Understanding Gross Margin: The Number That Determines Survival

What Gross Margin Actually Is

Gross margin is the percentage of revenue left after you subtract the direct costs of delivering your product or service. It is the money available to cover your overhead, pay yourself, and generate profit.

Gross Margin = (Revenue - Cost of Goods Sold) / Revenue x 100

If you complete a $10,000 job and the direct costs (materials, direct labor, subs) totaled $6,000, your gross margin is 40%.

This is the most important number in your business. Not revenue. Not the number of jobs. Gross margin determines whether you survive.

Why Revenue Is Misleading

A business doing $2 million in revenue at 20% gross margin has $400,000 to cover all overhead and profit. A business doing $800,000 at 55% gross margin has $440,000. The smaller company is in a stronger position despite doing less than half the revenue.

Revenue is vanity. Gross margin is sanity. Profit is reality.

Cost of Goods Sold (COGS) for Service Businesses

In a service business, COGS includes everything directly tied to delivering the work:

• Direct labor — Wages, payroll taxes, workers' comp, and benefits for field/production staff
• Materials — Everything consumed by the job
• Subcontractors — Outside labor you bring in for specific tasks
• Equipment rental — Job-specific equipment (not your owned fleet)
• Permits and inspections — Job-specific fees

COGS does not include:

• Office rent
• Admin staff salaries
• Vehicle costs (unless job-specific)
• Insurance (general liability, umbrella)
• Marketing
• Software
• Owner's salary

Those are overhead. They come out of gross margin, not before it.

Industry Benchmarks

Gross margin varies significantly by industry. Here are typical ranges:

| Industry | Typical Gross Margin | |----------|---------------------| | Residential remodeling | 35%–45% | | Commercial construction | 20%–30% | | Plumbing/HVAC/Electrical | 45%–55% | | Landscaping | 45%–55% | | Professional services | 60%–80% | | Cleaning services | 50%–65% | | IT services | 55%–70% |

If your gross margin is below the low end of your industry range, you have a pricing problem, a cost problem, or both.

Tracking Gross Margin

Per Job

Calculate gross margin on every single job. This is non-negotiable. You cannot manage what you do not measure.

After every job, compare estimated margin to actual margin:

• If actual is consistently lower than estimated, your estimating process is broken
• If it varies wildly, your job execution is inconsistent
• If it trends downward over time, costs are rising faster than your prices

Monthly

Track overall gross margin monthly. Plot it on a simple chart. You want to see a stable or rising line. A declining trend demands immediate attention.

By Service Line

If you offer multiple services, track gross margin separately for each. You will likely discover that some services are subsidizing others. That is valuable information — it tells you where to grow and where to cut.

What Destroys Gross Margin

Underestimating labor hours

The number one margin killer. If you estimate 40 hours and the job takes 56, you just lost 40% of your labor margin.

Scope creep without change orders

Every "while you are here" request that you do not charge for comes directly out of gross margin.

Material waste

Ordering too much, damaging materials on site, or not returning unused materials adds up across dozens of jobs per year.

Callback and warranty work

Every time you go back to fix something, you are spending money with zero additional revenue. Track your callback rate and cost.

Not tracking at all

The most common destroyer of gross margin is simply not knowing what it is. If you do not calculate it, you cannot manage it.

Improving Gross Margin

You have two levers: increase revenue per job or decrease costs per job.

Revenue Side

• Raise prices (see our guide on that)
• Reduce discounts
• Charge for scope changes
• Add premium options and upsells

Cost Side

• Negotiate better material pricing (volume discounts, supplier relationships)
• Improve labor productivity (better training, better tools, better scheduling)
• Reduce waste and callbacks
• Vet subcontractors for cost and quality

A 5% improvement in gross margin on $1 million in revenue puts $50,000 more in your pocket before you change anything else about the business.

The Survival Threshold

Here is the hard truth: if your gross margin is not high enough to cover your overhead, you are losing money on every job — and volume will not save you. Doing more of the wrong-priced work just accelerates the loss.

Calculate your overhead coverage ratio:

Overhead Coverage = Gross Profit / Total Overhead

If it is below 1.0, you are spending more on overhead than your jobs produce. You need to either raise gross margin or cut overhead. There is no third option.