Overhead and profit in a contract is the percentage markup a contractor adds on top of the direct costs of a job to cover the expenses of running their business and to earn a return on the work. In construction and insurance repair estimates, the common shorthand is “10 and 10,” meaning 10% for overhead and 10% for profit added to labor, materials, and other direct costs. The two numbers travel together, show up in nearly every construction bid, insurance estimate, and government contract, and have a real effect on what a project costs you or what a claim pays out.
What Overhead and Profit Each Cover
Overhead and profit do different jobs, even though they appear side by side on the same line.
Overhead is the indirect cost of staying in business between jobs. Office rent, administrative salaries, vehicles, insurance premiums, accounting fees, software subscriptions, warehouse space, a dispatcher’s time. None of it can be charged to one specific project, so it gets spread across every project as a percentage. Some overhead is fixed, like rent, and some varies with workload, like fuel. Both get folded into the same percentage.
Profit is what’s left for the contractor after all costs are paid, including overhead. It compensates them for the risk of taking on your job, uses up part of their bonding capacity, and funds reinvestment in equipment, training, and growth. A contract with no profit built in gives the contractor no reason to prefer your job over someone else’s.
How the Markup Is Calculated
OH&P is a percentage applied on top of direct costs: labor, materials, equipment rental, permits, and subcontractor charges. There are two ways the math gets done, and the difference matters once the numbers get large.
The flat method adds the combined percentage in one step. On $100,000 of direct costs at a combined 20%, you multiply by 1.20 and get $120,000.
The sequential method applies overhead first, then calculates profit on that new subtotal. At 10% overhead and 10% profit: $100,000 × 1.10 = $110,000, then $110,000 × 1.10 = $121,000. The effective factor is 1.21 instead of 1.20, because profit is being calculated on a base that already includes overhead.
On a $100,000 job the difference is $1,000. On a $2 million commercial project it’s $20,000. Most private construction contracts use the flat method, but confirm which approach your contract uses before signing.
The “10 and 10” Baseline
“10 and 10” is the industry starting point for general contractors, and the National Association of Home Builders has reported it as the typical markup, producing a 20% addition to direct costs.
Actual numbers vary. Residential contractors often charge 10% to 15% overhead and 10% to 20% profit. Commercial projects tend to run 12% to 20% overhead with 5% to 15% profit. Specialty subcontractors, who carry higher insurance costs and more expensive equipment, can mark up 25% to 50% combined. Treat 10 and 10 as a reference point for negotiation, not a ceiling.
OH&P in Insurance Repair Claims
Insurance disputes are where OH&P generates the most friction. When your property suffers covered damage, the insurer owes you the cost of repair, and that cost legitimately includes a general contractor’s overhead and profit, because a general contractor is typically the one performing or coordinating the work. Industry textbooks used by adjusters and the Property Loss Research Bureau both treat OH&P as a component of replacement cost.
Insurers sometimes resist paying it anyway, arguing the damage is simple enough that no general contractor is needed.
The Three-Trade Rule
An informal industry standard holds that when a repair requires three or more specialty trades, a general contractor is needed to coordinate the work, and OH&P belongs in the estimate. A kitchen fire that needs demolition, framing, electrical, plumbing, drywall, painting, and flooring plainly qualifies.
Harder cases involve two trades, or situations where the insurer argues a single contractor can handle everything. The majority legal view is that if hiring a general contractor is reasonably likely for the scope of the repair, OH&P should be included in the settlement, even if you haven’t actually hired one yet and even if no repairs have started. The question is whether the job is complex enough that you reasonably would hire one, not whether you already did.
If you’re coordinating the trades yourself, insurers push back harder. The counterargument, which has succeeded in court, is that a homeowner coordinating multiple trades is performing the general contractor’s role and incurring real costs of time, effort, and risk. Keep records of every subcontractor you hire, every schedule you coordinate, and every permit you pull.
OH&P in Federal Government Contracts
Federal contracting treats profit as a policy tool, with hard ceilings written into statute and a structured analysis contracting officers must follow.
