Cost of Goods Sold (COGS)

Cost of goods sold (COGS) is the sum of all direct costs required to deliver your product or complete a job. It includes materials, direct labor, and sub-contractor costs - any expense that only exists because you took on that specific work. Revenue minus COGS gives you gross profit, which tells you whether the work itself was profitable before you account for overheads like rent, insurance, and admin salaries. Understanding your COGS accurately is the foundation of knowing whether your pricing is working.

What COGS Includes in a Project-Based Business

In manufacturing, COGS is straightforward: raw materials plus production labor. In project-based businesses - construction, AV integration, promotional merchandise distribution, electrical contracting - the calculation is the same but the components look different.

For a general contractor, COGS includes materials purchased for that specific job, direct labor at a fully burdened rate, and all sub-contractor invoices tied to that project. For a promotional merchandise distributor, COGS is the landed cost of blank goods (including freight and import duties), decoration and setup fees, and direct delivery costs to the end customer. For an AV systems integrator, COGS is equipment at dealer cost, installation labor charged to that project, and any sub-contracted specialist work such as programming or cabling.

What COGS does not include is overhead: office rent, vehicle leases, insurance, software subscriptions, and sales staff who work across all your jobs. Those costs sit below gross profit on the income statement. Recovering them is what separates gross margin from net margin.

How COGS Connects to Gross Margin

The relationship is direct: Gross Margin (%) = (Revenue - COGS) / Revenue x 100. If you invoice a job for $10,000 and your COGS is $6,500, your gross profit is $3,500 and your gross margin is 35%. That gross margin must be high enough to cover overhead and still leave a net profit.

Benchmark gross margins vary by sector. Construction trades typically target 25-40% depending on trade type. Promotional merchandise distributors target 30-45% on a well-managed account. Electrical contractors target 26-40% on installation work. If your gross margin is consistently below benchmark, the cause is almost always in COGS - materials quoted at stale prices, unrecorded sub-contractor costs, or direct labor that was never captured against the job.

The practical implication is that COGS must be captured during the job, not reconstructed at the end. Every materials delivery, sub-contractor invoice, and direct labor hour needs to land in the job record before the customer invoice is raised. A COGS figure assembled from memory at invoice stage is almost always incomplete.

Zigaflow links purchase orders, delivery notes, and works orders to a single job record, so every direct cost is captured against the correct job before invoicing. That gives you an accurate COGS figure at job close and a real gross margin comparison against the quoted estimate.