21,296,011 20,020,023 9,077,373 16,797,802

(42,336,225 + 8,901,907) 100

× = 12.9%
371,208,754 + 27,144,952 1

Project Invoicing: Delay Period: 9,600,000

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To apply the formula:

(14.6% − 12.9%)

× 9,600,000

= 163,200

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34.1.10 Comparative Absorption Rate (CAR) Method

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑇𝑜𝑡𝑎𝑙 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

−( × 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑)
𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑇𝑜𝑡𝑎𝑙 𝐵𝑖𝑙𝑙𝑖𝑛𝑔𝑠: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑

= 𝑈𝑛𝑎𝑏𝑠𝑜𝑟𝑏𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑

Overheads:Actual Period

First half of
2016 2017 TOTAL

Contract Revenue 368,987,987 217,829,494 586,817,481

Contract Costs (323,368,772) (194,486,260) (517,855,032)
45,619,215 23,343,233 68,962,448

General and administrative Expenses (42,336,225) (26,460,141) (68,796,366)

Other Income 32,156,989 16,784,373 48,941,362
Finance costs (11,256,898) (7,829,949) (19,086,847)
Profit for the year 24,183,081 5,837,517 30,020,598

Overheads:Actual Period
General and Administration Expenses 68,796,366
Finance Costs 19,086,847
Overheads:Actual Period 87,883,212

Potential Total Overheads:Actual

Period 87,883,212 Assumed Overheads constant

Potential Total Invoicing: Actual

Period 645,499,229 Assumed 10% in lost invoicing

87,883,229
87,883,212 − ( × 87,883,212)
645,499,229

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= 75,918,118

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34.1.11 Alegheny Formula or Burden Fluctuation Formula (BFM)

(𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 %: 𝐷𝑒𝑙𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑 − 𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑓𝑓𝑖𝑐𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 %: 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑 )

× 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑠𝑢𝑚

= 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑑𝑒𝑙𝑎𝑦

Actual Office Overheads %: Delay Period:

First half of 2017

Contract Revenue 217,829,494

Contract Costs (194,486,260)
23,343,233

General and administrative Expenses (26,460,141)

Other Income 16,784,373
Finance costs (7,829,949)
Profit for the year 5,837,517

Actual Overheads:Delay Period

General and Administration Expenses 26,460,141
Finance Costs 7,829,949
Actual Overheads:Delay Period 34,290,089

Company Revenue:Delay Period

Contract Revenue 217,829,494
Other Income 16,784,373
Company Revenue:Delay Period 234,613,866

Actual Overheads:Delay Period % 14.6%

Actual Office Overheads % Actual Period:

2016 First half of 2017 TOTAL

Contract Revenue 368,987,987 217,829,494 586,817,481

Contract Costs (323,368,772) (194,486,260) (517,855,032)
45,619,215 23,343,233 68,962,448

General and administrative Expenses (42,336,225) (26,460,141) (68,796,366)

Other Income 32,156,989 16,784,373 48,941,362

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Finance costs (11,256,898) (7,829,949) (19,086,847)

Profit for the year 24,183,081 5,837,517 30,020,598

Actual Overheads:Actual Period

General and Administration Expenses 68,796,366
Finance Costs 19,086,847
Actual Overheads:Actual Period 87,883,212

Company Revenue:Actual Period

Contract Revenue 586,817,481
Other Income 48,941,362
Company Revenue:Actual Period 635,758,842

Actual Overheads %:Actual Period 13.8%

(14.6% − 13.8% )

× 30,000,000

= 237,656

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34.1.12 Specific Base Allocation Method

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34.1.13 Hank Laan Alternative Approach

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34.2 Summary of results

Based on the situation presented the results of the sample project produces the following results:

Formula Estimated Loss

Hudson's Original 1,350,000
Hudson's Revised 2,561,892
Emden's 2,781,805
Eichleay Original 1,474,491
Eichleay Variation No. 1 2,137,606
Eichleay Variation No. 2 1,461,352
Eichleay Variation No. 3 957,382
Manshul 1,189,305
Ernstrom 127,960
Carteret 163,200
Comparative Absorption Rate
Allegheny
Direct Method
Figure 48: Sample Project Results Summary

Estimated Loss
3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

Figure 49: Samples Project Graph (average line shown as red)

The results from the same situation demonstrate the variety of answers that can come from the use of
the different formula. The red line shows the average.

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Bibliography
Books
Bailey, Julian; “Construction Law”, 2nd Edition, Informa Law from Routledge, 2016

Burr, Andrew; “Delay and Disruption in Construction Contracts”, 5th Edition, 2017

Crown Office Chambers; Emdens Construction Law, LexisNexis 2016

Davison, Peter R and Mullen, John; Evaluating Contract Claims, 2nd Edition, Wiley-Blackwell, 2009

Furst QC, Stephen and Ramsey QC, Vivian, “Keating on Building Contracts”, 7th edition, 2001

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