Capital Electric Company v. The United States
729 F.2d 743
Fed. Cir.
1984
Check Treatment

CAPITAL ELECTRIC COMPANY, Appellant, v. The UNITED STATES, Appellee.

No. 83-965.

United States Court of Appeals, Federal Circuit.

Feb. 7, 1984.

729 F.2d 743

estate for years. Ga. Code § 85-803 (1935) (current version at O.C. Ga. § 44-6-103.9 See also

When the lease language of this contract is construed in tandem with the government‘s agreement to mortgage to the investor the Site,10 the investor‘s election to convey the improvements and its leasehold interest to a trustee,11 and the investor‘s right to assign its claims for moneys due from the government under the contract to a bank, trust company, or other financing institution,12 it becomes a flimsy fiction. To quote the observation of an anonymous home-spun philosopher: “No matter what it‘s called, a thing can‘t be what it ain‘t.”

By the foregoing analysis, we are persuaded that the district court erred in holding that Bankers Life had in land owned by the United States a leasehold estate taxable under Georgia law; that in reality, the government endeavored in this contract, considered in its entirety, to afford Bankers Life the means to enlist the pаrticipation of other financial institutions in its undertaking. In its true light, it is seen as the creation of a security interest not subject to Georgia taxation.

REVERSED AND REMANDED ON THE APPEAL; AFFIRMED ON THE CROSS-APPEAL.

Thomas J. Wingfield, Atlanta, Ga., argued, for appellant. With him on brief was Herbert H. Gray, III, Atlanta, Ga.

Mark D. Friedman, Washington, D.C., argued, for appellee. With him on brief were J. Paul McGrath, Asst. Atty. Gen., David M. Cohen, Director and Thomas W. Petersen, Washington, D.C.; Timothy Sullivan, Deputy Dist. Counsel, Baltimore Dist. Corps. of Engineers, Dept. of the Army, of сounsel.

James A. Pemberton, Jr., and Christopher M. McNulty, Washington, D.C., were on brief, for amicus curiae, Associated General Contractors of America.

Ira J. Smotherman, Jr. and Clifford F. Altekruse, Atlanta, Ga., were on brief, for amicus curiae, American Subcontractors Ass‘n.

Before FRIEDMAN and MILLER, Circuit Judges, and RE, Judge.*

JACK R. MILLER, Circuit Judge.

This appeal essentially involves the question of whether, as a matter of law, Capital Electric Company (“Capital“) was entitled, under the suspension of work clause of its contract with the Government, to recover damages for extended overhead and to calculate those damages according to the so-called Eichleay formula (

, aff‘d on recon.,
).1 It was stipulated that there were 303 days of compensable delay due to the fault of the Government. The General Services Board of Contract Appeals (“board“) held that Capital was not so entitled. We affirm in part, reverse in part, аnd remand.

The dispute arises from a contract awarded Capital on October 12, 1976, to furnish and install mechanical, electrical, and plumbing work for the construction of the Federal Building and U.S. Courthouse in Fort Lauderdale, Florida. Capital performed the electrical portion of the contract and subcontracted the remainder of the work to the Poole and Kent Company, which, in turn, further subcontracted work to United Sheet Metal Co., Firepak, Inc., Johns-Manville Sales Corp., and Honeywell, Inc.

Capital‘s contract was one of a series of prime contracts for the Fort Lauderdale project awarded under the phased design and construction technique. Phased construction ‍​​‌‌​‌​‌‌‌‌​​‌​‌​‌​‌​‌‌​‌‌​‌​​‌​​​​‌‌​‌​​‌​​‌‌‌​‍contemplates the overlapping of design and construction tasks as well as sequential or concurrent scheduling of segments of the work. The Govеrnment awarded, inter alia, separate prime contracts for structural concrete and interior finishes.

As a result of the structural concrete contractor‘s slow and erratic progress, the work of Capital and its subcontractors was unreasonably delayed and disrupted. Capital‘s work was also delayed and disrupted due to the Government‘s failure to act upon submittals for the electrical panels, main switchboard, and еmergency generator while the Government contemplated a contract change that was never issued.

The Board

Notwithstanding the Government‘s admission that the Eichleay formula has been the prevailing method adopted by the contract appeals boards, the board, which had approved use of the Eichleay formula in

, for the structural concrete phase of the same Fort Lauderdale project at issue here,2 expressly overruled its determination in Dawson. It rеcognized that the Corps of Engineers Board of Contract Appeals “continues to permit recovery of extended home office overhead,” citing
. However, it observed that recently the Armed Services Board of Contract Appeals had indicated that it will not permit recovery of extended home office overhead for periods of performance delay, suspension, or extensions of the сontract work, citing
(subsequently affirmed by the Claims Court,
, decided simultaneously with this case on appeal to this court).

