Cost of Goods Sold

What is cost of goods sold?

Cost of goods sold (COGS) represents the direct expenses required to deliver your product or service. For a plumber, this might include the cost of pipes and fittings for a specific job. For a landscaper, it could be plants, mulch, and soil. COGS only includes costs directly tied to specific jobs—not general overhead like office rent.

Understanding COGS helps you see how much you actually make on each job after covering direct costs.

What's included in COGS

For service-based contractors, COGS typically includes:

• Materials — Supplies and materials used for specific jobs
• Direct labor — Wages for workers directly performing the service
• Subcontractor costs — Payments to subs for work on specific projects
• Equipment rental — Equipment rented for particular jobs
• Permits — Job-specific permit fees

COGS vs. operating expenses

COGS are costs directly tied to delivering your service or product. Operating expenses are general business costs like rent, insurance, and office supplies that you'd pay regardless of how many jobs you complete. Keeping these separate helps you understand your true profit margins.