Unabsorbed Home Office Overhead

Unabsorbed Home Office Overhead is also a well-known, but not well-understood delay damage and like extended field overhead is only caused by a critical project delay.
Home office overhead costs are costs that are incurred to support the work, but are not directly chargeable to a specific project. Typically, the contractor’s home office overhead costs are apportioned and assigned to the contractor’s projects. Said another way, each project has to absorb its fair share of the contractor’s home office overhead costs.

Home office overhead costs include, but are not limited to:

  • Home office rental or home office ownership costs,
  • Corporate Taxes,
  • Insurance costs that can’t be assigned to a specific project,
  • Home office utilities and telephone,
  • Home office equipment and maintenance, and
  • Salaries of home office staff (company officers, estimators, payroll clerks, receptionists, and others not assigned to a specific project).

Although the terms Unabsorbed Home Office Overhead and Extended Home Office Overhead are often used interchangeably, they are not the same. For example, when a project experiences a critical and compensable delay, the project does not incur additional home office overhead costs, as it would additional field office overhead costs. Rather, the project’s extended duration may limit the contractor’s ability to earn revenue from new projects and, as a result, the revenue of contractor’s active projects are not able to fully absorb all of the contractor’s home office overhead costs during the period when the delayed project is being delayed. In this circumstance, the contractor’s home office overhead costs during the delay to the delayed project may be “unabsorbed” or “underabsorbed,” but, conceptually, not extended.

The calculation of the contractor’s unabsorbed home office overhead costs can be more complicated and is often quite controversial. It is usually determined through the use of appropriate apportionment formulas. The following is a comprehensive, but not exhaustive, list of such formulas and approaches:

  • Eichleay Formula,
  • Canadian Formula,
  • Allegheny Formula,
  • Carteret Formula, and
  • Fixed Percentage Approach.

Similar to extended field overhead costs, the executed change orders need to be evaluated, because if the change order work caused critical project delay, then the change order may address the contractor’s recovery of unabsorbed home office overhead costs.

(Given the complexities associated with determining the recovery of unabsorbed home office costs, it is recommended that the parties consult with those experienced in the determination of these costs.)