Cost of Goods Sold

What is cost of goods sold?

Cost of goods sold (COGS) represents the direct costs of delivering your services or products. For a contractor, this includes materials used on a job, subcontractor labor, and permit fees. For a retailer, it's the wholesale cost of inventory sold. COGS doesn't include overhead like rent or office expenses—just costs directly tied to what you sold.

COGS is subtracted from revenue to calculate gross profit.

COGS examples for service businesses

Direct costs that typically count as COGS:

• Materials — Supplies and parts used for specific jobs
• Subcontractor labor — Payments to subs working on your projects
• Direct labor — Wages for employees working directly on jobs
• Equipment rental — Tools rented for specific projects
• Permits and fees — Job-specific licensing costs

COGS vs. operating expenses

COGS are costs directly tied to specific revenue. Operating expenses are general business costs that exist regardless of any particular job. Keeping these separate helps you understand which jobs are actually profitable.