What Is O&P on an Insurance Claim?

When a property suffers damage and an insurance claim is filed, policyholders often encounter “O&P” within their settlement estimates. This acronym stands for Overhead and Profit, representing legitimate costs a general contractor incurs when managing and executing a repair project. Understanding O&P helps policyholders comprehend how their claim settlement is determined and ensures a complete restoration to pre-loss condition.

Understanding Overhead and Profit

Overhead and profit represent two distinct, yet equally important, components of a general contractor’s compensation for managing a repair project. Overhead refers to the indirect costs associated with running a construction business that are not directly tied to the materials or labor of a specific repair task. These costs include expenses such as office rent, utilities, administrative staff salaries, business insurance policies (like general liability and workers’ compensation), and the maintenance of essential tools and vehicles.

These indirect expenses are necessary for a contractor to operate legally and efficiently, ensuring projects are completed professionally. They are not attributable to a single line item of repair but rather support the entire operation. Profit, on the other hand, is the reasonable compensation a contractor earns for their expertise, the financial risks undertaken, and the capital invested in their business. It allows the business to remain financially viable, reinvest in equipment, training, and growth, and maintain a consistent level of service.

A contractor’s profit margin also accounts for the entrepreneurial risk involved in taking on projects, including potential unforeseen challenges and delays. Both overhead and profit are recognized as standard and necessary components in the construction industry, reflecting the true cost of professional project management and execution. Without these allowances, contractors would struggle to maintain operations or undertake complex repair projects.

When O&P is Applied to Insurance Claims

Insurance companies apply Overhead and Profit to a claim settlement when the scope of repairs requires significant coordination and project management. A common guideline used by insurers is the “three-trade rule,” which suggests that if a repair project necessitates the involvement of three or more distinct construction trades, O&P is warranted. For instance, a complex repair might involve a roofer, a drywall installer, and a painter, requiring a general contractor to manage the schedule, quality, and communication among these specialists.

Beyond the number of trades, other factors can also trigger the inclusion of O&P in a claim. Extensive damage requiring substantial project oversight, intricate logistical planning, or adherence to specific local building codes that mandate a licensed general contractor for certain types of repairs justify O&P. For example, large-scale fire damage affecting multiple rooms or significant water damage impacting structural elements and finishes across several areas involves diverse trades and complex coordination. In such scenarios, a general contractor’s role in overseeing the entire process is indispensable.

Conversely, O&P is not included for simpler claims involving minor, single-trade repairs. A small roof patch or the repair of a single broken window, which can be handled by one specialized contractor without extensive coordination, would not qualify for O&P. The determining factor is the complexity and scope of the repair, as well as the necessity of a general contractor to ensure work completion.

How O&P is Calculated and Included in Your Claim

The calculation of Overhead and Profit within an insurance claim estimate follows a standard methodology, applied as a percentage of the direct repair costs. While percentages can vary, insurers commonly apply 10% for overhead and an additional 10% for profit, resulting in a combined 20% allowance for a general contractor. This percentage is applied to the subtotal of the direct costs associated with the repair, which includes materials and labor for all individual trades involved in the restoration project.

O&P is calculated on the repair subtotal before other costs like sales tax or demolition expenses are added. For example, if the total direct repair costs for materials and labor amount to $20,000, an additional $4,000 (20% of $20,000) would be added for O&P. This amount is integrated into the overall claim estimate provided by the insurance adjuster, appearing as a distinct line item or embedded within the general contractor’s section of the estimate.

A general contractor plays a central role in justifying O&P by providing a detailed estimate that outlines their responsibilities for project coordination and management. Their estimate will itemize the scope of work, demonstrating the need for their oversight across multiple trades and the complexities involved. This detailed documentation supports the claim for O&P.