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West v. All State Boiler Inc.

June 25, 1998


Before Mayer, Chief Judge, Michel, and Schall, Circuit Judges.

The opinion of the court was delivered by: Michel, Circuit Judge.

Appealed from: Veterans Administration Board of Contract Appeals

This appeal and cross-appeal require us to re-examine and clarify the legal test a contractor must satisfy to recover unabsorbed overhead expenses that result from a government-caused suspension in contract performance. The government appeals the final decision by the Veterans Affairs Board of Contract Appeals (the "Board") in All State Boiler, Inc., VABCA No. 4537 (July 6, 1995), arguing that the Board misconstrued the legal test by requiring All State Boiler, Inc. ("All State") to show only that it would have been impractical, rather than impossible, to take on replacement, rather than additional, work before awarding All State its overhead costs using the Eichleay formula. All State cross- appeals, contending that it should have recovered its unabsorbed overhead costs for the entire fifty-eight day duration of the government-caused suspension rather than only for the twenty-two days beyond the contract deadline by which performance continued as a result of that suspension. We conclude that the Board correctly required proof of replacement, not additional, work, and properly awarded All State its unabsorbed overhead costs for only the additional time required to complete performance of the contract. We therefore deny both the appeal and cross-appeal, and affirm the Board's decision. In doing so, we clarify the showing that must be made by a contractor to justify Eichleay-based recovery and what is required from the government to rebut a prima facie case of entitlement.


All State was awarded a construction contract worth $1,354,285 to upgrade the boiler system in the Veterans Affairs ("VA") Medical Center in Northampton, Massachusetts. The contract involved the demolition and removal of three existing boilers and the installation of new boilers and plumbing, in eight separate phases. The completion dates for each of the eight phases of work were to be established by All State and the Contracting Officer's Technical Representative (the "COTR"). All State received the Notice to Proceed on January 13, 1994. The initial deadline for completion of the contract was 360 days, or January 5, 1995, but that date was extended to February 7, 1995, for reasons unrelated to this appeal. The contract also contained a standard Suspension of Work clause, pursuant to 48 C.F.R. § 52.212-12 (1994), as follows:

If the performance of all or any part of the work is, for an unreasonable period of time, suspended, delayed, or interrupted (1) by an act of the Contracting Officer in the administration of this contract . . . an adjustment shall be made for any increase in the cost of performance of this contract (excluding profit) necessarily caused by the unreasonable suspension, delay, or interruption, and the contract modified in writing accordingly.

The contract specifications required All State to obtain prior approval of all major equipment, material, and subcontractor selections within sixty days of the date of the contract award by filing "submittals." On February 2, 1994, however, All State sent the VA a proposed construction schedule which specified that all submittals would be provided within 108 days. Furthermore, the specifications required that the boiler renovation be scheduled to permit operation of the plant with one spare boiler available at all times. All State's proposed construction schedule predicted early completion of the project -- within 270 days -- based on the use of temporary boilers during construction. The VA rejected the proposed schedule because of the extended deadline for the required submittals and especially because of the proposed use of temporary boilers. All State provided seven alternative construction schedules, but no schedule was ever approved by the VA. Furthermore, the VA never received all of All State's submittals. Nonetheless, the VA allowed All State to begin demolition and disassembly of the boilers on March 28, 1994.

On the second day of demolition, All State discovered what it believed to be asbestos in the casing of one of the boilers. The contract made no provision for dealing with asbestos; the VA therefore requested separate bids for the asbestos abatement work. All State did not bid on the abatement contract. The VA declined All State's offer to continue performance out-of-sequence and suspended all work on the contract.

Performance resumed on the contract on May 28, 1994, after a fifty- eight day suspension. All State eventually completed the contract on March 1, 1995, twenty-two days after the amended deadline.

On June 2, 1994, All State submitted a claim to increase the amount of the contract by $55,739.74, based on costs associated with the temporary suspension of work. On August 30, 1994, All State revised its claim to $39,962. The Contracting Officer (the "CO") obtained an audit of the claim, which established a daily overhead rate of $718. In a final decision on November 17, 1994, the CO awarded to All State the costs of operational rentals during the suspension of the contract work -- a total of $522 -- and denied the remainder of the claim, including the request for unabsorbed overhead expenses.

