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Contractor glossary

Cost of goods sold

Updated

Definition

Cost of goods sold (COGS) is what the work you sold in a period cost to deliver. For a contractor, that means direct job costs: materials, field labor with its payroll costs, subcontractors, permits and equipment rented for jobs. Revenue minus COGS is gross profit.

Also called: COGS, Cost of sales, Job costs, Direct costs

What goes in it

The name comes from businesses that sell products, but for a contractor COGS is the cost of doing the work. The test is whether you can tie a cost to a specific job. Typical contractor COGS:

  • Materials and equipment installed or used up on jobs: units, fixtures, wire, shingles, chemicals, coating product.
  • Field labor: wages for time on jobs, plus the payroll taxes, workers' comp and benefits that come with those wages.
  • Subcontractors who do part of a job.
  • Job-specific costs such as permits, dumpster and disposal fees, and equipment rented for one job.

What stays out: office and dispatch wages, rent, marketing, software, phones and general business insurance. Those are overhead, the cost of being open whether or not today's jobs happen.

How it feeds gross profit

COGS sits right under revenue on the profit and loss statement:

  • Gross profit = Revenue minus COGS
  • Gross margin % = Gross profit ÷ Revenue × 100

Gross profit is what's left to pay overhead and leave a profit. Understate COGS and gross profit looks bigger than it is, and so does the margin you think your prices carry.

Example: A plumber replaces a water heater for $2,400. The heater and fittings cost $1,000, the permit $100 and haul-away $50. Two techs spend four hours each, and with payroll taxes and workers' comp their time costs $40 an hour, so labor is $320. COGS is $1,470 and gross profit is $930, about a 39% gross margin. If the books leave labor out, the same job shows $1,250 of gross profit and about a 52% margin, a number the shop never actually earns. The numbers are made up for illustration.

Common mistakes

  • Leaving field labor in overhead. That's the example above, repeated on every job: gross margin looks high, overhead looks bloated and you can't tell whether your prices cover crew time. If you're on the tools yourself, count your own hours too, or your margins will shrink the day you hire someone to do that work.
  • Counting purchases instead of usage. If materials hit COGS the day you buy them, a big stock-up makes one month look bad and the next look good. Track materials by job, or read margins over two or three months.
  • Forgetting credits. Materials returned to the supply house or put back on the truck should come off the job's cost. Otherwise the job looks worse than it was and your stock count drifts.
  • Burying callbacks. A callback is labor, fuel and parts with no new revenue. Give callbacks their own job type so you can see what they cost, instead of letting them quietly pull down other jobs.
  • Moving the gray areas. Fuel, small tools and a tech's time between jobs can go in COGS or overhead. Pick one and stay with it, or no two months compare.

How it connects

Job costing is COGS one job at a time, checked against the estimate. When both use the same categories, a dip in gross margin on the P&L takes you straight to the jobs that caused it.

Markup is applied to cost, so an incomplete cost produces an incomplete price. Gross margin is the check on whether your markup covers overhead and profit, and markup vs margin shows how to price to a target.

Taxes are a separate question

Your tax return groups costs under its own rules, and they won't always match the way you group job costs to run the business. Keep your monthly P&L built for decisions and have your CPA map it to the return; if you're a sole proprietor, start with Schedule C. For the full monthly read, see how to read a profit and loss statement.

Go deeper

GuideHow to Read a Profit and Loss Statement for ContractorsRead a contractor P&L line by line: revenue, job costs, gross margin, overhead and net profit, plus cash vs accrual and a 30-minute monthly review.GuideMarkup vs Margin: The Difference That Costs Contractors MoneyMarkup divides profit by cost; margin divides it by price. The formulas, an exact conversion table, the costly mix-up and how to price to a target margin.GuideHow to Set Your Labor RateBuild your labor rate from real costs: billable hours, payroll burden, overhead and profit, with worked examples from HVAC, roofing, plumbing and other trades.Plumbing guideHow to Price Plumbing JobsA practical way to price plumbing work: flat-rate books vs hourly, service-call and after-hours fees, parts markup, water heaters and drains.
Gross marginGross margin is gross profit as a percentage of revenue: what's left of each sales dollar after direct job costs (materials, field labor, subcontractors, permits), before overhead. A $10,000 job that costs $6,000 to deliver has a 40% gross margin.Job costingJob costing is recording what each job actually cost (materials, labor at its full hourly cost, subcontractors, permits, disposal and return trips) and comparing it with the estimate and the price, so you can see which jobs made money, which didn't and why.OverheadOverhead is the cost of running your business that isn't tied to a specific job: office and dispatch wages, rent, insurance, marketing, software, phones, accounting and similar costs you pay whether or not today's jobs happen. Your prices have to recover it.MarkupMarkup is the amount you add on top of a cost to arrive at a selling price, expressed as a percentage of that cost. A $100 part sold for $150 carries a 50% markup.Profit and loss statementA profit and loss statement (P&L), also called an income statement, reports a business's revenue, costs and profit over a period such as a month, quarter or year. It shows whether the work you did made money, not how much cash you have.Schedule CSchedule C (Form 1040), Profit or Loss From Business, is the IRS form a sole proprietor uses to report the business's income and expenses. The net profit or loss flows onto the owner's personal Form 1040, and a single-member LLC generally files it too unless it elected corporate treatment.

See every term in the glossary