Overhead and profit (or O&P as it is most often known) is a concept that is sometimes misinterpreted. It is frequently misapplied and disputed, and has been the subject of class action lawsuits against insurers in various states in connection with alleged custom and practice in the insurance claims field.
Overhead and profit are frequently described in the insurance restoration and accident reconstruction industry as a norm from which no variation is possible. This, on the other hand, is false and defies both logic and economic reality. But, before we explore the insurance custom and practice O&P myth, it’s important to first grasp what O&P is and how it’s used in the actual world.
There are only two major cost categories related with the “Cost of the Work” on any project from the perspective of a general contractor or construction manager:
- Direct Costs – these are the costs of furnishing and installing the project’s permanent elements, such as the structure, exterior envelope, interior finishes, vertical transportation, mechanical, electrical, and plumbing systems, and so on; and Indirect Costs – these are the costs of furnishing and installing the project’s temporary elements, such as the structure, exterior envelope, interior finishes, vertical transportation, mechanical, electrical, and plumbing systems, and so on
- Indirect Costs – which include General Conditions or Overhead, as well as Markup (Fee or Profit), which are costs associated with the project’s jobsite management, such as project management staff, jobsite trailers, telephones, administrative as well as temporary roads, temporary utilities, permits, fees, general hoisting, safety, and cleaning, which are not specifically associated with individual elements being erected. Indirect costs are sometimes known as General Conditions, General Requirements, or Field Office Overhead, and might include costs related to and defined in the Contract’s General and Supplementary Conditions, as well as Division 1 of the Specifications (usually). These agreements lay forth and require the Contract’s work norms and obligations. Markup, Fee, or Profit is designed to cover a portion of the contractor’s or construction manager’s General and Administrative (G&A or Home Office Overhead) expenditures while also providing profit. G&A costs are expenses that are not related to a single project but are incurred by the contractor’s business, such as estimating and preconstruction services, accounting, marketing, and so on.
Overhead:
Overhead refers to field office overhead or general conditions/requirements, such as project management employees and services, as it relates to a general contractor or construction manager. This is the amount by which a direct cost estimate is increased to account for the jobsite services of a general contractor or construction manager, as well as items not specifically aligned with a specific task of work, that may be required to allow for the orderly and coordinated installation of materials needed to complete work.
There are many different types of “overhead” costs, which can be classified into the following groups:
- G&A (General and Administrative) “Overhead for a “home office”; or overhead for a “field office,” which is often synonymous with the above-mentioned General requirements/Conditions.
- General Requirements, which are the costs involved with a general contractor or construction manager adhering to Division 1 work requirements. These are frequently referred to as “Project management personnel and supplies, temporary services and utilities, safety, and cleanup are all included in the “General Conditions” (among other items).
Overhead & Profit:
Overhead and profit on a project are charges that are added to the project’s direct cost to pay for the general contractor’s or construction manager’s services.
In most cases, overhead and profit will change with the market. When market conditions are unfavorable to the contractor (i.e., few construction projects are being launched), contractors reduce their profits to stay competitive, and they may take any task that would keep their employees occupied. Overhead will be decreased because a contractor will be able to put fewer people on a task and will be able to arrange for subcontractors to bear more of the indirect costs at no extra charge, cutting overhead.
Definitions:
A basic understanding of construction concepts is essential to comprehend what O&P is. The phrases (costs) listed below must be accounted for in any construction project, whether it be new construction, insurance restoration, repair, rehabilitation, or rebuilding.
- Materials that will become a permanent component of whatever is being built are known as permanent materials.
- Temporary materials are those that are required to complete a job but are neither permanent or reusable. Plywood and framing used to build concrete footings are an example of temporary materials.
- Skilled and unskilled labor employed to install (and support the installation of) materials are referred to as craft or trade labor.
- Disposable tools and equipment – These are small tools and equipment that are needed to install materials that aren’t reusable (i.e. small tools, saw blades, etc.).
- Equipment that can be reused to help with the installation of materials. These can range in size from a small rolling scaffold to a tower crane.
- Subcontractor – A trade contractor who is responsible for only one or a few trades. Subcontractors generally recruit both expert and unskilled workers to install the materials they are providing “The installation was “contracted.” They provide the necessary equipment and supervision to coordinate the installation, as well as direct costs and overhead “To account for their own risk and to reach their profit goals, they “mark up” their costs.
