Variable Cost

What is a variable cost?

Variable costs change based on how much work you do. If you complete more jobs, you spend more on materials. If business slows down, material costs drop. Variable costs are directly tied to your output level, unlike fixed costs which stay the same regardless of activity.

Common variable costs

For contractors and service businesses:

• Materials — Supplies used on specific jobs
• Subcontractor labor — Payments that depend on project needs
• Fuel — More driving for more jobs means more gas
• Hourly wages — If you pay workers by the hour based on work available
• Shipping — Costs that scale with order volume
• Sales commissions — Payments tied to sales performance

Variable costs and pricing

Know your variable costs per job to ensure your pricing covers them plus contributes to fixed costs and profit. If material costs are $500 and you charge $800, your contribution margin is $300—that's what's available to cover overhead and generate profit.