Roofing Contractors and GC’s know all too well the fight with insurers over line items and the elusive “O&P”. What’s funny is how many contractors use the term so loosely but have a rather vague idea of what it actually means. The term “overhead and profit” is bandied about as mythical “cherry on top” of an already “sufficiently profitable project”…well at least according to the insurance adjuster that is. Yet, can a contractor actually survive without it? And if not, then how can we do work on an insurance claim that does NOT have overhead and profit included?
Well, hopefully I can spread some light on this topic.
Here is the insurance companies issue. Most contractors fail to understand this. We think our job is to hit the insurance company for every line item we can squeeze out of them, and to justify O&P so we know it’s a juicy claim for sure. Greed has overcome us in a sense, and we fight sometimes, just to fight.
The insurer (not that I sympathize with the bullies) takes issue when a Roofing Contractor is doing the work on the claim for the property owner, and he is acting as a general contractor. This means he is handling all (or at least most) of the trades on the project. So what’s the problem?
Well, the problem in the insurer’s eyes is this; as a Roofing Contractor you are paying for materials directly to your favorite supply house, and paying your in house (w2) roofing crew, or subcontracted (1099) roofing crew. This makes you the Roofing Contractor. Within the line items in Xactimate for roofing, there is already a portion of overhead and profit included. So when you are asking for [GC] O&P in addition to the already included overhead and profit for the roofing line items, you are technically “double dipping” in the insurance companies eyes.
It would be different for instance, if you were the roofing contractor, making the commiserate overhead and profit built into the line items, and you were hired by a general contractor, who was paying you a lump sum for your work, in addition to all the other tradesmen he has to manage to complete the project. In this scenario, the GC is ok to bill for the GCO&P because he is truly acting as a GC. He is not paying for materials or labor directly, but instead paying you a contracted price, and you as the roofer are paying for your materials and labor directly.
This distinction is huge in the insurer’s eyes. According to the insurance policy language, insurers owe general contractor’s overhead and profit, in the event say, a homeowner’s house were to burn down. In this instance it is reasonable to assume that a GC would be needed to rebuild the home. Thus, when the insurer was calculating the policy premium, they took into consideration their risk, and included GCO&P in that risk calculation. Therefore, the insurer, technically, is charging the homeowner for GCO&P as part of their premium, and would be “reaping an illegal windfall” in the event they collected on those premiums, knowing they owe the GCO&P because it’s part of their fiscal duty to their policy holder, yet did not pay or will not pay. This would be akin to us charging a customer to tear off the roof, but performing an overlay. It’s fraud.
However, the insurer gets away with it, especially with roofers (the contractor trade most likely to hit the insurer as hard as they can for line items plus O&P). The reason is because, TECHNICALLY, they ARE paying overhead and profit to the roofer, for the roofing portion of the claim. Well, this is their defense at least…I didn’t say it’s a good one.
Our argument, is even though as a roofer, we may be paying the material and labor directly, we are still managing the claim process, managing the subcontractor trades as if we were the GC; which includes coordination with the property owner, and the other tradesmen. In all fairness, we should be paid additionally for the complexity it adds to the project. But how to get the insurer to cooperate?
Well, be reasonable. And understand their issue. There are a few remedies here that I have used to my success.
- Don’t ask for GCO&P on the roofing portion of the claim. Perform a “global change wizard” function in Xactimate (if you still use it), and include GCO&P on all items except for the roofing line items. This will get you paid GCO&P on the whole claim except for the roof. Once you do this, the adjuster will gladly agree to pay the O&P on the other trades you are managing, which is only right. However, the issue here is that the roofing is typically the largest part of the claim on a percentage basis, thus you are giving up the lion share of the GCO&P you would have gotten (the creme!) had the roofing been paid over and above as well. If this is an issue with you, then see #2.
- Get smart. If the insurer has an issue with paying you the GCO&P because you aren’t actually subbing out the roofing, then you have two options.
- Actually turn yourself into a GC and sub out the roofing to a roofing contractor. In this scenario, it’s the parallel of the prior issue. Now you are getting paid the GCO&P on the roofing, but if you are paying a roofer to do the work, then the O&P included in the roofing items themselves, is now going to another entity. It’s a flip flop.
- Use that free enterprising American brain of yours…Become the General Contractor by setting up an LLC (and getting a license if you can, but not necessary), and then hire your roofing company (same ownership, but separate entities, therefore separate overheads and staffing) to do the roofing work. This is the best, legal option available. The upside here is you are going to get to keep the GCO&P on the roof, get it approved easily, and also get to keep the O&P for the roofing only items. The only downside is you have to now manage two corporations rather than one, and must now pay taxes on both revenue streams (which offsets some of the earnings of the GCO&P if you aren’t tax savvy).
So, I hope this sheds some light on things for you.
When it comes to Lump Sum Bids and getting them approved…it isn’t that it’s impossible, or even difficult at all…maybe it’s just that you didn’t understand it, and when put in context, you were doing it all wrong.
There is a reason I created RoofBid Pro for my roofing company. There is a reason I started using the Lump Sum Bid methodology. It didn’t make my life harder…it actually made my claims processing MUCH easier. But that’s because I understood the process, the insurer’s issues, and was willing to solve that issue and make mine and my client’s lives much less painful.
For more tips and information…follow me on all my social media platforms, and check back here on RoofBidPro.com on our Blog, teaching roofing contractors how to get back to their roots, make more money, simplify their life, and reduce stress!
Good hunting fellow Roof Warriors!