Gross Margin

Gross margin measures the profit remaining after deducting the direct costs of delivering a product or service - known as cost of goods sold (COGS) - from total revenue. The formula is: Gross Margin (%) = ((Revenue - COGS) / Revenue) x 100. If you invoice a customer $10,000 for a job and the direct costs come to $6,500, your gross margin is 35%. Gross margin is sometimes called gross profit margin; the two terms are used interchangeably in most business contexts.

Why Gross Margin Matters in Project-Based Businesses

For businesses that operate job by job - contractors, promotional merchandise distributors, AV integrators, office furniture dealers - gross margin is more actionable than net profit as a day-to-day measure. Net profit is calculated across the whole business. Gross margin can be calculated per job, per customer, or per product line, making it a practical tool for understanding where your money is actually made.

A business might run 40 jobs in a quarter with solid total revenue, but if five of those jobs are dragging gross margin below 20%, those jobs are eroding profitability from the rest. Tracking gross margin at the job level reveals which customers and project types are actually contributing - and which are not.

Service-based and project-based businesses typically target gross margins of 30-50% depending on sector. Promotional merchandise distributors often work in the 30-45% range depending on product mix and decoration complexity. Construction businesses typically target 20-35%, with the specific rate depending on labour intensity and sub-contractor usage.

Gross Margin vs. Net Margin

Gross margin and net margin measure different things.

Gross margin deducts only direct costs: materials, labour, sub-contractors, and production costs directly attributable to delivering a specific job or product. It measures production and pricing efficiency.

Net margin deducts all costs - overheads, salaries, premises, software, and finance costs. It measures overall business profitability.

A healthy gross margin with a poor net margin indicates overheads are too high. A poor gross margin means the business is not pricing correctly or is not controlling direct costs - and no amount of overhead reduction will fix that underlying problem.

FAQs

What is the difference between gross margin and markup? Markup is calculated as a percentage of cost; gross margin is calculated as a percentage of revenue. A 50% markup produces a 33% gross margin, not 50%. If your target is a 40% gross margin, the markup required is approximately 67%, not 40%. Confusing markup and margin typically results in quotes that are systematically underpriced.

What direct costs should be included in COGS for a project-based business? Materials and goods purchased for the specific job, sub-contractor and labour-only costs, decoration or production costs from suppliers, freight directly attributable to the job, and any job-specific equipment hire. Overhead costs - business rates, software subscriptions, admin salaries - are excluded from COGS and deducted at the net margin level.

How do I improve gross margin without raising prices? Tighten purchase order controls to capture all supplier costs before invoicing, reduce rework that adds unbilled labour, and reconcile every job's costs before raising the final invoice. Labour running over estimate is one of the most common causes of gross margin erosion in service businesses.

Zigaflow tracks costs per job through works orders and purchase orders, so gross margin can be reviewed as soon as supplier costs are reconciled.