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In recent years I’ve spent a lot of time speaking to and consulting with builders and remodelers, big and small, and I’ve noted that there’s often confusion about what types of costs go where on a financial statement. On a typical P&L (profit and loss statement), the costs are segregated into two types: cost of goods sold (COGS) and overhead. COGS consists of the costs directly related to producing jobs. Accountants call these “above the line” costs. Overhead items, or indirect costs, go “below the line.” The “line” that differentiates these costs is the gross profit. To arrive at the gross profit, above-the-line job costs are subtracted from job income or selling price. To get net profit, overhead costs — below-the-line costs — are subtracted from the gross profit.
Above-the-line costs are the “sticks and bricks” that go directly into your project (labor, materials, and subcontracts) and are always directly proportional to the amount of work you do. In other words, direct job costs vary depending on how much work you do — so we call them “variable direct costs.”