Keywords: Delay; Loss and expense; Head office and profit recovery; Formulae; Emden, Hudson & Eichleay;

In part l of this 2-part briefing series, I examined the legal principles appertaining to the recovery of overheads and profit where a project was delayed for events that the employer was culpable.  In such claims, it is mandatory for a contractor to adduce the necessary level of proof to demonstrate the loss, but formulae, which are commonly used by contractors, is neither an appropriate nor acceptable means of calculating a loss.

The three most common formulae used [in the United Kingdom] for calculating loss of overhead and profit are Emden, Hudson and Eichleay, and to demonstrate in practical terms why such formulae are unacceptable ‘tools’ to finding out the real level of loss, below I have inputted each formula with identical data:

Data

Contract Sum	£525,000.00
Original contract period (in weeks)	52
Actual performance period	70 (18 weeks delay) – 490 days
Tender allowance for OHP	15%
Contractor company turn over from audited accounts	£7,100,000.00
Total annual HO OH&P	£2,450,000.00
Final Contract Valuation	£660,000.00

Hudson Formula

=	Head Office Overhead & Profit %	x	Contract sum x delay in weeks
	100%		Contract Period in weeks

=	15%	x	£525,000 x 18 weeks
	100%		52 weeks

= 0.15 x £181,730.76

=  £27,259.61

Emden Formula

=	Total OHP / Turnover	x	Gross Contract Sum	x	Owner-Caused Delay Period
	100%		Planned Contract Period

=	34%	x	£525,000	x	18 weeks
	100%		52 weeks

= 0.34 x £10,096.15 x 18 weeks

=  £61,787.52

Eichleay Formula

=	Final Contract Valuation	x	Total Company Overhead During Actual Contract Period	=	Overhead Attributable to Contract
	Total Turnover for Actual Period of Performance

=	Attributable Overhead	=	Overhead Attributable to Contract/Day
	Actual Days of Contract Performance

=

Daily Overhead

x

Days of Owner-Caused Delay

=

Head Office Overhead

=	£660,000	x	£2,450,000	=	£220,500
	£7,100.000

=	£220,500	=	£450 per day
	490 days

=

£450

x

126 days

=  £56,700.00

Summary of the Formulae
The original Emden formula referred to overheads only whereas Hudson considers both overheads and profit, although loss of profit can also be calculated using the Emden formula (as in the above example).  Moreover, the head office overheads percentage [and profit] used in the Emden formula is the actual percentage based on a contractor’s [audited] accounts.  Beyond this distinction, they are identical in their effect.  They apply the relevant percentage [for overheads and / or profit] to the Contract Sum and multiply this by the proportion, which a qualifying delay (in respect that the delay attracts the right for the contractor to claim reimbursement of direct loss and/or expense) bears to the original contract period. 

Eichleay’s formula was developed by Eichleay in the United States in the Appeal of Eichleay Corporation, ASBCA 5183, 60-2 BCA (CCH) 2688 (1960), and was approved in the United States case of Capital Electric Company v United States.  The formula is also reviewed in Hudson’s Building and Engineering Contracts (12th Edition).  This formula uses the actual overheads in a similar manner to Emden, but the total value of all payment certificates is inserted in lieu of the contract sum.

Comment
The above examples show that, despite each formula attempting to provide the answer to an identical question, each has produced contrasting figures that differ widely in value.  Formulae are far too speculative and cannot be an acceptable means of establishing loss. 

© Michael Gerard Consulting Limited
January 2011