If you've been a long-time reader or a contracting company owner, you've probably heard about "Cost of Goods Sold" (COGS). But what does it really mean, and why is it crucial for your construction business's success? Understanding COGS isn't just about accounting—it's about making smart decisions for profitability, pricing, and more.    1. What is the Cost of Goods Sold (COGS)?    COGS represents the direct costs of creating the products/services your business sells/provides. These include materials, labor hours, and even manufacturing overheads. Any expense that contributes directly to a product's creation is included in COGS.   COGS provides critical insights into your business's efficiency and profitability. It's a fundamental metric showing how much you spend to produce inventory relative to your sales.     Contractors often ask us if they can buy our and import them into their QuickBooks Desktop or QuickBooks Online file. The answer is yes! We also offer the complete QB Setup Template. 2. What are the components of COGS?  COGS isn't one-size-fits-all. It includes different types of costs depending on your business.  Here are the main components typically included in COGS: Materials: Raw ingredients or parts used to provide your service Payroll: The wages you pay to employees directly involved in production Manufacturing Overheads: Indirect costs required to produce services, such as equipment depreciation or utility costs.  Note  General overheads, such as office or marketing costs, are not included in COGS—only expenses tied directly to production count.  3. How do I calculate COGS?  Fortunately, calculating COGS follows a straightforward formula: COGS = Beginning inventory + Purchases during the period – Ending inventory  Breaking it down: Beginning inventory: The inventory value on hand at the start of the accounting period.  Purchases: All costs for new inventory bought or manufactured during the period.  Ending inventory: The value of unsold inventory at the period's end.  Example Calculation  Imagine you run a small boutique that sells handmade gifts. If: Your beginning inventory is $5,000,  You spent $8,000 on materials and production, and  Your ending inventory is $2,000,  Then your COGS would be:  $5,000 + $8,000 – $2,000 = $11,000  This $11,000 represents the cost of creating the products you sold during the period.  But wait - that is for a retail business. Simple. What about construction? Direct Costs are tied to the jobs (field labor, materials, and other cost items). Office materials (pencils, paper, toner, etc.) are overhead. Yes, an accountant could say these many pencils are used in the field and that notepad is used in the truck.  The answer is the dividing line of the direct costs to the job: the Costs of Goods Sold (COGS). That is why we've created our Chart of Accounts, which you can use inside QuickBooks, depending on your type of construction business. Most COGS accounting methods you will find are for inventory valuation, which is confusing to most contractors. Confusion always arises about the material. A construction contractor may purchase material and resell it to their customer at cost, thinking it is a reimbursable expense. (You lose money when doing this.)   Remember, all invoices to the Customer (Retail, General Contractor, Spec Builder, Developer) are income. Washington State has a clear explanation. If the words are on the invoice, then the invoice is either taxable or non-taxable based on other factors. Every line item on a customer invoice is income.   Purchases for the material are the Cost of Goods Sold or expenses if you are short-cutting your accounting. I have seen financial statements backed out because they will reflect reimbursable income as a negative number, thereby showing it as a deduction. (The net effect is...