Imagine you receive an award for a federal project that will require your subcontractor to start work right away.  You make sure your subcontractor is ready to go at the planned start date, but the Government delays the start of work. The contracting officer admits that the delays are the Government’s fault, but refuses to issue a contract modification extending the contract completion date. Fearing that the Government will not issue a contract modification and will assess liquidated damages, your subcontractor remains on standby for months. Should the Government be held to account for its failure to issue a timely contract modification? According to the Armed Services Board of Contract Appeals in its May 21, 2020 decision in the Appeal of Alderman Building Company, Inc., the answer is yes.

The Navy hired Alderman to perform renovations on a building at Camp Lejeune in March of 2009. But when it was time to start the work, the building was still occupied because there was no alternative space prepared for the tenants. The Navy repeatedly delayed the start date for the work for indefinite periods of time while it attempted to empty the building. The contracting officer acknowledged that these were Government-caused delays and stated his intent to issue a contract modification extending the contract completion date. However, he did not actually issue the modification until August of 2010, 17 months after contract award. During much of this period, Alderman’s subcontractor kept its forces on standby, ready to begin performance as soon as the Navy made the building available.

Alderman submitted a claim on behalf of its subcontractor seeking unabsorbed home office overhead under the Eichleay formula. The Eichleay formula is a long-standing legal doctrine that allows contractors to recover their home office costs (which are not usually allocable or allowable on federal contracts) when the Government unreasonably delays a contract for an indefinite period of time, and requires the contractor to remain on standby while it waits. In this case, it was clear that the Government’s delays were both unreasonable and for indefinite periods of time. But the Government argued that it had never directed Alderman to keep its subcontractor on standby during the delays, and that the subcontractor had no right to recover home office overhead.

The Board rejected the Government’s defense, holding that Alderman’s subcontractor “kept its work force on standby chiefly because of the threat of liquidated damages and because of the absence of a time extension.” In other words, the Board held that the Government’s failure to issue a timely contract modification forced the subcontractor to remain on standby while it waited. Because the subcontractor was on standby, it was entitled to recover its home office expenses incurred while waiting for the Government to start the work.

Prosecuting a claim for Eichleay damages can be challenging, and is highly dependent on the facts of the case. However, the Board’s holding that the Government’s failure to issue a timely modification for a contract time extension is effectively the same as an order to remain on standby may make it possible for far more contractors to recover such damages in the future. It may also open the door for other types of claims based on the Government’s failure to issue timely modifications. Most importantly, it may pressure contracting officers to issue time extension modifications as delays occur, rather than putting them off for a year or more.