COGS: what it means for home-service and trades companies
COGS (cost of goods sold) is the direct cost of delivering your work. For contractors, it is the number that separates revenue from gross profit, and the one number your financials hinge on getting right.
Definition
COGS is the total direct cost of delivering the jobs you completed in a period.
Cost of goods sold (COGS) captures every dollar tied to producing your revenue: labor on the truck, parts and materials used, subcontractor costs, and any other expense that only exists because a job existed. It does not include rent, admin salaries, or marketing spend. The formula is simple: COGS = direct labor + materials + subcontractor costs + other job-direct costs. Subtract COGS from revenue and you have gross profit.
For gross profit benchmarks and how the two numbers move together, see /glossary/gross-profit.
COGS in plain English for contractors
Picture a plumbing owner who opens QuickBooks mid-month and sees revenue tracking well, but net income is thin. The culprit is almost always hiding in COGS. If a company billed 320,000 dollars and spent 198,000 dollars on the direct cost of doing that work, its COGS is 198,000 dollars and its gross profit is 122,000 dollars. Every dollar below that goes to cover overhead and (ideally) produce net income.
The reason COGS matters so much is that it gates gross profit. You cannot improve gross profit without understanding what is driving COGS. Two shops with identical revenue can have very different gross profits if one runs tighter materials costs or pays more efficient labor. COGS is the lever.
What goes into contractor COGS
In home services, COGS typically includes: technician and installer wages (and burden) for time actually spent on jobs, parts and materials consumed on those jobs, equipment or equipment rental tied directly to the job, and subcontractor costs for work you pass through. It does not include the office manager's salary, your software subscriptions, advertising spend, or lease payments. Those are operating expenses that sit below the gross profit line.
Labor is typically the largest piece. On the financial side, many home-service companies track labor percentage as a standalone KPI precisely because it is both the biggest cost and the hardest to control in real time.
Why the COGS formula matters for home-service companies
Revenue is the headline number, but COGS tells you how much of that revenue you actually got to keep before overhead. A shop that grows revenue 20% year-over-year while letting COGS creep up at the same rate has not improved its position at all. Owners who watch COGS regularly catch material waste, tech overtime, or subcontractor cost creep before month-end, when something can still be done about it.
Warning
Common mistake: including overhead in COGS
One of the most frequent errors in home-service financials is mixing operating expenses into COGS. Rent, office salaries, marketing spend, software, and vehicle payments are period expenses, not job-direct costs. If those costs land in COGS, your gross profit looks artificially low, your job costing is wrong, and any comparison to industry benchmarks is meaningless. When reviewing your QuickBooks chart of accounts, check that only labor, materials, and direct subcontractor costs flow into COGS.
COGS components by trade
| Trade | Primary COGS components | Typical cost driver to watch |
|---|---|---|
| HVAC | Tech labor, refrigerant and parts, equipment (installs), subcontractor | Equipment cost on install jobs; refrigerant pricing volatility |
| Plumbing | Tech labor, fixtures and materials, drain equipment rental | Materials markup; overtime on emergency calls |
| Roofing | Crew labor, shingles and underlayment, dumpster, subcontractor | Material costs per square; subcontractor rate variance |
| Electrical | Tech labor, wire, panels, fixtures, permit fees (direct) | Labor hours vs. job estimate; material waste on large installs |
| Garage door | Tech labor, springs and hardware, door units (sales/install) | Door unit cost vs. ticket size; same-day parts availability |
Reading your COGS: good, watch, and poor signals
These signals are directional, not universal benchmarks. COGS ratios vary by trade, market, season, and business model. Use them to identify trends and prompt investigation, not as fixed pass/fail thresholds.
- COGS as % of revenue (gross margin proxy)Consistent COGS % with growing revenue means you are scaling without losing margin.Good
- Current
- varies by trade
- Target
- Stable or declining over time
- Labor portion of COGSWhen labor cost grows faster than revenue, tech productivity or job mix is shifting. Investigate before month-end.Watch
- Current
- largest single component
- Target
- Tracked separately from materials
- Materials cost per jobRising materials cost per job often signals waste, poor inventory management, or vendor price creep.Good
- Current
- varies by ticket type
- Target
- Consistent with your flat-rate or book price
- COGS % rising month-over-monthUncontrolled COGS growth compresses gross profit and hides a profitability problem even when revenue looks healthy.Poor
- Current
- increasing trend
- Target
- Investigate root cause
- Overhead misclassified in COGSMisclassified costs distort gross profit and make job costing unreliable. Review chart of accounts with your bookkeeper.Poor
- Current
- present in chart of accounts
- Target
- Zero overhead in COGS
| Metric | Current | Target | Status |
|---|---|---|---|
| COGS as % of revenue (gross margin proxy)Consistent COGS % with growing revenue means you are scaling without losing margin. | varies by trade | Stable or declining over time | Good |
| Labor portion of COGSWhen labor cost grows faster than revenue, tech productivity or job mix is shifting. Investigate before month-end. | largest single component | Tracked separately from materials | Watch |
| Materials cost per jobRising materials cost per job often signals waste, poor inventory management, or vendor price creep. | varies by ticket type | Consistent with your flat-rate or book price | Good |
| COGS % rising month-over-monthUncontrolled COGS growth compresses gross profit and hides a profitability problem even when revenue looks healthy. | increasing trend | Investigate root cause | Poor |
| Overhead misclassified in COGSMisclassified costs distort gross profit and make job costing unreliable. Review chart of accounts with your bookkeeper. | present in chart of accounts | Zero overhead in COGS | Poor |
Info
Owner takeaway: COGS is the gross profit gate
Every gross profit improvement starts with COGS. If your gross profit is under pressure, you either have a revenue problem (low tickets, slow volume) or a COGS problem (high labor, material overruns, or job-mix shift). The two are easy to confuse on a monthly P&L, but separating them is the first step to fixing the right one. Teams that surface COGS data in real time, broken out by department or job type, can spot a cost problem within the same week it appears rather than at month-end when the margin is already gone.
COGS vs. related financial terms
| Term | How it relates to COGS |
|---|---|
| Gross profit | Revenue minus COGS. Gross profit is the direct output of managing COGS well. See /glossary/gross-profit. |
| Labor percentage | Labor cost as a share of revenue. It is a sub-component of COGS, but significant enough to track as a standalone KPI. See /glossary/labor-percentage. |
| Net operating income (NOI) | Gross profit minus operating expenses. COGS feeds gross profit, which is the starting point for NOI. |
| Job costing | Allocating COGS to individual jobs or job types. Job costing is COGS broken down to the job level for profitability analysis. |
| Operating expenses (OPEX) | Period costs not tied to delivering specific jobs: rent, admin, marketing, software. These sit below gross profit, not in COGS. |
How COGS appears in a contractor dashboard
When datacube is configured with a QuickBooks financial dashboard, COGS flows directly onto the Financial board alongside revenue, gross profit, labor percentage, and expense pacing. The goal is to give an owner or controller a month-to-date view of these numbers without logging into QuickBooks every time they want to check the margin.
On a datacube Financial board, COGS is typically displayed as a dollar figure and as a percentage of revenue, with a month-to-date and year-to-date view. Some teams also set a COGS-percentage goal that turns red when the ratio exceeds their target, providing an early warning before month close. Because the data comes directly from QuickBooks, it reflects the same numbers the accountant sees, with no manual re-entry.
COGS FAQs
See COGS on a live financial board
Datacube can pull COGS, gross profit, labor percentage, and revenue from QuickBooks into a live Financial board so your team sees the margin picture month-to-date, not just at close. See how it appears in a datacube dashboard.
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