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Contractor glossary

Gross margin

Updated

Definition

Gross 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.

Also called: Gross profit margin, Margin

The formula

Gross margin compares gross profit to the price the customer paid:

  • Gross profit = Revenue minus Cost of goods sold
  • Gross margin % = Gross profit ÷ Revenue × 100
  • Price for a target margin = Cost ÷ (1 minus Target margin)

It works the same for one job or a whole month. On a job, cost is the job's direct costs. On the profit and loss statement, it's cost of goods sold for the period.

Example: A roofer's job costs $12,000 in materials, crew labor, disposal and permit. To earn a 35% gross margin, the price is $12,000 ÷ 0.65 = about $18,460. Gross profit is about $6,460, and $6,460 ÷ $18,460 = 35%. The numbers are made up for illustration.

What it tells you

Gross margin answers one question: do your prices cover the cost of doing the work with enough left over to pay for running the business? The money left after direct costs has to cover overhead and leave a profit. Say overhead is 30% of revenue and gross margin is 32%: the business keeps about 2 cents of each dollar it bills before interest and taxes.

That's why there's no single right gross margin. It depends on what your overhead costs and how much material your work carries. A detailer whose cost is mostly labor and a solar installer whose cost is mostly equipment can both be healthy at very different margins. Set your target from your own overhead and profit goal, then check it against finished jobs.

Gross margin is not markup

Markup is a percentage of cost; margin is a percentage of price. The same job always shows a smaller margin than markup, so mixing them up underprices work.

Markup on cost Gross margin on price
25% 20%
50% 33.3%
100% 50%

Markup vs margin covers the conversion and how to set a markup from the margin you need.

Common mistakes

  • Leaving field labor out of job costs. Gross margin looks high and overhead looks bloated, and you can't tell whether your prices cover crew time. If you work on the tools yourself, cost your own hours too.
  • Reading only the blended number. A month can hit its target while service calls run rich and installs run thin. Look at margin by job type with job costing.
  • Judging one month alone. Materials bought in one month for jobs finished in the next can swing the number. Compare rolling months, or track materials by job.
  • Confusing gross and net. Net margin is what's left after overhead too. A healthy gross margin can still end in a loss if overhead grows faster than revenue.

How it connects

Gross margin is the bridge between pricing and profit. Divide your overhead by it and you get your break-even point, the revenue you need just to cover overhead. Raise it with better prices or tighter job costs, and you need fewer jobs to break even. The full monthly read is in how to read a profit and loss statement.

Go deeper

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 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.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.
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.Cost of goods soldCost 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.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.Break-even pointThe break-even point is the revenue at which your business makes zero profit: gross profit from jobs exactly covers overhead. For a contractor, break-even revenue equals fixed overhead divided by gross margin, written as a decimal.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.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.

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