On repair or rebuild estimates, General Contractors charge for Overhead and Profit (“O & P”). Insurers are not always willing to pay O&P, but they are necessary costs of doing business, and policyholders are entitled to insurance benefits to cover them in most cases.
O & P is a percentage of the overall cost of a job that covers a General Contractor’s time and expenses.
When a General Contractor (“GC”) is involved in a job with three or more “trades” (subcontractors such as plumbers or electricians), the rule of thumb is that he or she is entitled to be paid for supervision and coordination. Although overhead and profit are two distinct categories of costs, they are typically always combined under the label “O & P” and expressed as two separate amounts, such as “10 and 10.” Operating charges for necessary equipment and facilities are known as overhead costs. The GC’s livelihood is dependent on profit. O&P is expressed as a percentage of the overall job cost. When O & P are set to “10 and 10,” they will be added to the overall task estimate at a rate of 20%.
- Whether the required building work would necessitate the level of supervision and coordination that justifies overhead and profit payout;
- How much O & P is required for the job – 5/10, 10/10, 10/15, or even 20/20 if the project or scenario is especially difficult;
- Whether or not O & P should be included in initial payments of real cash value amounts; and
- Is a property owner who serves as his or her own GC eligible to O and P compensation?
The following information is intended to assist policyholders/property owners in answering the following questions:
A general contractor is in charge of overseeing the entire building project, hiring the necessary crafts (carpentry, masonry, plumbing, electrical, and so on), and sequencing, coordinating, and supervising their work.
A general contractor is required anytime more than three trades are involved, according to a long-standing rule.
The general contractor is also in charge of researching zoning regulations and securing the required permissions.
What does O&P mean on an insurance claim?
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 RCV on insurance estimate?
ACV is the cost of replacing or repairing your home and personal belongings, less depreciation. Depreciation is the loss of value due to factors such as age or wear and tear.
Replacement Cost Value (RCV)
Even if you acquired RCV coverage, some types of property may only be reimbursed at ACV. These may include the following:
- Appliances, wood fences, non-building constructions, awnings, carpeting, outside antennae, and equipment are examples of non-building property.
- Antiques, collectibles, memorabilia, artifacts that cannot be replaced, and obsolete property that is stored or not in use are all examples of personal property.
Most companies will only pay you a portion of the RCV at initially. Before you may obtain the balance of the money, you must show that you repaired your property or replaced or repaired personal belongings.
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.
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.
What is a typical markup for contractors?
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How to Calculate Profit Margin on a Construction Job
This is how it goes. Let’s imagine ABC Company has $100,000 in revenue at the conclusion of the first year. It had a gross margin of $35,000, or 35 percent of revenue, because its cost of goods sold was $65,000, or 65 percent of revenue. As a result, we have a “margin” of 35%.
Now, the owner of ABC Company, let’s call him Ed, is ecstatic about the profits and undertakes exactly the same quantity and type of work in Year 2, but he utilizes his gross margin erroneously as the percentage he would mark things up. He conflates mark-up with margin, and in Year 2, he increases his costs by 1.35x.
Ed loses money on the same amount and type of labor in Year 2. He has a $12,000 swing between $10,000 profit and over $2000 loss. He mistook margin for markup and underpriced his jobs as a result.
We could dive into some major arithmetic to figure out why this happens, or we could just look at the chart below, which shows that to have a 35 percent margin, you must mark it up 54 percent or 1.54x. Remember that mark-up should be viewed as a multiplier.
Average General Contractor Markup
Here’s an useful markup & margin table for contractors to keep things simple. It shows you how much you need to mark things up to attain your desired profit margin. Most general contractors aim for a 35 percent profit margin, which means a mark-up of 54 percent, or 1.54, is required. Subs typically have a profit margin of 50%, which necessitates a mark-up of 100% or 2x, as seen in the table on the right.
Remember that your mark-up must account for more than just your direct costs when thinking about the distinction between mark-up and margin (COGS).
You must also cover your costs and earn a profit. As a result, you must determine what percentage of income is consumed by overhead and what percentage of revenue you wish to maintain as profit.
Some contractors make a 35 percent gross profit, with 25% going to overhead and 10% remaining in the business.
This is referred to as developing a business model, and it is one of the first things you should do when starting a company.
The Giersch Group can assist you in determining your margins, necessary mark-up, and other methods for improving your pricing and ensuring profitability.
- Margin and markup are two distinct concepts that are closely related but not interchangeable.
- Your figures are your figures. Once the profitability of your markup has been assessed,
How much should a contractor profit?
You don’t want a company that struggles, isn’t profitable, or fails. Your goal, I’m sure, isn’t merely to keep busy and make enough money to pay your bills. However, in the construction industry, this is the norm, with owners focusing on the wrong things every day. If you monitor the success of 95 out of 100 general contractors, builders, or subcontractors for ten to twenty years, you’ll hear the same tale over and over again: -They put forth too much effort and take too many risks. -They don’t ever make a lot of money. -They never have any money left over to put into the stock market. -They will never be debt-free. -They are unable to stop working because they require financial support. Only one out of every 100 construction firm owners will be independently affluent by the age of 65. – Four will have a stable financial situation. – Out of necessity, twenty-four will continue to work. – Thirty-one people will die. – Forty people will be broke and rely on social security to get by. It appears that business owners expect that their efforts will one day make them wealthy or provide them with financial independence. However, the chances of hitting the jackpot, winning the lottery, or inheriting a fortune to produce wealth are better than continuing to perform business as usual. Owners of construction companies are entitled to more. However, you’ll need a strategy and a laser-like focus on the figures to keep you on track. Even if you despise numbers, there are nine essential financial numbers you must know, track, and review on a weekly and monthly basis.
2. Be aware of your equity figures. The actual value of your company, excluding its intrinsic value, is known as equity or net worth. It’s the difference between your total assets and total liabilities. It’s at the bottom of your financial statement or balance sheet. Growing the company’s net worth is one of any construction firm owner’s main concerns. If the company’s worth doesn’t rise, it won’t be able to take on more work, improve its bonding capacity, or expand its size. Over 80% of construction firm owners have no idea how much their company is worth. Only once you’ve determined the value of your company’s investment can you set net profit goals for return on investment. Construction enterprises should aim for a net profit of at least 15% on total equity or investment, according to me. In addition, I recommend that businesses aim for a 25% return on equity as a good profit target. To figure out what your net profit objective should be, do the following:
How much do contractors charge?
Because general contractor rates vary by state, city, and even country, there is no such thing as a standard rate. However, the typical hourly rate is between $25 and $85.00.
Other contractors do not bill by the hour. General contractors often charge between 10% and 20% of the entire construction project cost. For even larger projects, professional construction services could cost as much as 25% of the total cost. The following is a breakdown of the current average contractor rates in the United States:
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 factor that could reduce the amount of your claim for a repair job. 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.