Which concept is used to allocate home office overhead to a government's contract when claims are involved?

Which concept is used to allocate home office overhead to a government's contract when claims are involved?

• A. Eichleay Formula
• B. GAAP
• C. SOP 81-1
• D. CGL

Answer: (A)

Allocating home office overhead to a government contract when claims are involved rests on using the Eichleay formula. This approach recognizes that overhead costs incurred at the home office should be tied to the duration a contract is active, including periods of suspension or delay caused by the government and potential claims. The goal is to spread the home office overhead across contracts in proportion to the time the contract was performing, so a delayed or disputed contract doesn’t unfairly saddle other jobs with extra overhead. In practice, you establish a base period for overhead, determine a daily overhead rate, and multiply that rate by the number of days the contract was active during the base period (including idle days). The result is the portion of home office overhead allocable to that contract, which is especially relevant when calculating recoverable overhead on claims. GAAP provides general accounting principles, SOP 81-1 covers construction accounting methods, and CGL is liability insurance—none specifically address this targeted overhead-allocation method.

Allocating home office overhead to a government contract when claims are involved rests on using the Eichleay formula. This approach recognizes that overhead costs incurred at the home office should be tied to the duration a contract is active, including periods of suspension or delay caused by the government and potential claims. The goal is to spread the home office overhead across contracts in proportion to the time the contract was performing, so a delayed or disputed contract doesn’t unfairly saddle other jobs with extra overhead. In practice, you establish a base period for overhead, determine a daily overhead rate, and multiply that rate by the number of days the contract was active during the base period (including idle days). The result is the portion of home office overhead allocable to that contract, which is especially relevant when calculating recoverable overhead on claims. GAAP provides general accounting principles, SOP 81-1 covers construction accounting methods, and CGL is liability insurance—none specifically address this targeted overhead-allocation method.