The board said that it would not accept the concept of compensable extended overhead, as opposed to underabsorbed overhead,3 and that the Eichleay formula is not a proper method of calculating underabsorbed overhead. It opined that the premise of Eichleay is that if the performance period were extended, overhead costs must have increased ipso facto, and noted that the auditor reported that use of the Eichleay formula could result in a computation of contract damages even in the absence of evidence that a contractor‘s work forces were idled, or placed in a position where they could not be redeployed or other work substituted. Thus, the Government argues that an automatic application of the Eichleay formula allows a contractor to escape the burden of proof faced by all claimants, namely: establishing the fact of injury.

DISCUSSION

Although these points have some degree of validity, we are not persuaded that they correctly reflect the concept of the Eichleay formula, at least as far as Capital is concerned. In this case, cоmpensable delay was stipulated before the board. Moreover, 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 con-tract period, when a major portion of the project had been completed and accepted) due to the limitation on its bonding capacity.4 Thus, Capital has not actually used an ipso facto approach. Indeed, as stated in

: “The mere showing of these facts [5] is sufficient to transfer to the Government the burden of going forward with proof that Appellant suffered no loss or should have suffered no loss.” Amicus American Subcontractors Association states: “When the evidence adequately proves the existence of damages owing to a delay in work on the project, the extent of those damages need not be quantified tо a mathematical certainty,” citing
.

Although the board recognized that calculation of contract damages is difficult and admitted that the method it used is an approximation, it faults the Eichleay formula for not being precise. Amicus Associated General Contractors of America points to a basic flaw in the method of calculation applied by the board (note 3, supra) in a case where no work is being performed during a suspension, for example, and application of a percentage overhead charge ‍​​‌‌​‌​‌‌‌‌​​‌​‌​‌​‌​‌‌​‌‌​‌​​‌​​​​‌‌​‌​​‌​​‌‌‌​‍(e.g. 9.2) to the direct costs of work performed (zero) would produce zero for overhead that nonetheless continues on.6 Capital lists examples of such overhead: weekly payrolls, Davis-Bacon reports, checks, W-2‘s, 941‘s and other required tax forms, cost records, review submittals from subcontractors, weеkly and monthly progress reports to the Government, and “the myriad similar tasks which are as critical as the on-site work but which can more easily be performed at a central location.” Amicus American Subcontractors Association adds: salaries, dues and subscriptions, auto and travel, telephone, and photocopying.

Capital argues that the Comb decision remains binding precedent with regard to Government contracts, citing

and
. It asserts that the board had “no authority to disregard the binding precedents established by the Court of Claims.” However, in fairness it should be said that if the board believed these precedents were wrongly decided, it was not improper for the board to act accordingly. At the same time, it must be recognized that, as held by the Court of Appeals for the Federal Circuit, sitting en banc,
, these Court of Claims precedents are binding precedent and can only be overruled by the Fеderal Circuit sitting en banc.7

As far as this panel is concerned, we do not believe these precedents should be overruled. They are of such long standing and have been followed in so many decisions of the various boards of contract appeals that such action should more properly be taken by the Congress. Nor are we persuaded that this would be an appropriate case for breaking precedent.

CONCLUSION

Capital has proposed that its damages be calculated according to a modified Eichleay formula or, alternatively, according to the Eichleay formula as follows:

Modified Eichleay Formula

Original Contract Price / total billings for original contract period + contract billings for extended period x fixed overhead for original contract period = fixed overhead allocable to contract

Fixed overhead allocаble to contract / original days of performance = daily contract overhead

Daily contract overhead x days delay = amount recoverable

Eichleay Formula

Contract billings / total billings for contract period x total overhead for contract period = overhead allocable to the contract

Allocable overhead / days of performance = daily contract overhead

Daily contract overhead x days delay = amount recoverable

Under the modified Eichleay formula, daily contract overhead would be $446.52; whereas under thе Eichleay formula, daily contract overhead would be $311. We are satisfied that the record does not support use of the modified Eichleay formula instead of the Eichleay formula and that Capital‘s damages should, therefore, be calculated according to the latter.

