Gross margin is what is left of revenue after the direct cost of doing the work — materials and the labour on the job — and before overhead.
What it answers
Whether the work itself is priced correctly.
That is a narrower and more useful question than whether the business is profitable, because it separates two problems that get confused constantly. A business can have healthy gross margin and lose money, because overhead is too large for the volume. A business can also have tight gross margin and survive, because it runs lean. The fixes are completely different.
Against net
Profit margin — sometimes called net — takes overhead out too, and answers whether the business as a whole works.
Read them together and the diagnosis is quick:
- Gross healthy, net thin — the work is priced right and the business is carrying too much cost. Look at overhead.
- Gross thin — the work is underpriced or costed wrong, and no amount of overhead cutting fixes it.
- Both thin — start with gross. Pricing is the lever with the shorter path.
The arithmetic trap
A gross margin target applied as a markup does not produce that margin. A 40% markup yields about a 29% margin, consistently, on every job. See markup and margin — it is the most expensive arithmetic mistake in the trades.
Where it hides its problems
An average conceals the spread. A healthy overall gross margin can contain one job type run at a loss and another carrying it, which is invisible until you look per job — see job margin.