What is the difference between COGS and operating expenses?

COGS covers only the direct costs tied to producing or delivering what you sell - materials, direct labor, sub-contractor costs, job-specific freight. Operating expenses (SG&A) cover the costs of running the business: rent, utilities, marketing, admin salaries, and software. Only COGS is deducted to calculate gross profit. Operating expenses are deducted below the gross profit line to arrive at net profit.

How do you calculate COGS for a project-based business?

For a project-based business, COGS equals all direct costs attributable to jobs completed and invoiced in the period: materials purchased, sub-contractor invoices, direct labor at fully burdened rates, and any job-specific costs such as freight or hire equipment. Costs for jobs not yet invoiced are treated as work in progress (WIP) and do not enter COGS until the job is billed.

Why does tracking COGS at job level matter?

Company-level COGS from your accounting software shows the total, but not which jobs drove it. Job-level COGS tracking - linking every purchase order, delivery note, and supplier invoice to a specific job record - tells you whether individual jobs hit their margin targets. Without it, a profitable month can mask several unprofitable jobs that are quietly eroding your overall margin.

Finance

Cost of Goods Sold (COGS)

The total of all direct costs incurred to produce the goods sold or deliver services completed in a period. Deducted from revenue to calculate gross profit. In project-based businesses, sometimes called cost of sales.

Cost of goods sold (COGS) is the total of all direct costs incurred to produce the goods sold or deliver the services completed in a given period. It appears on the income statement as the first deduction from revenue and is the starting point for calculating gross profit. Understanding what belongs in COGS - and what does not - is one of the most practically important distinctions in business financial management.

What Is Included in COGS

COGS covers only the costs directly tied to producing or delivering what you sell. For a product-based business, that means the cost of the goods themselves, decoration or processing costs, inbound freight, and any direct labor involved in production. For a project-based service business - construction, AV integration, promotional merchandise distribution, office furniture supply and installation - the equivalent is sometimes called "cost of sales," but the principle is identical.

In a promotional merchandise business, COGS includes: blank goods purchased from suppliers, decoration costs paid to contract decorators, inbound freight from supplier to decorator or to the customer, and kitting or packaging costs specific to a job. It does not include office rent, sales salaries, or software subscriptions. Those sit below the gross profit line in the overhead section.

In construction, COGS covers direct materials, sub-contractor labor, plant and equipment hire tied to a specific project, and any directly attributable site costs. In an AV integration business, it covers equipment purchased for a job, installation labor charged to that project, and cross-hire costs.

COGS vs Operating Expenses

COGS is the cost of doing the job. Operating expenses (SG&A) are the cost of running the business - premises, marketing, administration, and management salaries. Both reduce profit, but only COGS is deducted to calculate gross margin. Confusing the two inflates apparent gross margin and understates real overhead pressure.

COGS and Gross Margin

Gross profit is revenue minus COGS. Gross margin is gross profit expressed as a percentage of revenue. If a promotional merchandise distributor generates $50,000 in revenue on an order and COGS is $32,500, gross profit is $17,500 and gross margin is 35%. Every dollar saved in COGS - through better supplier pricing, accurate job costing, or eliminating unrecovered costs - directly improves gross margin without requiring additional revenue.

The common failure in project-based businesses is that COGS is not captured fully at job level. Materials that bypass the purchasing process and land as general overhead, sub-contractor invoices that arrive after the customer invoice is sent, and decoration costs that are estimated rather than confirmed at actual rates all create a gap between apparent and real gross margin. A 35% gross margin target on paper can quietly erode to 27% or lower when job-level COGS is properly reconciled.

Reconcile COGS Before Invoicing

For every job, confirm all direct costs - supplier invoices, sub-contractor invoices, van stock draws, and any job-specific freight - before raising the customer invoice. This gives you an accurate gross margin on the job, not a misleading estimate that only becomes visible at month-end.

COGS in Project-Based Businesses

For businesses that operate on a project basis rather than selling standard-priced products, job-level cost tracking is the mechanism that makes COGS meaningful. Without linking each purchase order, sub-contractor cost, and materials draw to a specific job record, COGS becomes a blended average that masks which jobs made money and which did not.

Accounting software (Xero, QuickBooks, FreeAgent) reports COGS at a company level from the general ledger. Job management software like Zigaflow captures COGS at the individual job level - linking purchase orders, delivery notes, and supplier invoices to the job record so actual cost of sales is visible before the customer invoice is raised, not just after month-end close.

Common in

Promotional Products & Branded MerchandiseConstruction & TradeAudio-VisualOffice FurnitureLighting Electrical

Frequently asked questions

See it in action

Ready to put this into
practice?

Book a free demo and see how Zigaflow fits your team.

Book a free demo View pricing