Supervisory Labor: Direct or Indirect Cost for Contractors?

It is important that insurance claims contractors don't confuse supervisory labor, a direct cost, with your overhead (indirect) costs. Educate the customer on the unique format of insurance claims estimates. Be sure to accurately track your supervisory labor and include those cost breakdowns in your estimate. 

Indirect Costs For Contractors

Xactimate is a common estimating software used as a means of establishing a common language between restoration contractors and insurance claims professionals. According to Xactimate, general overhead (aka indirect costs) are,

​General Overhead are expenses incurred by a General Contractor, that cannot be attributed to individual projects, and include any and all expenses necessary for the General Contractor to operate their business. 

Indirect costs are all of those necessary expenses that a contractor incurs but are not directly related to an individual project. If a contractor, or any business, does not account for their overhead expenditures in the costs of their goods and services, they will not be in business for long. Examples of general overhead, according to Xactimate, include but are not limited to:

• General and Administrative (G&A) expenses
• Office rent
• Utilities
• Office supplies
• Salaries for office personnel
• Depreciation on office equipment
• Licenses
• Advertising

Xactimate does not include consideration for these indirect or general overhead expenses in their unit pricing. Instead, they advise, that the contractor should add these costs to the estimate, "As a percentage of the total bid along with the appropriate profit margin. These two costs together constitute what is normally referred to in the insurance restoration industry as General Contractor’s O&P, or just O&P." While contractors and carriers have become comfortable with a 20% markup, this amount is not stipulated by the software. 

Direct Costs for Construction Projects

Supervision is common, i.e. industry standard, for construction projects. This role is often the responsibility of roles including project managers, site foremen, superintendents, departmental supervisors, safety managers, etc. Supervision is critical to successful project outcomes and is a real cost of the work being performed. Xactimate states that indirect costs or job-related (specific) overhead,  

​Are expenses that can be attributed to a project, but cannot be attributed to a specific task and include any and all necessary expenses to complete the project other than direct materials and labor. Examples (including but not limited to): Project managers, onsite portable offices and restroom facilities, temporary power and fencing, security if needed, etc. 

Supervisory labor (aka project management time) is as much a real cost that should be accounted for an compensated for the work as temporary power or restroom facilities. It is common to either bid supervisory labor as a percentage of the estimated labor or submitted as a breakdown for billing at project intervals (i.e. bi-monthly).