Cost of services is what it cost to deliver the work. It is the same idea as cost of goods sold, named for businesses that sell work rather than products.
What belongs in it
Direct labour — the wages of people doing the work, at full labour cost rather than the bare wage.
Materials and parts consumed on the job.
Subcontractors performing part of the work.
Equipment hired for a job, permits pulled for a job, and disposal arising from a job.
The test is whether the cost would exist if the work had not been done. If it would not, it is a cost of services.
What does not belong in it
Anything that continues when the work stops: rent, insurance, office wages, software, marketing. That is overhead.
Why the line matters
Revenue less cost of services is gross profit, and as a percentage it is gross margin — the answer to whether the work itself is priced correctly, separately from whether the business as a whole is.
Put a cost on the wrong side and both answers change. Direct labour recorded as overhead makes the work look more profitable than it is and the business look more burdened than it is, and nothing on the statement signals it.
The part most often misplaced
Wages. In a small business one person frequently does both delivery and administration, and their whole wage lands on one side or the other.
Splitting it by roughly how their time divides is more accurate than putting all of it in either place, and it is what makes job costs mean anything.