Gross margin

Gross margin is what is left from revenue after the direct cost of delivering the product or service: materials, direct labour, subcontractors, freight and anything else that scales with each sale. It is shown in dollars and as a percentage of revenue. Everything that keeps the doors open, from rent to the office team to the owner's salary, has to be paid out of it.

For a BC owner, gross margin is the number that decides whether growth is worth having. A business with a healthy gross margin gets stronger as it grows. A business with a thin one grows its problems. Because labour, materials and freight have all risen in recent years, many companies have a gross margin that is lower than the owner believes, and the gap only shows when it is measured by product, by job and by customer rather than as one average on the income statement.

In practice, gross margin is only as honest as the cost that goes into it. Labour burden, which is the benefits, payroll taxes, vehicles and tools that come with a wage, is the item most often left out. We rebuild the direct cost properly, report gross margin by line of business every month and use it as the floor for pricing and the basis for deciding which work to sell more of.