It stems from a misunderstanding of the terms, tasks, and responsibilities of those involved. It is coupled with the age old contention that insurance companies and owners want to pay as little as possible, while Contractors want to be able to bill as much as possible. Each is motivated to make or save enough money to stay in business.
To understand the right solution, we have to first understand that there are 3 types of Contractors:
1. Contractors – Any person who signs a contract to do work on your property is technically a Contractor. In most States, they also need to have a license issued by the municipality. Usually this type of Contractor performs 1 or 2 trades that are compatible or may be done in tandem. Examples: carpet and vinyl, drywall and painting, excavation and concrete, roofing and framing repair, or electrical, plumbing, heating and/or air conditioning, etc.
2.General Contractors – When a job requires several trades, such as building or remodeling a home, a General Contractor is required to oversee the coordination and quality of the work performed.
> They may have in-house employees that can do one or all of the trades;
> They may hire Sub-Contractors to perform some or all of the work; or
> They may be the Owner doing any or all of the above.
General Contractors are paid by the Owners, and then issue payments to the Sub-Contractors they hired. General Contractors also inspect, guarantee the quality, and warrantee all work performed.
3. Sub-Contractors – Contractors, (see above,) when hired by General Contractors or Owners to perform one or more individual trades on the project, become Sub-Contractors. They are usually accountable to the General Contractor, not the Owner, because the General Contractor retained them. (If the Owner hired them, then the Sub-Contractor’s relationship is with the Owner.) The General Contractor is responsible to hire, coordinate, inspect, and pay the Sub-Contractor for the work they do. Sub-Contractors also guarantee their work to the General Contractor, who then guarantees it to the Owner.
From these definitions, the insurance companies operated under a rule of thumb, starting about 50 years ago, which was typically accepted across the industry. It stated that any company that performed or oversaw 3 or more trades on a project was a General Contractor and entitled to Overhead & Profit on the entire project. Typically O&P was calculated as 10% Overhead + 10% Profit, but some areas of the country may have differing percentages.
While I don’t know of any documentation that details this practice in writing, adjusters would usually pay claims this way. As an estimator and General Contractor, I have seen this play out this way for decades.
The reasoning used, was that General Contractors spent time in scheduling, coordinating, and warranting the cost of an entire project, not just a trade or 2. This time wasn’t included in any line items of the estimate. If they didn’t perform 3 or more trades, they were not managing the project; they were just a Contractor and their O&P was built into the estimate price for the portion of work they did.
Anyone who has been in restoration for more than 20 years is familiar with this way of doing things.
Xactimate® estimating software, made by Xactware®, added a white paper to their website explaining how Xactimate® calculates O&P. A portion of their paper is listed below, and used with permission.
(If you don’t want to read the legal text of the paper, jump down below the indented portion and I will tell you what it says.)
General Overhead are expenses incurred by a General Contractor, that cannot be attributed to individual projects, and include any and all expenses necessary for the General Contractor to operate their business.
Examples (including but not limited to):General and Administrative (G&A) expenses, office rent, utilities, office supplies, salaries for office personnel, depreciation on office equipment, licenses, and advertising.
Including General Overhead expenses in an Xactimate® estimate--General Overhead expenses are not included in Xactware’s unit pricing, but are typically added to the estimate as a percentage of the total bid along with the appropriate profit margin. These two costs together constitute what is normally referred to in the insurance restoration industry as General Contractor’s O&P, or just O&P. General Overhead and Profit percentages can be added in the Estimate Parameters window within an Xactimate estimate.
Job-Related Overhead are expenses that can be attributed to a project, but cannot be attributed to a specific task and include any and all necessary expenses to complete the project other than direct materials and labor.
Examples (including but not limited to): Project managers, onsite portable office and restroom facilities, temporary power and fencing, security if needed, etc.
Including Job-Related Overhead expenses in an Xactimate® estimate--Job Related Overhead expenses should be added as separate line items to the Xactimate estimate. This is done within the Line Item Entry window of an Xactimate estimate by selecting the proper price list items, or creating your own miscellaneous items.
