The phrase overheard and profit,a.k.a O&P as it is more often known, is mistaken and frequently the topic of misunderstandings and disputes. Because of the purported custom and practice in the worker's compensation industry, class action lawsuits against insurance companies have been filed in many jurisdictions.
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Overhead and profit are frequently
referred to in the insurance restoration and accident reconstruction industry
as a norm from which variation is not permitted. But this is false and goes
against economic truth and logic. But first, we must clarify what O&P is
and how it is used in practice before exploring the fallacy surrounding this
insurance practice and habit.
There are just two main cost
components that constitute the "Cost of the Work" on any project, in
the eyes of a general contractor or construction manager:
Insurance claim consultant in texas USA
To purchase and install the project's
permanent components, direct costs are required, such as the building's
structure, exterior envelope, interior finishes, vertical transportation,
mechanical, electrical, and plumbing systems, etc.
Indirect costs are Basic Circumstances
or Operational costs and Markup (Fee or Profit), which are expenses related to
the project's Jobsite management and include things like project management
personnel, Jobsite previews, and other costs. Indirect costs can also include
fees associated with and specified in the General and Supplemental Conditions
of the Contract and (usually) Division 1 of the Specification. General
Conditions, General Requirements, or Field Office Overhead can also be called
General Conditions.
The work regulations and commitments
specified and mandated by the Contract are described in these agreements.
Markup, Fee, or Profit is meant to
make a profit for the contractor or construction manager while covering a
proportion of General and Administrative (G&A or Home Office Overhead)
expenses.
G&A costs are charges for the
client's business operations unrelated to a specific project, such as
estimating and preconstruction services, accountancy, promotion, etc.
Overhead:
Prevailing circumstances and needs,
such as project management personnel and services, are referred to as
"overhead" when discussing a general contractor or construction
manager.
This is the sum by which a precise
estimated cost is elevated to take full responsibility for the Jobsite
amenities of a general contractor or construction manager and for goods not
particularly aligned with a particular mission of work that may be needed to
enable an organized and coordinated setup of in- formation to complete the project.
Profit
The term "profit" refers to
the markup that the construction manager or contractor applies to the sum
amount.
The estimated direct cost :
The estimated general conditions and
needs as well as certain G&A charges.
Expenses & Revenue:
For the main contractor's or
construction management's services, overhead and profit are expenses that are
applied to the project's direct cost.
Costs and Markups for Insurance
Repair Projects: In the field of insurance repairs,
costs for projects that are calculated and agreed upon often follow a framework
where unit expenses are applied to specified scope of work, followed by costs
for overhead and profit where appropriate.
The subcontractor performs the
following calculations to determine the unit cost, including some that call for
experience-based judgment:
·
The total amount of materials
needed, which includes waste
·
Amount paid for labor.
·
The predicted productivity
level for installing components can vary from job to job depending on site circumstances,
the difficulty of the work, etc.
·
The dangers of underestimating
or not knowing conditions.
·
The current situation of the
construction industry, including the contractor's workload, his need for or
desire for the task, etc.
Application: Insurance Repair
However, during the preceding twenty
years, several software firms have started to create applications that let the
user enter a "project scope" into a system using a set of codes.
The software then prices the figure
after applying a base price to the purview.
The cost of removing damaged material
from the reinstallation is frequently broken out in the pricing information
provided with these programs.
The fundamental issue with these tools
is that a user might lack the knowledge or skills to "examine beyond"
the unit cost to assess whether material prices, waste factors, labor rates,
productivity rates, and markups are accurate for the project at hand.
The risk is that the insurers have no
ability to unbiasedly decide what may be appropriate on a liability basis,
despite the fact that many so-called "repair contractors" have
authorized cost that comes with the program.
So it shouldn't come as a shock that
when calculating the expense and financial gains, computer programs would
typically "default" to conventional parameters (when required).
Insurance companies, claimants, and
repair companies frequently add 10% overhead and 10% profit (sometimes
cumulatively) to various losses, even though there is no "custom and
practice" in the insurance sector about when this is done (and in what
percentages).
However, occasionally, contractors
will add a significant number of the expenditures for general conditions and
needs as line items in their estimate, followed by profit and overhead.
The overhead and profit might not be
acceptable depending on the number and magnitude of prevailing circumstances
included in the estimate.
Consider a commercial building fire
that causes the destruction of building components worth roughly $100,000.
While one contractor adds general
conditions worth $10,000, the other doesn't. There is no question that each
contractor should not receive the same amount in expense and profit. The size
and duration of the project, the state of the market at the time of loss, and
general circumstances, overhead, and profitability must thus be assessed
objectively. This needs to be objectively thought about on a "loss by
loss" basis.
Additionally, like with major
commercial building projects, the expense and profit should drop as projects
grow in terms of dollar volume. This is primarily due to the fact that the
actual cost of General Conditions/Requirements charges, stated as a proportion
of the price to install materials, is frequently lower when a bigger dollar
volume is put into a project over time.
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