# What Is Cost of Goods Sold (COGS) for a Contractor?

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 for a contractor**

```
COGS = Job materials + Field labor and burden + Subcontractors + Other direct job costs
```

Where:
- 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](https://www.brix.so/learn/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 with inventory**

```
COGS = Beginning inventory + Purchases + Direct labor and other direct costs − Ending inventory
```

> **Worked example: a plumbing company's year**
>
> Illustrative numbers. A plumbing company with six technicians bills $1,400,000 for the year.
>
> Job materials: $360,000. Field labor with payroll taxes and workers' comp: $420,000. Subcontractors (excavation and concrete): $60,000. Permits and equipment rental: $25,000.
>
> COGS = $360,000 + $420,000 + $60,000 + $25,000 = **$865,000**.
>
> Gross profit = $1,400,000 − $865,000 = **$535,000**, a 38.2% gross margin.
>
> That $535,000 has to cover the office, trucks, insurance, marketing and the owner's pay before there's any net profit. If $150,000 of field labor had been booked as overhead, gross margin would show 48.9% and the owner might think prices were fine when they weren't.

## 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

**What tends to dominate COGS in each 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 |

_Patterns, not measured statistics._

## 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](https://www.brix.so/learn/accrual-vs-cash-accounting) for how your method affects when costs are recorded.

> General information, not tax advice. Inventory and cost rules depend on your entity, revenue and accounting method. Confirm your treatment with a CPA or enrolled agent.

## How do you set up COGS in QuickBooks?

Create Cost of Goods Sold accounts in your [chart of accounts](https://www.brix.so/learn/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](https://www.brix.so/learn/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](https://www.brix.so/templates/quickbooks-chart-of-accounts-for-contractors).

## COGS vs. operating expenses

COGS is variable: do twice the jobs and it roughly doubles. Operating expenses ([overhead](https://www.brix.so/learn/overhead)) are mostly fixed in the short run. That's why the split matters for pricing. Your [markup](https://www.brix.so/learn/markup) has to cover COGS *and* a share of overhead, then leave profit. Use the [break-even calculator](https://www.brix.so/tools/break-even-calculator) to see how many jobs you need to cover overhead at your current gross margin.

## Common COGS mistakes

1. **Field labor in overhead.** The most common error. Technician wages for job time are COGS.
2. **Leaving out labor burden.** Wages alone understate labor cost. Add payroll taxes, workers' comp and benefits.
3. **Materials not coded to jobs.** A supply-house run for three jobs, entered as one lump, wrecks job costing.
4. **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.
5. **Inconsistent rules.** Fuel in COGS one month and overhead the next makes margins jump for no reason.

BRIX keeps expenses categorized, so materials, subs and job costs land in the right COGS accounts, and syncs with QuickBooks so your gross profit line is accurate without month-end cleanup.

- [Bookkeeping and tax help](https://www.brix.so/features/bookkeeping-taxes): Keeps expenses categorized, tracks 1099 subcontractors and sales tax, and reminds you of quarterly estimated tax dates. BRIX does not file taxes or give tax advice.
- [QuickBooks sync](https://www.brix.so/integrations/quickbooks): Syncs customers, invoices and payments with QuickBooks so the books match the jobs.

## 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?](https://www.brix.so/learn/gross-margin)
- [How to Read a Profit and Loss Statement (Contractor's Guide)](https://www.brix.so/learn/profit-and-loss-statement)
- [What Is Overhead, and How Do Contractors Calculate It?](https://www.brix.so/learn/overhead)
- [What Is Labor Burden?](https://www.brix.so/learn/labor-burden)
- [What Is Job Costing?](https://www.brix.so/learn/job-costing)
- [What Is a Chart of Accounts?](https://www.brix.so/learn/chart-of-accounts)
- [Break-Even Calculator for Service Businesses](https://www.brix.so/tools/break-even-calculator)
- [QuickBooks Chart of Accounts for Contractors (Import CSV)](https://www.brix.so/templates/quickbooks-chart-of-accounts-for-contractors)
- [Bookkeeping for contractors that keeps your books tax-ready all year](https://www.brix.so/features/bookkeeping-taxes)
- [Contractor invoicing software that sends the invoice and chases the money](https://www.brix.so/features/invoicing-payments)

## Sources

- [IRS — 2025 Instructions for Schedule C (Form 1040), Part III](https://www.irs.gov/instructions/i1040sc) (checked 2026-10-12)
- [IRS — Rev. Proc. 2025-32 (2026 inflation adjustments), section 4.30](https://www.irs.gov/pub/irs-drop/rp-25-32.pdf) (checked 2026-10-12)

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Written by BRIX Editorial Team. Last updated 2026-10-12. General information, not tax, legal or financial advice.
Canonical: https://www.brix.so/learn/cost-of-goods-sold