What Is Cost of Goods Sold (COGS)?
Cost of goods sold is the income statement line item that represents the direct costs of producing revenue. In manufacturing, COGS includes raw materials and production labor. For service contractors, COGS represents the field labor, materials, and subcontractor fees required to complete jobs. It is the accounting equivalent of what contractors call direct costs in operational terms. COGS is subtracted from revenue to produce gross profit on the income statement.
- Revenue: total revenue invoiced in the period
- COGS: total direct job costs in the same period (field labor + materials + subcontractors)
Why It Matters to Contractors
Understanding COGS matters for contractors who use accounting software like QuickBooks, because job costs must be mapped to the correct account categories to produce an accurate income statement. When field labor, materials, and subcontractor fees are correctly classified as COGS rather than operating expenses, the gross profit line reflects the actual margin on the work itself. This makes the P&L a useful management tool rather than just a tax document.
How It Works
On the income statement, COGS sits directly below revenue. Revenue minus COGS equals gross profit. Below gross profit, operating expenses (overhead) are subtracted to produce net income. For contractors using QuickBooks, field labor is typically recorded under a COGS labor account, materials under a COGS materials account, and subcontractor payments under a COGS subcontractors account. The specific account structure may vary by accountant.
A contractor generates $200,000 in revenue in a quarter. During that period, field labor totaled $60,000, materials cost $40,000, and subcontractor fees were $20,000. COGS = $120,000. Gross profit = $200,000 - $120,000 = $80,000, which is a 40% gross margin for the quarter.
COGS vs. Direct Costs
COGS and direct costs refer to the same category of expenses, but in different contexts. Direct costs is the operational term contractors use when discussing job costing and field management. COGS is the accounting term used on the income statement. For contractors, the two are effectively interchangeable: both represent the labor, materials, and subcontractor costs tied to specific jobs rather than overhead.
How Contractors Track This
COGS is tracked through accounting software by assigning job expenses to the correct COGS accounts as they are incurred. When IRONGRID integrates with QuickBooks, invoices and associated job costs sync to QuickBooks automatically, keeping COGS accounts current without manual entry. Reviewing the COGS breakdown monthly helps identify whether labor, materials, or subcontractor costs are trending in the wrong direction.
Related Terms
Frequently Asked Questions
How do contractors categorize COGS in QuickBooks?
In QuickBooks Online, contractors typically create sub-accounts under Cost of Goods Sold for each major cost category: labor (or subcontractors), materials, and equipment. Field labor paid to W-2 employees can be tracked through the payroll module with the appropriate COGS account assigned. Materials purchased for specific jobs are coded to the COGS materials account when the bill or expense is recorded. An accountant familiar with contractor bookkeeping can set up the correct chart of accounts.
Is payroll a COGS expense for service contractors?
Field labor for technicians who perform billable work is typically classified as COGS. Office staff, managers, and other non-billable employees are usually classified as operating expenses or overhead. The distinction matters because field labor directly produces the revenue shown on the same income statement; office labor supports the business generally. Some contractors classify all payroll as overhead for simplicity, but this understates the true gross margin.
Why does COGS matter for contractor financial reporting?
COGS determines gross profit, which is the primary indicator of operational efficiency for a contracting business. If COGS is too high as a percentage of revenue, the business is not charging enough relative to its delivery costs, or its actual delivery costs are higher than estimated. Monitoring the COGS breakdown over time, especially the labor and materials components separately, reveals where margin is being lost.