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

Most people who choose to get involved in the construction industry aren’t that fond of things like accounting. There are some exceptions, but generally, if you like to work with your hands and build things from scratch, you’re not a huge fan of spreadsheets and formulas.

However, if you’re good at running a construction business, bidding lots of work, and growing your company bank balance, there’s going to come a time when you’re going to have to pay more attention to the business side of the construction business.

At some point, someone will probably ask you about your Cost of Goods Sold, or COGs, and you’ll need to know how to calculate it (even if you don’t crunch the numbers yourself). Here’s what you need to know about how to calculate the Cost of Goods Sold in the construction industry.

Who Needs to Know Your Cost of Goods Sold?

The first thing you probably want to know about COGs is who might ask you for it, and why you need to have this information ready.

The most obvious person who might talk to you about COGs is your accountant, although they’ll probably be telling you what it is, rather than asking about it. There are several people who might, however.

If you are ever considering taking on a partner or getting a private investor for your construction business, they will probably want to know all your financial information, including COGs.

Likewise, if you ever apply to a bank for financing for your construction business, they will want to see your financials, and that will include information about the Cost of Goods Sold.

How to Calculate Cost of Goods Sold

Now that you know what COGs are, you need to know how to calculate the Cost of Goods Sold in the construction industry. There is a formula for this, which is:

COGS = beginning inventory + purchases – ending inventory

However, while that’s technically correct, it’s not the easiest way to explain how to calculate COGS.

Instead, you only need to calculate your material costs, including all the direct material costs for your projects. Then add all the direct labor costs for your projects.

COGs do not include any indirect or overhead costs like building rentals, marketing and advertising, and so on. It’s only the direct materials and labor that were actually required to get your jobs done.

One way to make sure you always have your COGs information on hand is to use good construction estimating software and to track project expenses and time spent on every site carefully. As long as you are tracking those two things, calculating COGs will be simple!