How to calculate Cost of Goods Sold (COGS) in the construction industry

TLDR

Understanding the Cost of Goods Sold (COGS) is crucial for any construction business looking to stay profitable, secure financing, or bring on partners. In construction, COGS is simply the total of your direct material and labor costs for each project. Track your expenses carefully, and calculating it becomes straightforward.

Why Every Contractor Should Know Their COGS

Most people who get into construction love working with their hands, not crunching numbers in spreadsheets. But if you want to grow your business, bid more work confidently, and keep your projects profitable, you can’t ignore the financial side. At some point, you’ll need to understand and calculate your Cost of Goods Sold (COGS).

COGS is the total cost of completing a project, covering the direct costs of labor and materials. Knowing it isn’t just a bookkeeping exercise it’s essential for making informed business decisions.

Who Needs to See Your COGS?

Your accountant will definitely care, but it doesn’t stop there. If you’re considering a business partner, a private investor, or applying for a bank loan, they’ll likely want a clear picture of your finances. COGS is a key part of that story because it shows exactly how much it costs to deliver your projects. Accurate COGS reporting helps build trust and demonstrates that you understand your business.

How to Calculate COGS in Construction

The classic formula is:

COGS = Beginning Inventory + Purchases – Ending Inventory

Technically correct, but in construction, it’s easier to focus on the practical side. Here’s how to think about it:

1. Direct Material Costs – Include all materials actually used for the project, from lumber and drywall to nails and fixtures.
2. Direct Labor Costs – Include all labor that went directly into completing the project.

COGS does not include overhead costs like office rent, marketing, or equipment that isn’t tied to a specific project. Only count the direct costs that were essential to get the job done.

The easiest way to keep your COGS accurate is to track all project expenses and labor hours carefully. Construction estimating software, like Bolster, makes this simple by keeping your material and labor costs in one place, ready for you whenever you need them.

Understanding your COGS gives you a clearer picture of profitability and helps you make better business decisions. Keep track of your costs, use the right tools, and you’ll always have the data you need to grow your construction business confidently.