Poole and Kent have used an “Eichleay-type formula,” as have its subcontractors. The slight difference between damages calculated according to the Eichleay formula ($150.99 daily contract rate) and the “close variation” (board‘s words) of the Eichleay formula ($155.81 daily contract rate) used by Poole and Kent appears to be appropriate to its circumstances, as do the variations used by Poole and Kent‘s subcontractors, Firepak, United Sheet Metal, and Johns-Manville. Honeywell‘s claim for extended office overhead doеs not appear to be justified ($2,850 said to have been “eyeballed“).

In view of the foregoing, we affirm the board as to Honeywell and in all other respects reverse the board and remand for further proceedings consistent with this opinion.

AFFIRMED IN PART; REVERSED IN PART; AND REMANDED.

FRIEDMAN, Circuit Judge, concurring:

Although I agree with the court that the appellant is entitled to recover, the analysis ‍​​‌‌​‌​‌‌‌‌​​‌​‌​‌​‌​‌‌​‌‌​‌​​‌​​​​‌‌​‌​​‌​​‌‌‌​‍through which I reach that conclusion differs somewhat from that of the court.

For almost 40 years the Court оf Claims consistently has held that the delay damages a government contractor may recover include extended home office overhead incurred during the period of delay. The leading case is

, which the court subsequently followed and approved a number of times. E.g.,
;
. Similarly, the various boards of contract appeals repeatedly allowed the recovery of this element of delay damages.

The government now asks us to jettison this settled line of authority on the ground that all of those cases were wrongly decided. It argues that since the delay in performance ordinarily does not increase the total amount of office overhead the contractor incurs in connection with the particular contract, but merely spreads it over a longer period, allowing the contractor to recover for such overhеad for the period of delay would result in compensating the contractor for losses it did not actually incur. According to the government, the only situations in which a contractor may recover for such extended office overhead is where the delay in performance: (1) requires the contractor to hire additional personnel or incur other additional expenses; or (2) prevents the contractor from taking on other work it would have been able to assume had there not been the delay.

Although superficially plausible, the government‘s argument does not withstand more penetrating analysis based upon the theory on which extended office overhead is allowed as an element of delay damages. By definition this type of overhead cannot be directly attributed to the performance of a particular contract, yet it is an essential part of the contractor‘s total cost of doing business. Some basis, therefore, must be found for allocating this total overhead among the various contracts in connection with which it is incurred.

A contractor‘s estimate of its costs necessarily includes its overhead costs, which it calculates on the basis of the time required to perform the contract. Where performance of a contrаct has been delayed, the overhead expenses of performing that contract continue for the additional time. A portion of the total overhead for that additional period accordingly is allocable as a cost of performing that contract.

As the Court of Claims explained in

,

It would not be expected that a contractor would enlarge his main office staff and facilities at a time when one of his jobs was merely marking time. But unless his office was understaffed before the suspension, it too would, pro tanto, mark time during the suspension, unless the useful work which it would have been doing in regard to this job, if the job had not been suspended, had been replaced by extra work made necessary by the suspension. So the fact that no extra help was hired seems both natural and immaterial. If some employees had been laid off, that would have been material, since it would have enabled the contractor to pay the full staff which he would need during the extra time that the work was in process, because of the delay, with the money he had saved by laying off employees during the period of suspension.

But it is, ordinarily, not practicable to lay off main office employees during a short and indefinite period of delay such as occurred here. So the contractor, instead of saving the salary of that proportion of his main office staff which is attributable to this contract, is obliged, in effect, to waste it, and to spend a similar amount at the end of the contract for the extra time made necessary by the delay. This waste is caused by the breach of contract, and it ought to be paid for by the party guilty of the breach.

.

In other words, a portion of the overhead incurred during the entire period of performance must be charged against the revenue received during that period as a cost of performing the contract. The Court of Claims decisions, as well as the Eichleay formula used to calculate the amount of such extended office overhead, are based upon and reflect these economic realities of the construction business. I think those decisions are correct, and I see no reason for thе panel (which is bound by those decisions) to invite the full court to reconsider them en banc.

*

The Honorable Edward D. Re, Chief Judge, United States Court of International Trade, sitting by designation.

M.M. & P. MARITIME ADVANCEMENT, TRAINING, EDUCATION & SAFETY PROGRAM (MATES) and Maritime Institute of Technology & Graduate Studies, Appellants, v. DEPARTMENT OF COMMERCE, INTERNATIONAL TRADE ADMINISTRATION, Appellee.

No. 83-1130.

United States Court of Appeals, Federal Circuit.

March 5, 1984.

