Cost of goods sold, usually shortened to COGS, is what it cost to deliver the work you sold. In a service business it is sometimes called cost of sales or direct costs, and the three mean the same thing.
The test is simple: would this cost exist if the job had not happened? If no, it is COGS. If yes, it is overhead.
What belongs in it
Materials and parts used on jobs.
Direct labour — the wages of people doing the work, for the hours they were doing it.
Subcontractors engaged for specific jobs.
Equipment hired for a job, permits pulled for a job, disposal fees incurred by a job.
What does not
The office rent, the admin salary, your own vehicle, insurance, software. Those continue whether or not you sell anything.
The awkward one is a salaried technician. Their wage continues regardless, which makes it look like overhead — but the work they do is the product, so it belongs in COGS. Most businesses treat field wages as COGS and office wages as overhead, and that is the right instinct.
Why the line matters
It is the line that produces gross margin, which answers whether the work is priced correctly.
Put overhead into COGS and gross margin looks worse than it is, which leads to raising prices that were fine. Put COGS into overhead and gross margin looks better than it is, which hides underpricing until the year end.
Either error makes the most useful diagnosis in the business unreliable.
Consistency beats precision
The exact placement of a borderline cost matters far less than placing it the same way every month. A margin trend built on a shifting definition is not a trend.