What is gross margin?
Gross margin is revenue minus the direct cost of delivering it, shown as a percentage of revenue. In a services company, direct cost is mostly field labor, materials, subcontractors and equipment used on the job. A 35 percent gross margin means 35 cents of every revenue dollar is left to pay for sales, overhead and profit.
Why it matters to a revenue leader
Gross margin tells you whether the work your team sells is worth doing. Two sellers can hit the same revenue number while one brings in jobs at 45 percent and the other at 22 percent. Discounts, underpriced change orders and jobs sold outside the company's sweet spot show up here first. If you pay sellers on revenue alone, you may be paying for margin erosion.
How to calculate it
Gross margin = (revenue minus cost of goods sold or cost of services) divided by revenue. A common mistake is leaving out costs that belong to delivery, such as warranty callbacks or crew travel, which flatters the margin.
Example
Fictitious numbersA testing and inspection firm completes $1.2 million of work in a quarter. Technician labor, lab fees and travel cost $780,000. Gross profit is $420,000 and gross margin is 35 percent.
"What gross margin did each seller's work carry last quarter, and who sets the floor?"
Sources
- Gross Margin Ratio (Corporate Finance Institute) checked 9 Oct 2026