Glossary
Cost of goods sold
Also called: COGS · direct costs · cost of revenue
Cost of goods sold is everything you spent that only exists because a specific job happened — materials, field labour, subcontractors and equipment for that job.
The test is simple and it settles almost every argument about where a cost belongs: would you have spent it if the job had not happened? Materials, the crew hours on that job, the sub you brought in and the machine you rented all fail that test, so they are cost of goods sold. Rent, insurance, the office manager and the truck payment would have been spent regardless, so they are overhead.
The awkward cases are real and worth deciding deliberately rather than by habit. A salaried foreman who also runs jobs is partly direct and partly overhead. A truck is overhead, but the fuel burned driving to a specific job is arguably direct. Whichever way you split them, split them the same way every month — a category that moves between buckets makes year-on-year comparison meaningless.
Revenue minus cost of goods sold is gross profit, and gross profit is the number every pricing decision and every break-even calculation depends on.
Why it matters to a contractor
Get the line wrong and both numbers either side of it are wrong. Overhead misclassified as direct cost makes your margin look worse than it is; direct cost buried in overhead makes it look better, which is the direction that causes real damage.
Work it out on your numbers
See also