You may receive a budget proposal for your construction project, that contains a line item that says something like “Fee,” “Contractor’s Fee,” or “O&P”. What does this mean exactly? O&P is short for overhead and profit. When you see a line item like this on a budget proposal, it’s generally listed as a percentage at the end of all the other job costs. In our local construction market, this percentage is typically equal to 12% - 25% of the project costs. Each of the line items in the budget proposal are listed at the builder’s actual cost, without any markup.
What Does the Contractor’s Fee Cover?
There are two parts to the Contractor’s Fee; overhead and profit.
Overhead Expenses:
- Advertising
- Contractor’s General Liability Insurance
- Depreciation
- Education
- Interest Expenses
- Vehicle Expenses (unless mileage is part of your agreement)
- Tools & Equipment (other than tools or equipment consumed on your job)
- Office Expenses
- Non Project-Specific Personnel Costs such as reception & administration.
- Rent
- Safety Compliance
- Utilities
- Warranty Expenses
Profit:
Profit is what your contractor walks away with after all wages, materials, permits & subcontractors are paid. According to the Construction Financial Management Association (http://www.cfma.org), the average pre-tax net profit is between 1.4% and 2.4% for general contractors and between 2.2% and 3.5% for subcontractors. Think about that for a minute; this means on your $100,000 construction project, that the typical builder will only realize a net profit between $1400 and $3500.
It is also important to note that wages and profit are not the same thing. For example, say that your builder works 100 hours on a project and also has a helper that worked 100 hours on the same project. In this case, 200 hours of time is billable as a wage expense (cost) and is not considered overhead or profit. Overhead and Profit is only the amount the customer pays in addition to the actual costs incurred.
Why Don’t I See a Fee on my Proposal?
If your builder doesn’t include overhead and profit on your project; it really means one of two things. Either they are not listing the actual cost for each budgeted line item (using hidden markups), or that they will not be in business for long!
Do you still have questions or comments about the Contractor’s Fee? Please give us a call or send a private message and we will be happy to discuss it with you further. It’s important that you understand and are comfortable with your financial relationship with your contractor.