All State appealed to the Board. Before the Board, All State and the VA stipulated that All State was further entitled to $9,628 in direct field costs and salaries that accrued during the suspension of work. Thus, the only issue before the Board was whether All State was entitled to recover unabsorbed home office expenses. The Board concluded that All State had successfully demonstrated that All State was required to "stand by" during the government-caused suspension and that it was "impractical" for All State to take on additional work during that period. See All State Boiler, slip op. at 15-20. Specifically, the Board made the following findings of fact with respect to All State's ability to take on additional work:

During the suspension of work, [All State] had approximately $5 million of additional bonding capacity and continued to actively bid for new work. [All State], as a matter of its deliberate business practice, maintained its work-on-hand volume at approximately half of its bonding capacity. Although [All State] bid several jobs smaller than those for which it would typically compete during the suspension period in an effort to generate revenue, it was impractical for [All State] to bid, obtain contracts, and begin work on new projects in the 58 day period of the suspension. In general, however, [All State] was not prevented from bidding on new projects by reason of the suspension of work.

Id. at 7 (emphasis added). The VA argued to the Board that the second prerequisite to Eichleay recovery requires a contractor to demonstrate that it was not just impractical but impossible for it to take on additional work. The Board reviewed Federal Circuit law and determined that the government had overstated the requirement, noting that the "VA's expression of the second prerequisite . . . is contrary to the [Federal Circuit's] holdings and would impermissably [sic] restrict the ability of Federal construction contractors to recover the costs of unabsorbed overhead expenses to which they are entitled under Federal contract law." Id. at 16. The Board concluded that the second prerequisite merely "requires that the claimant demonstrate that it was impractical to obtain other work during the delay period." Id. at 18 (emphasis added). Furthermore, the Board hypothesized that:

[N]o reasonably healthy and prudent contractor[] would be able to establish that it was unable to take on additional work during an entire contract period. Under the VA's analysis, Eichleay could be used only in two extremes: when a contractor is in such a precarious state, or when a contractor's business [is] so good, that it has no available bonding capacity for the entire contract performance period, and therefore it could take on no additional work. Such an interpretation does not make business sense.

Id. at 19. The Board separately concluded that All State had failed to demonstrate that it would have completed the contract work early but for the government-caused suspension. See id. at 12. The Board therefore awarded All State its unabsorbed overhead costs for the twenty-two days beyond the deadline that proved necessary to complete the contract, based on the auditor's daily overhead rate, totaling $15,796. See id. at 21.

The government appeals from this decision, arguing that the Board applied the incorrect legal test to determine whether costs should be awarded under the Eichleay formula, arguing as it did before the Board that the contractor must show it was impossible -- not just impractical -- for it to take on additional work as a result of the suspension. All State cross-appeals, arguing that the Board improperly awarded indirect costs for only the twenty-two day extension of the performance period rather than for the full fifty-eight days of the suspension. The notices of appeal and cross-appeal as to the appropriateness of the Board's Eichleay award were timely filed, and this case was submitted for our decision following oral argument on March 5, 1998. We have jurisdiction over a final decision by a board of contract appeals pursuant to section 8(g)(1) of the Contract Disputes Act of 1978, codified at 41 U.S.C. § 607(g)(1) (1994), and 28 U.S.C. § 1295(a)(10) (1994).


I. Standard of Review

Although we review a Board decision on a question of law de novo, we may only overturn Board fact-finding that is arbitrary and capricious, unsupported by substantial evidence, fraudulent, or so erroneous as to imply bad faith. See 41 U.S.C. § 609(b) (1994); Wickham Contracting Co. v. Fischer, 12 F.3d 1574, 1577 (Fed. Cir. 1994). Nonetheless, even on issues of law we give careful consideration to the Board's legal Conclusions in recognition of its "considerable experience in construing government contracts." Wickham, 12 F.3d at 1577 (citing United States v. Lockheed Corp., 817 F.2d 1565, 1567 (Fed. Cir. 1987)). We therefore review the Board's interpretation of the legal tests for recovery of unabsorbed overhead expenses as a question of law; its decisions with respect to the underlying facts related to those legal tests shall be upheld unless we conclude they are not supported by substantial evidence.

II. Unabsorbed Overhead and the Use of the Eichleay Formula

The bid price of a government contract incorporates any anticipated expenses arising from the performance of that contract, such as construction wages and equipment rental, to be incurred by the contractor. These are direct costs, because they arise solely because of and are attributable directly to performance of a specific contract. In addition, a government contractor incurs indirect costs which are not attributable to one contract in particular but arise because of its general operations. Indirect costs are usually those costs that are "incurred despite construction inactivity on a project, such as home office overhead including accounting and payroll services, general insurance, salaries of upper level management, heat, electricity, taxes, depreciation." Interstate Gen. Gov't Contractors, Inc. v. West, 12 F.3d 1053, 1058 (Fed. Cir. 1993). A contractor recovers its indirect costs by allocating them on a ...

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