Eichleay allocates head office overhead to the contract by its share of billings and spreads it over the days actually worked, which is why it gives less than Emden on the same accounts.
The Eichleay formula allocates the contractor's home office overhead to the delayed contract in proportion to its billings, divides it by the days the contract was actually performed, and multiplies by the days of compensable delay. On an illustrative 24,000,000 contract, for a contractor billing 160,000,000 with 12,800,000 of home office overhead, a 90-day delay on a 600-day programme gives 2,782.61 a day and a claim of 250,435, against 288,000 by the Emden formula on the same accounts.
Worked in full in Construction Cost Control by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
When an owner suspends or delays the work, the site costs of the delay can be counted: plant, supervision, welfare. The head office cannot. Its rent, its estimators and its accounts department carry on, and the delayed contract is no longer generating the turnover that was meant to pay its share of them. That share is unabsorbed overhead. The Eichleay formula, named after a 1960 decision of the US Armed Services Board of Contract Appeals, is the standard way of quantifying it on US federal work; in the UK and Commonwealth the Hudson and Emden formulas do the same job.
US federal boards and courts allow Eichleay only where the government delayed the work for an uncertain period, the contractor was on standby and it could not reasonably take on replacement work. The arithmetic below is the easy part; proving those conditions is the hard one.
| Input | Value |
|---|---|
| Contract billings over the actual performance period | 24,000,000 |
| Total company billings over the same period | 160,000,000 |
| Total home office overhead over the same period | 12,800,000 |
| Original contract period, days | 600 |
| Compensable delay, days | 90 |
| Actual days of performance | 690 |
| Head office overhead in the tender, for Hudson | 6.0% |
Overhead here means head office costs only, excluding profit, so that the three formulas compare like with like. All figures are illustrative.
1. Allocable overhead = (contract billings / total company billings) × total home office overhead = (24,000,000 / 160,000,000) × 12,800,000 = 15.0% × 12,800,000 = 1,920,000.
2. Daily overhead rate = allocable overhead / actual days of performance = 1,920,000 / 690 = 2,782.61.
3. Claim = daily rate × days of compensable delay = 2,782.61 × 90 = 250,435.
Excel: =24000000/160000000*12800000/(600+90)*90
The claim is 1.04 per cent of the contract billings. The divisor is what distinguishes Eichleay: the overhead allocated by billings is the overhead of the whole period the contract was on the books, delay included, so it is spread over the 690 days actually worked, not the 600 planned.
| Formula | Method | Daily rate | 90-day claim |
|---|---|---|---|
| Eichleay | Billings share of actual overhead, over actual days | 2,783 | 250,435 |
| Emden | Overhead % from the accounts (8.0%) × contract sum, over the original period | 3,200 | 288,000 |
| Hudson | Overhead % in the tender (6.0%) × contract sum, over the original period | 2,400 | 216,000 |
Emden and Eichleay start from the same accounts and the same 8.0 per cent overhead ratio, yet Eichleay gives 13.0 per cent less. The only difference is the divisor. Hudson uses the percentage the contractor priced rather than the one it incurred, so a contractor that priced its overhead below what it actually carries claims less, and one that priced above it claims more.
| Delay, days | Actual days | Daily rate | Eichleay | Emden |
|---|---|---|---|---|
| 30 | 630 | 3,047.62 | 91,429 | 96,000 |
| 60 | 660 | 2,909.09 | 174,545 | 192,000 |
| 90 | 690 | 2,782.61 | 250,435 | 288,000 |
| 120 | 720 | 2,666.67 | 320,000 | 384,000 |
| 180 | 780 | 2,461.54 | 443,077 | 576,000 |
The Eichleay claim grows less than in proportion to the delay, because a longer delay lowers its own daily rate. The billings ratio matters as much: if the company's total billings over the period were 120,000,000 rather than 160,000,000, the contract's share would be 20.0 per cent and the claim 333,913; at 200,000,000 it would be 12.0 per cent and 200,348. A contractor whose other work grew during the delay therefore claims less, which is consistent with the formula's premise that the overhead was absorbed elsewhere.
The time-related costs of a delay on site, priced alongside head office overhead, are in the free workbook for this case, and worked in full in how to calculate prolongation costs. Productivity losses from the same delay are in the measured mile calculation.
Both allocate head office overhead by the contract's share of turnover. Emden takes the overhead percentage from the accounts, applies it to the contract sum and divides by the original contract period; Eichleay divides by the actual days of performance including the delay. On the illustrative figures Emden gives 288,000 for 90 days and Eichleay 250,435, 13.0 per cent less.
Because the overhead allocated by billings already covers the whole performance period, delay included. Spreading 1,920,000 over 600 days instead of 690 lifts the daily rate from 2,782.61 to 3,200 and the claim from 250,435 to 288,000, 15.0 per cent more, which reproduces Emden rather than Eichleay.
No. The allocable overhead is fixed by the billings ratio, so each extra day of delay also lowers the daily rate. On the illustrative contract 90 days are worth 250,435 and 180 days 443,077, not twice as much; Emden, with a fixed daily rate, would give 576,000 for 180 days.
This article is one calculation from Construction Cost Control. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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