What Is Cost of Goods Sold (COGS) for a Contractor?
By BRIX Editorial Team · Updated
Cost of goods sold (COGS) is the direct cost of producing the work you sell. For a contractor or service business, COGS, often called cost of sales or job costs, includes materials, field labor and its payroll costs, subcontractors, and job-specific equipment, permits and disposal. Revenue minus COGS is gross profit, the money left to pay overhead and keep.
Key takeaways
- COGS = the costs that rise and fall with the jobs you do. Overhead is what you pay even in a week with no jobs.
- Gross profit = revenue − COGS. Gross margin = gross profit ÷ revenue.
- Field labor belongs in COGS; office staff and the owner's admin time belong in overhead.
- Misclassifying job costs as overhead makes your gross margin look better than it is and your prices too low.
- Most small contractors who meet the IRS small business taxpayer test can skip keeping a formal inventory, but confirm with your tax preparer.
How do you calculate cost of goods sold?
For a service or contracting business that doesn't stock much inventory, COGS is simply the total of direct job costs for the period. If you carry inventory (a warehouse of equipment, a big parts room), adjust for what's still on the shelf.
COGS = Job materials + Field labor and burden + Subcontractors + Other direct job costs
- Job materials
- parts, equipment and supplies bought for specific jobs
- Field labor and burden
- technician and crew wages for job time plus payroll taxes, workers' comp and benefits (labor burden)
- Subcontractors
- subs hired for specific jobs
- Other direct job costs
- equipment rentals, permits, dump fees and anything else that exists only because of a job
COGS = Beginning inventory + Purchases + Direct labor and other direct costs − Ending inventory
What counts as COGS vs. overhead for a contractor?
| Cost | COGS or overhead? | Why |
|---|---|---|
| Materials for a specific job | COGS | Only bought because of the job |
| Technician and crew wages for job time | COGS | Direct labor; include payroll taxes and workers' comp |
| Subcontractors on a job | COGS | Direct job cost |
| Permits, dump fees, job equipment rental | COGS | Tied to specific jobs |
| Truck fuel and maintenance | Usually overhead | Some contractors charge a per-job vehicle cost to COGS; pick one approach and stay consistent |
| Shop supplies and small tools | Usually overhead | Not tied to one job |
| Office staff, dispatcher, CSR wages | Overhead | Paid regardless of job count |
| Rent, insurance, software, marketing | Overhead | Fixed or semi-fixed |
| Technician unbillable time (training, shop days) | Debated | Many shops keep all field wages in COGS for simplicity; others move non-job hours to overhead |
| Owner's draws | Neither | Draws are equity, not an expense, for a sole proprietor or partnership |
COGS by trade
| Trade | Biggest COGS items | What to track separately |
|---|---|---|
| HVAC | Equipment (condensers, furnaces, air handlers), field labor | Equipment vs. parts and refrigerant, so replacement margins and service margins are visible |
| Plumbing | Field labor, fixtures and water heaters, pipe and fittings | Service vs. new construction materials |
| Electrical | Field labor, wire, panels and gear | Large gear purchases by job; lift rentals |
| Roofing | Shingles and underlayment, crew labor or subcontracted crews, dumpsters | Subcontracted crews vs. in-house labor |
| General contractor | Subcontractors, materials | Subs by trade; permits |
| Landscaping | Crew labor, plants, mulch and stone | Maintenance labor vs. install materials |
| Cleaning | Field labor, supplies | Labor by account to spot underpriced contracts |
Do contractors need to keep inventory for taxes?
Many don't. The IRS 2025 Instructions for Schedule C say that if you are a small business taxpayer, you can choose not to keep an inventory. A small business taxpayer, for that purpose, is one with average annual gross receipts of $31 million or less for the three prior tax years (indexed for inflation) that isn't a tax shelter; for tax years beginning in 2026 the inflation-adjusted limit is $32 million, per Rev. Proc. 2025-32. If you choose not to keep an inventory, you can treat it as non-incidental materials and supplies. Ask your tax preparer which method fits, especially if you keep a stocked warehouse.
Sole proprietors report COGS in Part III of Schedule C. Corporations and partnerships report it with their own returns; your preparer will know the form. See accrual vs. cash accounting for how your method affects when costs are recorded.
How do you set up COGS in QuickBooks?