Notes

1
We use the word “essentially” because Capital alternatively claims damages accоrding to a “modified” Eichleay formula; also, its subcontractors’ damages have been computed according to a “modified” Eichleay formula. These will be discussed infra.
2
The board said: We cannot agree with the Government‘s contention that our decision in Dawson was just an example of acceptance as a matter of administrative convenience of the concept of recovery of extended home office overhead during periods of delay. We said in Dawson that the concept of recovery of extended home office overhead during periods of delay had its origin in
, and that the Eichleay formula was simply an appropriate method for calculating extended home office overhead.
. Comb was not a departure from existing law on recovery of breach damages due to performance delay. It was preceded by
and
. There are other, older cases but further citation would not be helpful. In distinguishing Coath & Goss which involved a performance extension and granting recovery of extended home office overhead for a period of performance suspension, Comb may be read as authority for the proposition that recovery of еxtended home office overhead may be permitted where it is, in effect, wasted as a result of a performance suspension. To that extent, we do agree with the Government that Dawson might be distinguished as involving a performance suspension rather than a performance extension, as is the case here. But we do not think that such a distinction is meaningful.... The principle of recovery announced in Comb was, in fact, expanded in Eichleay, and there applied to a period of performance extension rather than performance suspension.
. There are many other cases....
3
It explained that these are separate and distinct concepts; that underabsorbed overhead is particularly involved in manufacturing cost accounting; that extended overhead is a concept unique to construction contracting; that it has, as its premise, that extending the performance period will increase overhead costs and is calculated by “a daily rate method.” On the other hand, it explained that underabsorbed overhead occurs when direct costs are diminished as a result of delay; that the contract‘s share of overhead is diminished, while the overhead share of all other contract work is increased; and that underabsorbed overhead is calculated by dеtermining an allocation rate differential. Thus, it calculated allowable home office overhead by multiplying the direct costs attributable to the delay period by 9.2 percent, which the auditor estimated was the normal rate of allocation of home office overhead of the contractor.
4
In
, the Engineer Board of Contract Appeals found that there was extensive evidence to establish the disruptivе effect of the delay on the contractor‘s operations and quoted from
, that “[i]n order to recover, the plaintiff must show, at the minimum, that the delay somehow affected plaintiff‘s operations so that it was not practical to undertake the performance of other work even had it been available.” The Engineer Board added that “[i]t is not necessary that [the contractоrs] show futile attempts to obtain other work which somehow could have been substituted for this major project ....”
5
“The suspensions occurred at various times and in connection with various features of the contract work.... One item of work would be suspended, then another and so on through an extended series of suspensions. The partial suspensions were lifted at innumerable, varying intervals over a prolonged period of time with the issuance of the numerous modifications providing for changes in the contracts. Under these circumstances it would not have been prudent or practical for appellant either to risk the layoff of Home Office personnel or facilities, or, on the other hand, to absorb personnel and facilities so made idle by taking on new commitments.”
6
Although this is obviously a “worst case” example, it demonstrates that the ‍​​‌‌​‌​‌‌‌‌​​‌​‌​‌​‌​‌‌​‌‌​‌​​‌​​​​‌‌​‌​​‌​​‌‌‌​‍Government‘s method of calculating damages can lead to absurd results.
7
The Government‘s motion for initial hearing of this case en banc was denied by the court.
9
Georgia Code (1933), Sec. 85-803, provides: Rights of tenant as to use. Grounds of forfeiture of estate. An estate for years carries with it the right to use in as absolute a manner as a greater estate, but not to the injury of the property or of thе person entitled either in remainder or reversion; the acts of omission and commission prescribed as grounds of forfeiture of an estate for life shall operate as to the same effect as against a tenant for years.
10
Title II, Article 5: At the request of the Investor, the Government agrees to mortgage to the Investor the Site as further assurance of the Government‘s performance of its undertakings under this Contract.
11
Title III, Article 4(b), n. 7, supra.
12
Title IV, Article 6: Assignments. Pursuant to the provisions ‍​​‌‌​‌​‌‌‌‌​​‌​‌​‌​‌​‌‌​‌‌​‌​​‌​​​​‌‌​‌​​‌​​‌‌‌​‍of the Assignment of Claims act of 1940, as amended (31 U.S.C. 203, 41 U.S.C. 15), claims for moneys due or to become due from the Government to the Investor under this Contract may be assigned to a bank, trust company, or other financing institution, including any Federal lending agency and may thereafter be further assigned and reassigned to any such institution.