insurance

Overhead and Profit

A standard percentage added to construction and repair estimates to cover a contractor's business expenses and profit margin. In property insurance claims, this typically ranges from 10-20% of the total repair costs and is often included in settlement calculations for covered losses.

Example

“After the fire damage to their home, the insurance adjuster included overhead and profit in the settlement, adding $8,000 to the $40,000 repair estimate to ensure the homeowner could hire a qualified contractor.”

Memory Tip

Think 'O&P' - contractors need to keep the lights On and make a Profit to stay in business.

Why It Matters

Understanding overhead and profit ensures property owners receive adequate settlement amounts to actually complete repairs with professional contractors. Without this markup, insurance payouts may fall short of real-world repair costs, leaving policyholders to pay the difference out of pocket.

Common Misconception

Many people think overhead and profit is just extra money going to greedy contractors, but it actually covers essential business costs like insurance, equipment, office expenses, and fair compensation. Some also believe it's automatically included in all estimates, but it may need to be specifically requested in insurance claims.

In Practice

Consider a kitchen fire causing $50,000 in damage. The direct labor and materials cost $42,000, but a contractor needs overhead and profit to handle permits ($500), insurance ($800), equipment rental ($1,200), project management ($3,000), and reasonable profit ($2,500). The insurance company would typically add 10-20% ($4,200-$8,400) to the base estimate, bringing the total settlement to $46,200-$50,400 to ensure the homeowner can hire a reputable contractor.

Etymology

The term combines 'overhead' from accounting terminology meaning indirect business costs, and 'profit' from Latin 'profectus' meaning advancement or gain.

Common Misspellings

overhed and profitoverhead and prophitover head and profitoverheed and profit

More in insurance

Other insurance terms you should know

deductibleThe amount you pay out-of-pocket before your insurance begin…insurance premiumThe amount paid periodically to an insurance company in exch…deductibleThe amount a policyholder must pay out of pocket before insu…copayA fixed amount paid by an insured person at the time of a me…coinsuranceA cost-sharing arrangement where the insured pays a percenta…out-of-pocket maximumThe most an insured person will pay for covered healthcare s…