Cost-plus-a-percentage-of-cost contracts are prohibited outright, because they reward the contractor for spending more. For cost-plus-fixed-fee contracts, profit (called “fee”) is capped:
- 15% of estimated cost for research, development, or experimental work, excluding the fee itself
- 6% of the estimated construction cost for architect-engineer services for public works, excluding fees
- 10% of estimated cost for all other cost-plus-fixed-fee contracts, excluding the fee
These caps come from both the defense procurement statute and the civilian agency procurement statute, and the FAR implements them across federal acquisitions.1Office of the Law Revision Counsel. 10 USC 3322 – Cost Contracts2Office of the Law Revision Counsel. 41 USC 3905 – Cost Contracts The 6% architect-engineer cap applies specifically to the production of designs, plans, and specifications, not to investigative or feasibility work by the same firm.
At agencies with $50 million or more in noncompetitive awards, contracting officers must use a structured approach to set a profit objective before negotiations begin. The approach weighs the complexity of the work, the risk the contractor assumes, the capital investment required, past performance, and cost risk from the contract type.3Acquisition.GOV. FAR 15.404-4 – Profit The FAR explicitly warns against driving profit down just to lower a price or applying historical averages automatically.
Overhead in federal contracts has its own rules. Contractors must group indirect costs logically and allocate them using a base that reflects the benefit each project receives.4Acquisition.GOV. FAR 31.203 – Indirect Costs They can’t cherry-pick which costs go into the overhead pool, and once an allocation method is set, every item in that base shares the burden proportionally. Separate pools are common: manufacturing overhead, engineering overhead, and a general and administrative pool on top, each with its own allocation base and all subject to audit.
OH&P in Architecture, Engineering, and Consulting
Professional services firms handle OH&P through a billing multiplier on direct labor rather than a percentage on materials. If an engineer earns $50 per hour and the firm bills that engineer at $150 per hour, the net multiplier is 3.0. Historical averages for architecture and engineering firms have sat near that 3.0 figure for decades, with roughly 1.70 of it covering overhead and the gap above breakeven producing about a 10% operating margin.
The multiplier makes overhead and profit less visible than a construction bid’s explicit “10 and 10” line. If you’re hiring a design or consulting firm, ask for the overhead rate and multiplier directly, not just the hourly rate.
What to Check Before You Sign
OH&P percentages aren’t fixed by law in private contracts. They’re negotiated, and a few things are worth looking at closely.
Project risk drives the number. A straightforward office renovation carries less risk than a historic restoration with unknown structural conditions, and the contractor taking on more unknowns should earn a higher profit percentage. Contract type matters too: a firm-fixed-price contract, where the contractor absorbs overruns, justifies more profit than time-and-materials, where you bear most of the risk.
On larger projects, consider a ceiling rate on overhead. You agree in advance that overhead will not exceed a specified percentage for any contract year, with the final rate determined by audit after the work. If audited costs come in below the ceiling, you pay the lower rate. If they come in higher, the contractor absorbs the difference.5U.S. Department of Transportation. Overhead Rates
Watch how costs are categorized. Some firms charge items like printing, specialized software, or project manager time as direct costs, which keeps the overhead rate lower on paper. Others fold the same items into overhead. Two bids quoting the same overhead percentage can produce meaningfully different totals depending on what sits in which bucket, so ask each contractor how they allocate costs before comparing numbers.
Gross Profit Is Not Take-Home Profit
The “profit” in OH&P isn’t the contractor’s bottom line. It’s the gross margin on that particular job, before the company’s overhead eats into it.
Imagine a contractor with $1 million in annual revenue, $600,000 in direct project costs, and $100,000 in overhead. Gross profit is $400,000, or 40% of revenue. Net profit, after overhead, is $300,000, or 30%. When a contractor charges “10 and 10,” the 10% profit doesn’t mean they pocket 10 cents on every dollar. It means 10% of direct costs are designated as profit on that job, and overhead still has to come from somewhere, which is partly out of that margin.
That matters during negotiation. Squeezing a contractor to razor-thin margins reduces their ability to absorb surprises, keep quality up, and stay solvent long enough to honor the warranty. The cheapest bid isn’t always the best value if the contractor cuts corners or disappears mid-project.