- Gross margin = (sales minus job costs) divided by sales. Job costs are labor, materials, subs and anything else a single job uses.
- Net margin = what is left after overhead too (truck, insurance, phone, software, office, your own salary) divided by sales.
- A job can show a healthy gross margin and the business still lose money if overhead is bigger than the gross profit.
Gross margin: is the job priced right
Gross profit is the price of the job minus the costs that belong to that job. Gross margin is that profit as a share of the price.
- Job costs (also called cost of goods sold): labor on the job including payroll taxes, materials, subs, equipment rental, permits and dump fees.
- Gross profit = price minus job costs.
- Gross margin = gross profit divided by price.
The IRS works the same way on Schedule C: Publication 334 has you figure gross profit from gross receipts and the cost of goods sold before you deduct any business expenses.
Example: a job priced at $8,000 with $2,600 of materials, $2,200 of labor and $400 of permits and disposal has $5,200 of job costs. Gross profit is $2,800. Gross margin is $2,800 ÷ $8,000 = 35%.
Net margin: does the business keep anything
Overhead is everything you pay whether or not a job is running: the truck payment, fuel between jobs, insurance, your phone, software, marketing, accounting, the shop, and a fair salary for yourself. Net profit is gross profit minus overhead. Net margin is net profit divided by sales.
Example for a year: $300,000 of sales at a 35% gross margin leaves $105,000 of gross profit. If overhead including your own salary is $78,000, net profit is $27,000, and net margin is $27,000 ÷ $300,000 = 9%.
Why you need both
| Gross margin | Net margin | |
|---|---|---|
| Answers | Is each job priced right? | Is the business worth running? |
| Costs taken out | Job costs only | Job costs and overhead |
| Check it | On every job | Monthly or quarterly |
| Fix a low one by | Raising prices or cutting job hours and waste | Raising gross margin, adding volume or trimming overhead |
The trap: if your own pay is not in overhead, net margin looks better than the business really is. Pay yourself a wage on paper before you count the profit.
Using margins to price
Work backward. Add up a year of overhead, divide by the sales you expect, and you know what share of each job must go to overhead. Add the net margin you want, and that is your target gross margin. Then price each job by dividing its costs by one minus that target. Our profit margin calculator and break-even calculator do the math, and markup vs margin explains why dividing beats multiplying.
Sources
- IRS Publication 334, Tax Guide for Small Business, chapter 7: Figuring Gross Profit, checked October 9, 2026
Published October 16, 2024. This page is general information, not legal or tax advice. Rules change and differ by state and city, so confirm with the agency named before you act.