The most expensive accounting mistake in home services hides in one line of your P&L. Technician labor belongs in cost of goods sold, not overhead. Owners who get this wrong think they’re running 65% margins when they’re really at 50 or below. Get it in the right column and you’ll finally see your true numbers: aim for 50% COGS, 35% overhead, 15% profit.
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And these are the KPIs that you need to be paying attention in order to make sure that your HVAC plumbing or electrical company is operating efficiently. So for this example, we're going to say for easy math, that your revenue for a certain period was $100. Your cost of goods sold, so everything associated with generating that $100. That is labor, materials, permits, subcontractors, whatever you can tie directly to that specific revenue should be in what is called cost of goods sold. Those should run around $50. You generated $100. You spent $50 to generate that $100. Your gross margin dollars should be $50. Now we're going to get down to overhead. So what are all the things? The truck, the insurance, the people in the office, all of those things that you need to generate that $100. What are those? Those should run around $35. Now after you take your cost of goods sold, you take your overhead, you are left with profit. In a home services business, you should be aiming on this particular example for $15. Now let's look at that in percentages. So $50 on your $100 job is 50% gross profit is what you should be aiming for, overhead of 35% and profit of 15%. If you hit those numbers, your company is operating efficiently. Now let me tell you it's about a few nuances. If you are electrical or plumbing only, you should see this margin higher than 50%. What drags this down on the HVAC side is the cost of equipment. Now the good part is you can probably still keep your overhead the same, which means more profit. The other piece of this is when you look at your gross profit margin, a lot of people will say, "Well, I'm running at 60, 65%, and they don't have the labor of the technician included in cost of goods sold." It's down here in overhead. That is not overhead. What you are selling is skilled trades, skilled labor. It should be up here. So if it's not, get with your accountant or your bookkeeper and get that up there so that you can actually see your true gross profit.
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