Understanding profit markup and margin for insurance claims estimating

Overhead and Profit (O&P) in Xactimate Line Items?

Is it true, there is no O&P in the Xactimate repair line items?

Xactiamte trainer and estimating guru, Ben Justesen, joined The DYOJO Podcast to discuss this topic and more. On Xactimate Sessions File 005, Ben responded, "This is a good question. Whether you realize it or not, it's a little bit loaded. When I when I think of overhead and profit (O&P). as a markup, that markup is not included in the Xactimate line items."

The Difference Between Markup & Profit for Insurance Claims Estimating

What is markup? You have your line items coming together to form the cost of your scope. You add a markup, which in the insurance industry is often considered this arbitrary 10% overhead plus 10% profit (aka 10 and 10). This add-on to the end of your Xactimate estimate is your markup. 

Markup doesn't actually give you a guaranteed profit margin, which is what you actually take away from the project once you've paid for the work and the cost of goods sold. In simplified terms:

• Margin is what you have at the end of a project 
• Markup is what you add to the front of an estimate

"However," remarks Mr. Justesen, "That markup is only a portion of the margin that you would need. So there is some margin in the line items themselves. But it's on a certain component. That's the labor component. There's are no margin on materials, there is no margin considered on equipment. So the margin that you have to consider is on the labor."

in addition to running a multi-site restoration company out of Moses Lake, Washington, Ben also has created the Enlightened Restoration Solutions (ERS) course to help insurance claims estimators elevate their skill sets. He is the leading proponent for encouraging restorers to make their own pricelist within Xactimate and teaches them how to effectively do so.

He reminds contractors that if all they rely upon is the 20% markup added to their estimate, they will struggle to cover their true overhead costs or meet their actual profit margin goals. If a restorer sticks to a strict 20% markup, they need to understand they are only netting a 16.67% margin. 

20% Markup is only 16,67% Margin for Restoration Estimates

I will try to do this justice. This is something Ben justesen demonstrated when I attended his ERS course. If you watch the video you will notice that I am using the legal pad from the Law Offices of Edward H Cross, aka The Restoration Lawyer. Another resource like to shout out is The Book on Restoration Collections by Ed Cross. This book is available through their website and is designed to take the mystery out of collections for insurance claims. 

Restoration professionals hear all the time that 20% overhead and profit (O&P) is more than enough. But, you and I know that this is actually only 16.67% margin. I will demonstrate how:

• If you're just going off the strict (and arbitrary) 10 and 10 O&P
• If you have $1,000 estimate, and you add a 20% markup
• You would times your cost by 1.20 (markup) to arrive at a total of $1,200.00
• 20% of $1,000.00 is $200.00, so we add $200.00 (20%) as an O&P markup
• But, if we now divided $200.00 overhead and profit by our $1,200.00 in sales, our calculator will read 16.67.

​
Why is this? That is because if we had an invoice from a subcontractor for $1,000.00 and the gracious insurance company allowed us to mark that invoice up by 20%, we would then be charging $1,200.00. From our $1,200.00 we pay our sub $1,000.00 and we are left with $200.00. Our $200.00 is only 16.67% of the $1,200.00 that we charged. So, not only did we NOT get at least 20% (which is far lower than ANY insurance company makes as an overhead and profit margin), we also likely had to wait on the money so the insurance and the client allowed us to finance the payment interest free while they waited to pay the $1,200.00 so that we could recoup what is left of our $200.00. 

Most restoration companies, most contractors, and most insurance companies have a higher profit margin goal than 20%. This markup can really drag those margins down on your individual projects and your overall goals for the year. If you're only getting a 20% markup on the front end, it can really skew your margin on the back end. ​