Answered: What is the Eichleay Formula used for?

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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What is the Eichleay Formula used for?

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Answer: Eichleay Formula is used for solving the disputes created in Home Office overhead cost on contracts with the federal government, dealing with construction delay claims in various projects.

The basic concept of the formula is that it calculates the home office overhead costs as a function of revenue of the firm concerned where the total home office overhead cost, subject to allocation to the project are divided throughout the duration of the project which includes the period of delay in order to reach to reach a daily home office overhead rate ( also known as HOOH). After that the daily rate need to be multiplied with compensable delay duration for getting the extended HOOH costs.

HOOH cost ( allocable to project ) = $(t o t a l c o n t r a c t b i l l i n g s / t o t a l b i l l i n g s o f c o m p a n y o v e r t h e c o n t r a c t p e r i o d) \times (h o m e o f i c e o v e r h e a d f o r t h e c o n t r a c t p e r i o d)$

Daily HOOH cost for contract = $(a l l o c a b l e H O O H t o p r o j e c t / p e r f o r m a n c e p e r i o d o f c o n t r a c t)$

unabsorbed HOOH = $D a i l y h o m e o f f i c e o v e r h e a d \cos t f o r c o n t r a c t \times D e l a y d a y s$

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