Create Cost of Goods Sold accounts in your chart of accounts for materials, subcontractors, field labor and other job costs. Then post every supplier bill, sub invoice and field payroll to those accounts and to the job (customer or project). Your profit and loss statement will then show a gross profit line, and project reports will show job-level profit. A ready-made structure is in our QuickBooks chart of accounts for contractors.
COGS vs. operating expenses
COGS is variable: do twice the jobs and it roughly doubles. Operating expenses (overhead) are mostly fixed in the short run. That's why the split matters for pricing. Your markup has to cover COGS and a share of overhead, then leave profit. Use the break-even calculator to see how many jobs you need to cover overhead at your current gross margin.
Common COGS mistakes
- Field labor in overhead. The most common error. Technician wages for job time are COGS.
- Leaving out labor burden. Wages alone understate labor cost. Add payroll taxes, workers' comp and benefits.
- Materials not coded to jobs. A supply-house run for three jobs, entered as one lump, wrecks job costing.
- Owner's field work invisible. If the owner works in the field and draws instead of taking a wage, gross margin looks better than a business with paid techs would see. Price as if you'll pay someone to do that work.
- Inconsistent rules. Fuel in COGS one month and overhead the next makes margins jump for no reason.
Frequently asked questions
Do service businesses have cost of goods sold?
Yes, though it's often called cost of sales or cost of revenue. For a service or contracting business, it's the direct cost of delivering the work: field labor, materials, subs and other job costs. Leaving it out of your P&L hides your gross margin.
Is labor included in cost of goods sold?
Direct labor is. Wages for technicians and crews doing billable work, plus payroll taxes and workers' comp on those wages, belong in COGS. Office, dispatch and sales wages are overhead.
What's the difference between COGS and overhead?
COGS is the cost that exists only because you did a job, and it rises with volume. Overhead is the cost of keeping the business open: rent, insurance, office staff, software and marketing. Gross profit covers overhead; what's left is net profit.
Are vehicle costs COGS for a contractor?
It depends on how you track them. Many small contractors keep truck costs in overhead. Others charge a per-job vehicle rate to COGS for more accurate job costing. Either works if you're consistent.
What is a good gross margin for a contractor?
It varies widely by trade and type of work, so there's no single number. Calculate yours monthly, compare service work to installs and new construction, and make sure gross profit covers overhead plus the profit you want. See our gross margin guide for the math.
Do I need to track inventory as a contractor?
For management, track anything significant on trucks and in the shop. For taxes, small business taxpayers can generally choose not to keep a formal inventory, per the IRS Schedule C instructions. Confirm the right approach with your tax preparer.
Related
- What Is Gross Margin?Gross margin is the share of revenue left after direct job costs. The formula, what counts as COGS for trades, and why service and install margins differ.
- How to Read a Profit and Loss Statement (Contractor's Guide)How to read a profit and loss statement as a contractor: each line explained, a worked P&L for a plumbing shop, ratios to check monthly, and red flags.
- What Is Overhead, and How Do Contractors Calculate It?What counts as overhead in a trades business and how to calculate your overhead rate per revenue dollar, billable hour, job and day, with a worked example.
- What Is Labor Burden?Labor burden is what an employee costs beyond wages: payroll taxes, workers' comp, benefits. See the formula, 2026 tax rates and a tech's true hourly cost.
- What Is Job Costing?Job costing tracks what each job really cost vs. the estimate. What to track, a sample job cost report with variances, and a simple system for small crews.
- What Is a Chart of Accounts?How a chart of accounts works for contractors: the five account types, a sample numbered list, job cost accounts, QuickBooks setup and mistakes to avoid.
- Break-Even Calculator for Service BusinessesFind how many jobs and how much revenue your service business needs each month to break even, and what it takes to hit your profit target.
- QuickBooks Chart of Accounts for Contractors (Import CSV)Free QuickBooks Online chart of accounts for contractors and service trades: a ready-to-import CSV with account types, detail types and import steps.
- Bookkeeping for contractors that keeps your books tax-ready all yearContractor bookkeeping that stays current: categorized expenses, 1099 subcontractor tracking, sales tax and quarterly tax reminders, synced to QuickBooks.
- Contractor invoicing software that sends the invoice and chases the moneyTurn finished jobs into invoices the same day, send polite automatic reminders on unpaid ones, and sync invoices and payments to QuickBooks.
Sources
- IRS — 2025 Instructions for Schedule C (Form 1040), Part III (checked October 12, 2026)
- IRS — Rev. Proc. 2025-32 (2026 inflation adjustments), section 4.30 (checked October 12, 2026)