How it works
What gross margin tells you about a job
Gross margin is the share of the price left after the job’s own costs: the labor, the materials, and anything else you spent only because of this job. It is the money that pays for everything else in the business — the office, the trucks, insurance, your own pay — and then, if there is any left, profit.
How to calculate it by hand
Total cost = labor + materials + other direct cost
Gross profit = revenue − total cost
Gross margin = gross profit ÷ revenue
Markup on cost = gross profit ÷ total cost
Price for a target margin = total cost ÷ (1 − target)
Worked through with the example numbers above: a job priced at $8,500 with $1,800 labor, $2,900 materials and $400 other cost has a total cost of $5,100. Gross profit is $3,400. $3,400 ÷ $8,500 = 40.0% gross margin, and $3,400 ÷ $5,100 = 66.7% markup. To have made 45% on the same costs the job needed to be priced at $5,100 ÷ 0.55 = $9,272.73 — or, at the same price, to cost no more than $8,500 × 0.55 = $4,675.00.
Common mistakes
- Treating markup as margin. Marking costs up 40% does not produce a 40% margin; it produces 28.6%. This is the most expensive mistake on this page, and the one it is built to catch.
- Using the wage instead of the loaded cost. Payroll taxes, workers’ comp and benefits are part of what an hour of labor costs you.
- Forgetting the small direct costs. Permits, disposal, equipment rental, a subcontractor, the second trip for a missing part. Each is small; together they are the difference between the margin you quoted and the one you made.
- Averaging percentages across jobs. A $500 job at 60% and a $10,000 job at 20% do not average 40%. Add up the dollars: $2,300 of profit on $10,500 is 21.9%.
- Calling gross margin profit. Overhead has not come out yet. A 40% job in a business with 35% overhead makes 5%.
What good data looks like
The margin is only as honest as the costs behind it. Hours come from when the tech actually clocked in and out, not a guess at the end of the week. Materials go on at what the supplier invoiced, freight included. Every cost is recorded against the job it belongs to, while the job is open. And the estimate is kept, so the finished job can be compared with what it was sold at — a job that was quoted at 45% and finished at 40% tells you where to look.
How to improve it
- Price from the margin you need, not from cost plus a habit. Divide cost by (1 − target).
- Compare estimate and actual on every job for a month. The same few causes — a callback, an underpriced part, a job that always runs long — usually account for most of the gap.
- Charge for the things you give away: trip charges, diagnostics, after-hours time.
- Update the price book when supplier prices move, not once a year.