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Gross Margin: Definition and Meaning
Definition
Gross margin is the amount remaining after direct costs are subtracted from revenue. It may be expressed as a dollar amount or as a percentage of revenue.
Why It Matters
Gross margin helps management evaluate pricing, labor efficiency, materials, subcontractor costs, product mix, project performance, and cost control. A change in gross margin can be an early signal that a business should investigate estimates, purchasing, productivity, waste, or pricing.
For contractors, gross margin should be evaluated by project as well as at the company level whenever reliable job-cost information is available.
Example
Revenue of $100,000 less direct costs of $60,000 results in a gross margin of $40,000, or 40 percent.
Related Terms
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