Gross margin is revenue remaining after subtracting costs directly associated with delivering services, stated as dollars or a percentage of revenue.
Definition
Gross margin shows the portion of service revenue left after a firm subtracts costs it classifies as directly tied to delivering client work. These costs often include project labor and subcontractor expense, but firms differ on whether labor burden, reimbursable expenses, or other project costs belong in the calculation. A firm may report gross margin in dollars or divide it by revenue to express a percentage. The result is useful for seeing what remains to cover overhead and other operating costs, as long as the revenue and cost definitions are clear. Gross margin is not net income, since it generally excludes at least some operating expenses, financing costs, and taxes. It is not cash flow, since billing and payment timing can differ from revenue recognition. Comparisons between firms or service lines can mislead when their cost classifications or revenue bases differ.
How owners use it
- Track the amount of service revenue left after the firm's selected direct costs.
- Compare service lines only after confirming which labor, burden, and subcontractor costs are included.
- For example, ($500,000 revenue - $300,000 direct costs) ÷ $500,000 = 40% gross margin.
- Assess whether project fees cover delivery costs and contribute toward operating expenses.