Job-Personnel Overhead represents the non-wage related expenses incurred by a General Contractor that are associated to having their own employees perform the work, or the total G&A expenses incurred by a professional Sub-Contractor when using their services.
Examples: Vehicle costs, uniforms, mobile phones, depreciation on hand-tools owned by the company, etc.Job-Personnel Overhead also includes the portion of General and Administrative expenses and profit that correlate to employees performing billable tasks, and that are not included in the General Contractor O&P mark-up. These expenses will be incurred either by the general contractor using employees or by a sub-contractor, depending on who is actually performing the work. If the work is being sub-contracted, then these expenses are commonly called Sub-Contractor Overhead and Profit.
Including Job Personnel Overhead/Sub-Contractor O&P in an Xactimate® estimate--Job Personnel Overhead (or Sub-Contractor O&P) expenses are included in the Labor Overhead portion of each unit price in the Xactware® price list. The Labor Overhead, along with expenses for Labor Burden and Worker Wage (wage paid to the individual) make up the Retail Labor Rate.
Here is what it says above.
General Contractors, managing 3 or more trades, have expenses that cannot be specifically assigned to a particular project. These costs include, but are not limited to: General and Administrative (G&A) expenses, office rent, utilities, office supplies, salaries for office personnel, depreciation on office equipment, licenses, and advertising, etc.
These particular expenses are not included in the individual line items in an Xactimate® price list. Therefore, to be compensated, they are added as an Overhead and Profit expense at the end of the estimate on the entire cost of the project.
If a General Contractor has expenses that are unique to a project such as purchasing or renting a particular piece of equipment, acquiring permits and fees, or retaining an expert, (such as an architect or engineer), then this expense should be added as a line item in the estimate as a typical Job Related Expense, explained below.
Job Related Expenses are expenses that can be attributed to a project, but cannot be attributed to a specific task. These costs include, but are not limited to: Project managers, onsite portable office and restroom facilities, temporary power and fencing, security, etc. This would also include: permits, fees, architects, engineers, and other experts.
These expenses are added to the estimate as individual line items and include any O&P due a Contractor or Sub-Contractor.
So, if your Project Coordinator spent 3 hours calling, scheduling, and inspecting the project, the Project Coordinator line item is written into the estimate. This is just the same as if you had rented a portable toilet or fencing for the job. This is true whether you are a Sub-Contractor or the General Contractor using your own people. The Sub-Contractor O&P is already built into the line item prices by Xactimate® in this situation.
Finally, Job-Personnel Overhead represents the non-wage related expenses incurred by a General Contractor that are associated to having their own employees perform the work, or the total G&A expenses incurred by a professional Sub-Contractor when using their services.
The caveat here that everyone misses in this statement, is: These expenses will be incurred either by the General Contractor using employees or by a Sub-Contractor, depending on who is actually performing the work.
This is followed with: Job Personnel Overhead (or Sub-Contractor O&P) expenses are included in the Labor Overhead portion of each unit price in the Xactware® price list. They are not added or included in the general O&P for General Contractors because they already exist in each individual line item. It makes no difference if the General Contractor’s employees do the work or if a Sub-Contractor and his employees do the work.
So, whether you are the mitigation contractor who comes in the middle for the night and cleans up the mess or the drywall installer/painter who puts it back together, your O&P is already included in the individual line items and should not be added again to the end of an Xactimate® estimate.
According to general industry standards, you can only add O&P on the entire job if you managed 3 or more trades as a General Contractor because you incurred additional expenses that are not already included in the individual line items.
This said, Contractors have the right and freedom to charge whatever the market will bear, providing they are not illegally gouging the customer. But, if they claim to use pricing that is consistent with general industry standards and especially if they state that they use the accepted price lists as published by Xactware®, O&P is typically not acceptable unless they are managing 3 or more trades on the project.
Photo courtesy of XactLoss via https://jwheelerlaw.com/2017/04/who-pays-contractor-overhead-and-profit/
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