BREACH AND DAMAGES
In the case of North Delhi Municipal Corporation v. Varinderjeet Singh,1 the Delhi High
Court noted that the employer should pay the contractor his full dues and held that, “Once the
work is carried out payments ought not to be delayed.”
In 2006, in the case of McDermott International Inc. v. Burn Standard Co. Ltd.,2 the Supreme
Court had the opportunity to discuss some of the formulae for computation of damages in
detail.
(i) Hudson Formula: In Hudson's Building and Engineering Contracts, Hudson formula is
stated in the following terms:
(Contract Head Office overheads profit %) x (contract sum ÷ period in weeks) x delay in
weeks
**Where Contract Head Office (head office overheads) and profits percentage submitted in
tender.
***Dividing the total overhead cost and profit of the organisation as a whole by the total
turnover of the organisation normally arrives at the head office percentage.
In the Hudson formula, the head office overhead percentage is taken from the contract.
Although the Hudson formula has received judicial support in many cases, it has been
criticized principally because it adopts the head office overhead percentage from the contract
as the factor for calculating the costs, and this may bear little or no relation to the actual head
office costs of the contractor.7
This formula has been highlighted in Ellis-Don Ltd v. The Parking Authority of Toronto8.
(ii) Emden Formula: In Emden's Building Contracts and Practice, the Emden formula is
stated in the following terms:
(Head Office Overhead & Profit ÷ 100) x (Contract Sum ÷ Contract Period) x Delay Period
**The formula divides the total overhead cost of the contractor's organisation by the total
turnover. This results in a percentage based on the contractor's actual head office overhead,
instead of one contained in an isolated contract.
1
2018 SCC OnLine Del 8066.
2
(2006) 11 SCC 181.
Using the Emden formula, the head office overhead percentage is arrived at by dividing the
total overhead cost and profit of the contractor's organization as a whole by the total turnover.
This formula has the advantage of using the contractors actual head office and profit
percentage rather than those contained in the contract.9
(iii) Eichleay Formula: The Eichleay formula was evolved in America and derives its name
from a case heard by Armed Services Board of Contract Appeals, Eichleay Corp. It is applied
in the following manner:
Step 1: Overhead Allocable to the Contract. This is a calculation to determine the portion of
the Office Overhead that should be allocated to this project. This is a way of calculating that
amount.
(Contract Billings ÷ Total Billings for contract Period) x Total Overhead for Contract
Period
Step 2: Daily Allocable Overheads/ Daily Overhead Rates
This is a calculation to determine the daily rate for the allocation of Office Overhead
(Allocable Overheads ÷ Total Days of Contract)
Step 3: Daily Overhead Rate/ Amount of Unabsorbed Overhead
This is simply a matter of multiplying the number of compensable delay days by the daily
allocable overhead rate.
Daily Allocable Overheads/ Daily Overhead Rates x No. of days of delay
This formula is used where it is not possible to prove loss of opportunity and the claim is
based on actual cost. It can be seen from the formula that the total head office overheads
during the contract period is first determined by comparing the value of work carried out in
the contract period for the project with the value of work carried out by the contractor as a
whole for the contract period. A share of head office overheads for the contractor is allocated
in the same ratio and expressed as a lump sum to the particular contract. The amount of head
office overhead allocated to the particular contract is then expressed as a weekly amount by
dividing it by the contract period. The period of delay is then multiplied by the weekly
amount to give the total sum claimed.
