Contractor overhead and profit (O&P) is an important aspect of any construction project. In simple terms, overhead refers to the expenses that a contractor incurs in order to run their business, while profit refers to the money that the contractor makes from the project. O&P is usually expressed as a percentage of the total cost of the project, and it is added to the project cost to arrive at the final price.
So, what exactly is included in contractor overhead and profit? Let’s take a closer look.
1. Office expenses: A contractor needs to maintain an office to run their business. This includes rent, utilities, insurance, office equipment, and supplies. These costs are included in contractor overhead.
2. Salaries and wages: A contractor must pay their employees, including project managers, foremen, and administrative staff. These salaries and wages are also included in overhead.
3. Equipment costs: A contractor requires various types of equipment, such as tools, machinery, and vehicles, to complete a construction project. The cost of acquiring and maintaining this equipment is included in overhead.
4. Insurance: A contractor needs various types of insurance, such as liability insurance and workers’ compensation insurance. The cost of these insurance policies is included in overhead.
5. Taxes: A contractor must pay various taxes, such as state and federal income tax, payroll tax, and sales tax. These taxes are also included in overhead.
6. Bonding costs: Construction projects often require contractors to obtain performance and payment bonds. The cost of obtaining these bonds is included in overhead.
7. Contingency: A contractor must account for unforeseen events that may occur during a construction project. This includes changes to the project scope, delays, and unforeseen expenses. A contingency fee is usually included in overhead to cover these costs.
8. Profit: The profit margin is the amount of money that the contractor makes from the project. This is usually expressed as a percentage of the total cost of the project.
In conclusion, contractor overhead and profit includes a wide range of expenses that are necessary for a contractor to run their business and complete a construction project. It is important for contractors to accurately calculate O&P in order to provide a fair and competitive bid for a project. By understanding what is included in contractor overhead and profit, clients can make informed decisions when selecting a contractor for their project.