What is O&P in Construction in the USA?

In the construction industry across the United States, O&P, which stands for Overhead and Profit, is a crucial financial component that significantly impacts job costing, contractor bids, insurance claims, and client negotiations. Understanding what O&P entails, how it is calculated, and where it applies is essential for general contractors, subcontractors, insurance adjusters, and property owners alike.

Understanding Overhead in Construction

Overhead represents the indirect costs required to operate a construction business. These are expenses not directly linked to labor or materials for a specific job but necessary for the company to function. Overhead costs include:

• Office rent and utilities
• Salaries of administrative staff
• Accounting and legal services
• Business insurance
• Marketing and advertising expenses
• Vehicle and equipment maintenance not allocated to a project
• Licensing, permits, and compliance fees

These costs are typically expressed as a percentage of the total project cost, and while they do not contribute directly to the physical construction, they are indispensable for project execution.

Profit in the Construction Sector

Profit is the financial gain that a contractor earns after covering all expenses, including labor, materials, and overhead. Profit margins in construction vary based on the type of project, market conditions, and contractor pricing strategies. Typically, contractors apply a standard 10% markup for profit, though this can fluctuate depending on complexity, risk, and competitive pressures.

Profit ensures sustainability, business growth, and the ability to reinvest in tools, training, and innovation. It is also a reward for taking on the risks associated with construction projects, such as cost overruns, delays, and warranty obligations.

Standard O&P Percentages in Construction

The industry standard in many residential and commercial construction projects across the USA is:

• 10% Overhead
• 10% Profit

This is often referred to as 10 and 10, totaling 20% markup over the base cost. For example, if a construction job costs $100,000 in direct costs, applying O&P would bring the total to $120,000.

However, these percentages are not legally fixed. They can be negotiated based on project scale, location, insurance claim policies, and contractual agreements.

How O&P is Applied in Construction Estimates

In a typical construction estimate, especially those prepared for insurance claims or project bids, the O&P is calculated after determining the direct costs:

1. Labor – All wages and benefits paid to on-site workers.
2. Materials – All construction materials, including delivery fees.
3. Equipment usage – Costs associated with machinery and tools.
4. Subcontractor fees – Payments to specialists like electricians or HVAC technicians.

Once direct costs are totaled, the contractor adds a percentage for overhead, then another percentage for profit. These figures are usually added sequentially to the subtotal, creating a compound markup that reflects the true project cost.

O&P in Insurance Claims and Restoration Work

In the context of insurance restoration, O&P becomes even more critical. Many contractors working on insurance-funded repairs, such as after fire or water damage, include O&P to cover their operational expenses and margin.

However, insurance companies often scrutinize or challenge these fees. Insurers may argue that O&P is only justified when three or more trades are involved, making the project complex enough to warrant general contractor oversight.

This policy can lead to disputes, especially if contractors feel that all reconstruction projects, regardless of complexity, should account for O&P. Contractors often cite industry standards and publications like Xactimate (a leading estimating software) which default to O&P inclusions under specific parameters.

Controversies Around O&P in Construction

There is ongoing debate around when O&P should be applied, particularly in the insurance restoration sector. The major points of contention include:

• Threshold of complexity: Whether smaller, single-trade jobs warrant O&P.
• Double-dipping concerns: When subcontractors already include overhead and profit in their quotes.
• Lack of transparency: Miscommunication between contractors, insurers, and clients can lead to misunderstandings about the legitimacy of O&P charges.

To avoid disputes, it is essential to document all project scopes, clarify contractual terms, and ensure detailed itemization in estimates and invoices.

When O&P is Justified and Necessary

In a legitimate construction setup, O&P is justified under the following conditions:

• The project requires project management across multiple trades.
• The general contractor coordinates permits, scheduling, logistics, and inspections.
• Administrative expenses (beyond jobsite labor) are clearly outlined in the estimate.
• The contractor assumes liability and risk for job performance and warranty.

These scenarios confirm the necessity of O&P as a fair and expected part of doing business.

Best Practices for Contractors Applying O&P

To ensure transparency and avoid friction with clients or insurance carriers, contractors should:

1. Clearly define O&P in all estimates – Use itemized language to show how percentages are derived.
2. Educate clients on the necessity – Explain what overhead covers and why profit is essential for business viability.
3. Use industry-recognized estimating tools – Platforms like Xactimate or RSMeans strengthen credibility.
4. Include supporting documentation – Proof of licenses, insurance, office expenses, and trade coordination enhances justification.
5. Negotiate proactively with insurance adjusters – Be prepared with industry data to support your case for O&P inclusion.

Conclusion

Overhead and Profit (O&P) are not arbitrary markups—they are fundamental to the operational sustainability and financial integrity of construction businesses in the United States. Whether applied in residential building, commercial development, or insurance restoration work, O&P covers critical non-direct costs and ensures that contractors are compensated fairly for their efforts, risk, and expertise.

In an increasingly competitive and regulated construction landscape, understanding and appropriately applying O&P in construction is essential for profitability, compliance, and client satisfaction.

Looking for professional help estimating construction costs with proper O&P inclusions? Connect with experienced estimators who understand the nuances of the U.S. construction market and can help you get it right, every time.

End of Article.