How to Get Paid for Overhead and Profit (O&P) on Complex Restoration Jobs

Overhead and profit (O&P) charges are crucial for contractors performing complex, large loss restoration jobs, in order to cover indirect costs and ensure business sustainability. However, securing O&P consent from insurance companies often proves challenging. This article explores the reasons behind O&P denials, and outlines ways to win more approvals.

Why Obtaining O&P Approval is Often Challenging

Unfortunately, getting O&P approval can be difficult for a multitude of reasons:

• Pressure to Reduce Costs – Many insurance companies scrutinize O&P charges because they consider those to be additional expenses beyond direct project costs. Consequently, they may require in-depth justifications for the charges, making approval a complex process.

• Inconsistent Policies – Different insurance carriers have varying policies on when to allow O&P, as well as how much they will allow. 

• Lack of Understanding – Many insurance adjusters do not fully understand the true costs and intricacies involved in complex restoration work. Therefore, their project scopes may be incomplete. 

• An Outdated Guideline – The old "10 and 10" markup rule (recommending a 10% average contractor markup for overhead and a 10% markup for profit) is an outdated but often-used benchmark. Many insurance companies still try to adhere to it, even though it's often insufficient to cover true business costs. (For example, you are often expected to provide estimating, consulting and coordination, all of which increase your overhead costs. But these aspects are not always factored into insurers’ O&P calculations.)

• Misconceptions About Project Complexity – Insurers may claim jobs lack complexity to avoid paying O&P, even on large projects. (These assertions are more likely when contractors provide unclear or insufficient communication.)

• Variability in State Regulations – Regulations and industry practices can vary significantly from state to state. This variability may lead to confusion and inconsistencies in how O&P is handled and approved.

• Negotiation Challenges – Contractors often have to fight to justify their O&P by providing extensive substantiation and spending time responding to objections.

• Documentation Requirements – Proper documentation is crucial for O&P approval. Restoration contractors must provide detailed documentation to justify overhead and profit charges (including change order overhead and profit rate figures). Insufficient or unclear documentation can lead to delays or denials.

Proactive Strategies for Justifying O&P 

Here are four things you can do before and during a project to help prevent O&P denial. And you can do all of these easily with the help of a single app!

1. Come to an Agreement on Project Scope

Many pricing disagreements are caused by a difference in scope. So, completing and documenting an accurate scope – and then getting the adjuster to review and agree with your scope– can be key to negotiating a price that includes O&P charges. It’s all about persuading your counterpart to accept your point of view.

TIP: The best way to develop an accurate scope is to use a professional floor plan app, such as magicplan. The magicplan app (a type of restoration contractor software) enables you to sketch a precise layout in real time with a mobile device. Then you can insert notes about your initial assessment, photos of damaged areas, and links to sweeping, 360-degree panoramic images. The end result is an exportable document that explains and visualizes the extent of damage and explains your proposed restoration work.

2. Present an Estimate That is Clear and Informative

This involves creating an estimate document that is comprehensive and well-organized, so that any insurance company representative can read it, understand it, and be able to justify writing a check.

TIP: Make sure you’re using a floor plan app that lets you send your job-site sketch directly to Xactimate estimating software. This is the fastest and easiest way to begin formulating an accurate Xactimate estimate.

3. Use Standard Operating Procedures (SOPs)

This demonstrates a commitment to completing projects in a professional and systematic manner.

TIP: A multi-function floor plan app can be used to do a variety of tasks, including creating SOPs. For example, the magicplan app helps you develop clear and consistent procedures for handling any process in your restoration business operations.

4. Document Everything Once Work is Underway

Meticulous recordkeeping can be a tremendous asset because it provides clear evidence of all work that is performed. You’ll need to document every aspect, including management and coordination time.

TIP: Integrate your floor plan app into your daily operations. Use it frequently to maintain logs of labor, equipment, sensors, and materials used. Also, generate a field report with your app periodically (e.g., a water mitigation report), to demonstrate the complexity of resources you are using for the project.

Negotiation Tactics for Dealing with an Insurance Adjuster

Despite your best efforts, an adjuster may still choose to reduce or deny your O&P charges. Try these six tactics for defending your position:

1. Articulate the Necessity of O&P – Advocate for it: Point out the project’s complexity and need for coordination. Explain why your business must charge O&P to remain sustainable. Use facts and figures to illustrate the realities of your business.

2. Don’t Feel Pressured into Applying the “10 and 10” Guideline – This outdated, cookie-cutter approach is unrealistic, unfair, and detrimental to contractors. Instead, quote O&P markups that match the complexity and scale of each project and are necessary for your particular business to remain profitable.

3. Ask Questions Instead of Instantly Defending Your Position – Skillful questioninghelps you understand the adjuster’s stance, so you can develop a strong negotiation strategy.

4. Build a Credible Case with Gathered Data – Use facts concerning past cases and current industry practices to support your O&P charges. This will help prove that overhead and profit are necessary and normal costs.

5. Stay Persistent – Regularly follow up during the negotiation process to maintain open and consistent communication. And remain courteous but firm with your arguments.

6. Be Prepared to Walk Away from Unprofitable Jobs – Projects that only allow you to break even (or worse, suffer a loss) are not worth your time. Do what you have to do to earn adequate revenue.

Summary 

Understanding and effectively navigating the complexities of O&P approval is an important aspect of your restoration business. By employing the proactive strategies and helpful negotiation tactics listed above, you’ll be better able to ensure fair compensation for the critical work your company performs.

NEXT: SEE HOW TO STANDARDIZE THE WAY YOUR TEAM CAPTURES DOCUMENTATION

Learn how to create effective ‘Documentation SOPs’