Cost of Goods Sold (COGS)
What it measures
Cost of Goods Sold (COGS) is the direct cost of producing the revenue your business earned. If you didn’t take the job, you wouldn’t have spent the money. That’s what makes it COGS.
What counts as COGS:
- Materials and parts consumed in delivering the product or service
- Direct labor for billable hours, including payroll burden (taxes, workers’ comp, benefits attributable to that labor)
- Subcontracted work tied to specific jobs
- Equipment rental for a specific job (not equipment you own and use across jobs, that’s overhead)
- Job-specific costs: permits, disposal, project-specific insurance, freight on materials
- Direct supplies: items consumed in delivering the service (cleaning chemicals for a cleaning company, paint for a painter)
Why it matters
Gross profit tells you the profitability of your product or service. It’s the revenue from the work minus the direct cost of delivering it, so it answers one question: is the thing you sell making money?
That answer is only as good as the costs you put into COGS. The most common gap we see is direct labor sitting in operating expenses, lumped in with administrative pay and the owner’s pay. When the cost of the people doing the work isn’t in COGS, gross profit looks a lot healthier than it really is. A business can look like it’s earning a comfortable margin on paper while the jobs themselves are barely breaking even.
Once that labor moves into COGS where it belongs, the real gross profit shows up and so does the real picture: which work is paying off and which isn’t.
Gross profit gets even more useful when you break it down by the parts of a job instead of looking at one blended number. When you track the revenue and the cost of each component side by side, you can see the profitability of each one on its own.
For example, a job might split into labor and materials:
- Labor: what you charge for labor against what that labor costs you
- Materials: what you charge for materials against what you pay for them
Splitting it this way often surprises owners. It’s common to make good money on labor while passing materials through at close to cost, so the materials side is barely contributing. Sometimes it’s the reverse, where a healthy markup on materials is quietly covering for labor that’s priced too low. A single blended number hides both. The category view shows you exactly which lever to pull.
When these numbers are accurate, every decision you make off your margins is built on something you can trust.
Want help putting this number to work in your business? That’s exactly the kind of thing we set up together in coaching.