Gross margin by job, product or client, and why it matters

Your income statement shows one gross margin for the whole company. That number is an average, and averages hide the truth. In almost every BC company we open up, a few products, jobs or clients earn most of the margin while others consume it. Until you can see margin at that level, growth means doing more of everything, including the work that loses money.

This guide explains how to measure gross margin by job, product or client with the systems you already have, and how to act on the result.

Decide the unit that matters

Pick the unit your business actually manages. For a contractor it is the job. For a manufacturer or e-commerce store it is the product or product family. For a professional firm or a distributor it is often the client. For a clinic it may be the service type. You can measure more than one, but start with the one that drives decisions this quarter.

Then define direct cost for that unit and write the definition down. Direct cost is everything that would disappear if the job, product or client disappeared: materials, direct labour, subcontractors, freight, merchant fees, commissions and sometimes software seats or equipment dedicated to it.

Capture cost at the source

The accounting system can only report margin by job if every cost is coded to a job when it is entered. That means purchase orders and supplier bills carry a job or product code, timesheets record hours against jobs, and subcontractor invoices reference the job. Most modern accounting and job management platforms support this with classes, tracking categories, projects or inventory items. The discipline is in using them every time.

If coding has been patchy, do not wait for perfect history. Start coding properly from the first of next month and build a rough view of the last year from job sheets, sales reports and supplier statements. A rough view is enough to find the biggest problems.

Build the margin table

For each unit, list revenue, direct cost and gross margin in dollars and as a percentage of revenue. Add the quoted or standard margin beside the delivered margin so you can see variance. Sort the table two ways: by margin dollars, which shows where the business actually earns its living, and by margin percentage, which shows where pricing or delivery is weak.

Look at both columns together. A large client at a modest percentage may still be the most valuable relationship in the company. A small job at a negative percentage is a decision waiting to be made.

Act on what you find

Work through the low margin units in order. First ask whether the price is wrong. Many are legacy prices that never moved with costs. Second, ask whether delivery is wrong, meaning the crew, the process or the purchasing on that work costs more than it should. Third, ask whether the scope is wrong, with the customer receiving more than they pay for. Only after those three do you consider exiting the work or the client.

Share the table with the people who influence it. Estimators learn which job types they underquote. Account managers learn which clients need a different conversation. Purchasing learns where material costs have drifted.

Set a rule for how low a unit's margin can go before it triggers a review, and apply it the same way to every job, product and client. Without a rule, the conversation about a favourite customer or a long-standing product line gets postponed indefinitely. With one, the review happens on schedule and the decision is about the numbers rather than the relationship. Record what was decided and check the unit again a quarter later.

Keep it alive

Margin by unit is a monthly report at minimum and, for job-based businesses, a weekly one for jobs completed that week. Put the top and bottom five on the owner's weekly pack. Review the full table at month end with your bookkeeper or controller, and once a year with your CPA so the direct cost definitions match how year end statements are prepared.

Over time this report becomes the basis for pricing policy, sales targets and the story you tell a lender or buyer about where the company's profit really comes from.

Common errors in margin analysis

• Allocating overhead into gross margin, which blurs the line between pricing problems and overhead problems
• Ignoring warranty, rework and returns, which belong to the job or product that caused them
• Measuring only percentages and cutting a large, profitable account because its percentage looks low
• Letting uncoded costs pile up in a general account where they belong to nobody