How to calculate it
Gross margin % = (revenue − direct costs) ÷ revenue × 100
Direct costs are the labor and materials that went into delivering the work. Office rent, software and other overhead are not direct costs; they are paid for out of the gross margin.
Example
Illustrative numbers only. A job is invoiced at $1,000. Technician labor, fully loaded, cost $400 and materials cost $250. Gross profit is $1,000 − $650 = $350, so the gross margin is 35%. That $350 has to cover overhead before any of it is profit.
Margin is not markup
Margin is measured against the price; markup is measured against the cost. A 50% markup produces only a 33% margin. Mixing the two up is how a business prices at "50% over cost" and then finds it has far less left than it expected.
Why it matters
Gross margin tells you whether a type of job pays for itself before the overhead bill arrives, which makes it the quickest check on whether your prices are right.
Related
- Markup vs margin calculator
- How to price service jobs profitably
- Job costing for service businesses
- Labor burden
Definitions here are general and educational. Exact meanings can vary by trade, region, and software.