- General Contractors are in charge of organizing and directing the work of tradespeople. They may self-perform some tasks and work directly for the owner. They have the authority to enter into subcontract agreements for trade work and are responsible for doing so.
- Construction Manager – Typically provides the same services as a general contractor, but does not perform work himself, and is the point person for the project “The owner’s “agent” In certain situations, a “The subcontract agreements may not be held by CM.
- Direct Labor Cost the amount paid directly to craft/trade labor on an hourly (or daily) basis.
- Fringe Benefits – Costs that are often provided by an employer or required by union collective bargaining agreements to be paid directly to the labor union (often applied to each hour worked).
- The contractor (or subcontractor) bears the expense of each hour (or day) that a craft/trade laborer is paid. These expenditures include things like workers’ compensation insurance, social security taxes, disability insurance, and Medicare taxes, among others.
- General and Administrative Overhead, often known as Home Office Overhead, is the expense of running a subcontractor, general contractor, or construction manager’s business.
- Profit/Fee – The subcontractor’s or contractor’s/construction manager’s compensation for completing the task, usually expressed as a percentage (though sometimes as a fixed amount).
- Construction Contingency A risk-accounting element used by a subcontractor, contractor, or construction manager.
Understanding what costs go into each of these categories will help define exactly what O&P is. Keep in mind that the cost of each construction project is made up of two aspects (direct and indirect costs). Assume a subcontractor is responsible for providing and installing the following scope of work:
- HVAC air handlers, condensers, controllers, ducting, and other items are purchased based on project specifications. For some materials, this substance may contain waste components (wire, sheet-metal, conduit, etc).
The cost of furnishing, installing, and delivering equipment and appurtenances, labor (direct, fringe, and burden) to set and pipe the equipment, supervisory labor, materials and equipment (i.e. the general conditions and requirements necessary for the sub to complete its work if not provided by the GC/ CM), insurances, certain home office overhead, and profit will all be included in the subcontractor’s cost.
How do you calculate O&P?
You’d need to add $60 ($1000 x 6%) to the same Project 1 with $1,000 in expenditures.
It’s also important to keep in mind that your overhead cost isn’t a one-time estimate. Because business expenses might rise or fall, it’s critical to recalculate at least twice a year.
Calculating your construction profit
After paying for a project’s costs and overhead, your profit is the money left over. This money can be used to reward yourself or your employees, reinvest in business growth, or serve as a safety net in the event of future losses.
With your profit markup, you’ll have to do some trial and error to come up with an adequate profit margin for your business.
A profit markup (sometimes called a profit percentage) is not the same as a profit margin. A profit markup is a percentage added to the cost of a project to generate a profit margin.
Start adding a fair profit figure to your project estimates that represent your overhead, such as $50/day, to find your target amount. If you’re having trouble winning projects because of cost, lower this number until you succeed; if you’re succeeding, gradually raise it until you get some cost pushback.
You can calculate your profit markup once you’ve identified and tested the “sweet spot” (i.e., the percentage you add to your project costs to create this profit).
Divide your profit figure by the total sum of overhead, material, and labor expenditures, then multiply by 100 to get your profit % for a project. This is the profit percentage you applied to the project’s cost.
Let’s say your Project 1 costs are $900 ($600 labor, $240 supplies, and $60 overhead), and you make a $100 profit.
What is meant by contractor O&P give three components that are considered in the O&P?
1. Total number of materials required, including waste 2. Labor costs 3. The estimated rate of material installation productivity, which varies from job to job depending on site conditions, work complexity, and other factors.
What is O&P in roofing?
If you’ve ever filed a roofing claim with your homeowner’s insurance, chances are you’ve heard about O&P from your roofing business or general contractor. “Overhead and Profit” is what O&P stands for. It refers to the portion of your claim that covers the project management and overhead expense associated with managing your rehabilitation project in the context of roofing and outside services.
How much should a contractor charge for overhead?
According to a nationwide NAHB survey, average net profit was 9% and overhead was 10%. That’s pretty close to the “10 and 10” rule of 10% overhead and 10% profit, which is commonly used in the sector.
How much should a contractor charge for overhead and profit?
General contractors charge overhead and profit (GCOP) on a regular basis, usually at a rate of 10% for each. This is how they are compensated. An insurer who refuses to pay GCOP until the repairs are finished puts the property owner in a difficult financial situation.
What if home insurance estimate is too low?
