The recovery of unabsorbed home office overhead has become extremely difficult for contractors. The damages are intended to compensate a contractor for disrupted cash flow incurred as a result of a project owner’s suspension of the work. Unable to bill against the contract at the anticipated rate, the contractor cannot absorb fixed home office expenses as expected. But, owners have criticized the recovery as phantom damages. And, courts have imposed stricter requirements.

This was illustrated in a recent decision by the Virginia Supreme Court. A contractor was denied recovery of unabsorbed home office overhead because it failed to affirmatively prove it could not have replaced the revenue from the suspended contract with other revenue-producing work. Without this proof, the widely recognized “Eichleay formula” was nothing more than a “mathematical model” based on assumptions. Construction Claims Advisor also covered a different aspect of this case in the Oct. 18 issue.

Other cases this week address an arbitration agreement and the default termination of a subcontractor. While a written arbitration provision need not be signed in order to be enforceable, there must be proof of mutual assent to the provision. And the subcontractor’s diversion of material from the job site justified the default.