O and P is an industry term in construction representing Overhead and Profit, an integral part of nearly every project estimate. This financial allowance is added to the direct costs of construction, serving the dual purpose of covering a contractor’s general business expenses and providing a necessary return on investment. Understanding how Overhead and Profit are calculated and applied is fundamental to accurately pricing a construction project and ensuring the financial health of the contracting business.
Defining Overhead (O)
Overhead, in the context of the O&P calculation, represents the fixed and variable costs required to keep the construction business operational, regardless of whether a specific project is underway. These expenses are sometimes called “general and administrative” costs because they relate to the non-site-specific functions of the company. Overhead covers costs associated with maintaining the central office space, including rent, property taxes, utilities, and routine maintenance for the corporate facility.
General overhead also covers the salaries and benefits for personnel who are not directly assigned to a specific job site. This includes administrative staff, such as receptionists and bookkeepers, executive salaries, and costs associated with the sales or marketing departments.
Operational costs extend to general business insurance policies, such as liability coverage and worker’s compensation for office employees. This also includes general advertising costs and ongoing professional fees for accounting and legal services. These sustained operating expenses must be recovered across all projects the firm undertakes throughout the year.
Defining Profit (P)
Profit is the financial margin applied above all project costs, including the recovery of both direct expenses and general overhead. This component is not a cost recovery mechanism but rather the financial incentive that justifies the risk and investment taken on by the contractor. Profit compensates the business owners for their expertise, the capital they have invested in the company, and the financial liability assumed throughout the duration of the project.
Generating a consistent profit is necessary for the long-term viability and growth of any construction company. Profit enables investment back into the business, such as purchasing new equipment, upgrading technology, or providing training for employees. Without this margin, a contracting firm would merely break even, preventing it from expanding operations or building the financial reserves required to weather economic downturns.
General Overhead Versus Job-Specific Overhead
A frequent point of confusion in construction accounting is the distinction between general overhead and job-specific overhead, which are treated differently in the estimate. General overhead is the cost of running the entire company, and it is recovered through the application of the ‘O’ percentage within the O&P calculation. This percentage is applied uniformly across all projects to ensure all general administrative expenses are covered.
Job-specific overhead, also known as project overhead, includes direct expenses incurred only because a particular job exists and are necessary to manage the site. These costs are unique to the project and must be itemized as direct line items within the project estimate, not recovered through the general O&P percentage.
Examples of job-specific overhead include:
- The salary for the on-site project superintendent.
- The cost of temporary utilities.
- Portable toilets and temporary fencing for security.
- Obtaining specific building permits.
- Project-specific performance bonds.
- Expenses for temporary storage trailers or dumpsters.
Since these expenses are directly traceable to one project, they are added to the material, labor, and subcontractor costs before the final O&P percentage is applied.
Calculation and Standard Application of O&P
The application of Overhead and Profit in construction often follows a widely recognized industry standard, typically calculated as 10 percent for overhead and 10 percent for profit, resulting in a combined 20 percent O&P. This calculation method is utilized by general contractors when they coordinate the work of multiple specialized trades on a single project. The 20 percent figure is applied to the total sum of the direct costs, which includes all material, labor, and subcontractor expenses for the project.
To illustrate the application, if the combined total of a project’s materials, labor, and subcontracted work equals $100,000, the contractor applies the 20 percent O&P to that base figure. This results in an additional $20,000 added to the estimate, with $10,000 allocated to cover general overhead and $10,000 allocated as profit. The final contract price presented to the client would therefore be $120,000. This standardized mathematical approach provides a transparent and defensible method for establishing the final project price.
When General Contractor Overhead and Profit is Required
The application of General Contractor Overhead and Profit is required in specific scenarios where the complexity of the work necessitates centralized management by a single entity. The primary circumstance involves projects that require the coordination of three or more distinct construction trades, such as roofing, electrical, and plumbing work.
The O&P is warranted because the general contractor is performing a management function, including scheduling, quality assurance, safety compliance, and financial oversight across the different subcontractors. This structure is particularly prevalent and often mandated in the context of insurance restoration claims following property damage.
When a home or business sustains damage, the general contractor acts as the coordinator of the necessary repairs, handling demolition, cleanup, and reconstruction involving multiple specialty trades. Industry standards acknowledge that this coordination role is a service that requires compensation, justifying the application of O&P to the total cost of the repairs. Without this allowance, the general contractor would be expected to manage a complex repair scope involving multiple parties.