You can still go back to the insurance company if you discover further damage after accepting the home insurance adjuster’s settlement offer or accepting an advance. You can “reopen” the claim and submit a new claim for a higher sum. It’s common for plans to require claims to be made within one year of the disaster, but check with your state to see if this is the case.
You may also receive numerous payments if there is damage to different homeowner’s insurance policy categories. For additional living expenses incurred while your house is being remodeled, you may be eligible for a separate homeowners insurance settlement payment.
What is a claim estimate?
When you file a claim, your insurance company will assign you to a claims adjuster, who will inspect the damage and produce an initial estimate of how much it will cost to repair the vehicle.
- The adjuster’s estimate is merely a guideline, not a full settlement. Don’t feel obligated to accept the insurance company’s adjuster’s estimate unless you’ve determined that it will cover the cost of the repairs to your satisfaction.
- The insurance will require you to obtain at least one estimate from your mechanic, garage, or auto dealer, which you may compare to theirs.
- Don’t be surprised if your insurance company chooses to pay for the lowest price. They want to make sure they don’t pay a wildly inflated repair cost, just as you want to make sure your automobile is properly repaired. Betterment, as defined by insurance companies, is one aspect that could lessen the amount of your claim for a repair project. If your old car is fixed with brand-new parts, your insurance may argue that the repairs have increased the car’s worth, and so your claim can be properly reduced by the difference between a used and a new part.
- Your insurer cannot compel you to have repairs done at a certain shop, but they might insist on getting multiple estimates for the work to be done on your car if they believe the first quote is too excessive.
- If necessary, you can bargain. You are not obligated to accept it if you believe the amount is insufficient to repair your vehicle. If the repair estimate is too low based on what your mechanic has informed you, don’t be afraid to argue with the adjuster.
What is included in contractor overhead?
The cost of running a firm is known as overhead. Subcontractors, machinery, equipment, insurances, office employees, office supplies, vehicles, and other costs are often included in overhead in the construction industry. These are divided into two categories: direct and indirect. Direct overhead costs (such as equipment rental) can be assigned to a specific job, whereas indirect costs cannot (such as the cost of the office holiday party).
After subtracting the job cost and overhead amounts from the contract price, profit is the amount of money remaining. So, if a project costs $20,000 and costs $15,000 in supplies and $2,500 in overhead, the profit is $2,500.
The NAHB conducted a national survey in 2019 that included data from over 6,500 home builders. According to the data, the average overhead on building projects in 2019 was around 11%, and the average profit was around 9%. Those percentages are quite near to the “10 and 10” rule, which is what most construction companies aim for.
Can you depreciate overhead and profit?
The California legislature is now discussing Assembly Bill 188, which would require an insured to be compensated for a total loss of a building in the same way as an insured is compensated for a partial loss of a building, i.e. for the building’s actual cash value.
Depreciation must represent the actual state of damaged property at the time of a loss, according to California Insurance Code 2051 and California Code Regs. tit. 10, 2695.9. Physical depreciation can only be applied to components of a structure that are generally susceptible to repair and replacement during the structure’s useful life, according to California Insurance Code 2051. Depreciation can only be applied to building components that are projected to experience wear and tear under this regulation. Before depreciation can be applied, the question of whether the component is regularly replaced by the home or building owner must be answered. What is the extent of maintenance required to keep the component in excellent working order if it is not a component that is replaced? The foundation, structural elements, walls, and plumbing of a building, for example, are rarely rebuilt, therefore any depreciation is inappropriate. Depreciation should not be applied to any expenditure in a building repair estimate that is not related to the building property. As a result, an insurer cannot deduct depreciation for labor, plans, permits, overhead, or profit. The amount of depreciation that can be applied to a construction component that requires minimum maintenance should be limited. A brick wall, for example, will almost certainly never be replaced, but it may require some care every ten to twenty years.
Depreciation cannot be applied purely on the basis of the age of a building component in California. According to California insurance requirements, any depreciation adjustment must represent the measurable difference in market value due to the property’s age and condition. 2 As a result, depreciation must be calculated based on the actual state of the damaged property. The insured’s maintenance of the property, when the building component was last replaced, and the property’s or component’s quality are all factors to examine. You can demonstrate modest depreciation deductions if you can prove the property was in good to outstanding condition.
According to California’s depreciation guidelines, assessing and evaluating the condition of the property previous to the loss is critical in determining the necessary amount of depreciation to apply. This entails obtaining as much information as possible from an insured, whether by photos, contractors, or extensive oral details. This data will aid in minimizing and accurately calculating depreciation.