What Is Gross Margin and Why Your Trades Business Depends on It

You're busy. Jobs are coming in. The truck is moving. And somehow, at the end of the month, there's barely anything left.

This isn't a revenue problem. It's a gross margin problem — and most trades business owners have no idea what their number actually is.

What Gross Margin Actually Means

Gross margin is the percentage of revenue you keep after paying for the direct costs of doing the work — labour, materials, subcontractors, equipment rentals.

It does not include your office rent, insurance, admin staff, or your own salary. Those come later. Gross margin is just: did the job itself make money?

The formula is simple:

Gross Margin % = (Revenue − Cost of Goods Sold) ÷ Revenue × 100

So if you invoice $10,000 for a job and your direct costs (labour, materials, subs) were $6,500, your gross margin is 35%.

That 35% is what's left to cover your overhead — and hopefully leave some profit behind.

Why This Number Runs Your Business

Here's what I tell every client when we first sit down: your gross margin is the ceiling on everything else.

If your gross margin is too thin, no amount of volume will save you. You'll just be doing more work to lose money faster.

I've seen electricians doing $1.2M in revenue and clearing almost nothing. When we dig in, the gross margin is sitting at 22%. That's not enough to cover overhead, pay the owner properly, and still have anything left. We covered a real version of this in our case study on how TradeBrain helped an electrical company power up their business.

More revenue didn't fix it. Better margins did.

What's a Healthy Gross Margin for a Trades Business?

There's no universal number, but here are the ranges I use as benchmarks with clients:

Under 30% — Danger zone. You're likely underpricing or your job costs are out of control.
30–40% — Workable, but tight. You need low overhead and no surprises.
40–55% — Healthy. This is where most well-run trades businesses should operate.
55%+ — Strong. Usually means you've got good pricing power, efficient crews, or a niche service.

Service businesses (cleaning, landscaping, pest control) often run higher than material-heavy trades like plumbing or electrical. Know your industry baseline — but don't use it as an excuse to stay low.

The Two Ways Gross Margin Gets Destroyed

In my experience working with trades and service businesses across BC, margin problems almost always come from one of two places.

1. Underpricing jobs. You're not charging enough. Either you're guessing at quotes, not accounting for all your labour time, or you're discounting to win work. If you haven't read our post on how to price your jobs properly as a trades contractor, start there.

2. Job costs running over. The quote was fine — but the job took longer, materials cost more, or a sub came in over budget. This is a systems problem. Without job costing built into your process, you won't even know it's happening until it's too late.

We've written about profitably costing jobs before, and it remains one of the most important habits a trades owner can build.

How to Actually Track Your Gross Margin

Most owners look at their bank account to decide if things are going well. That's not tracking — that's guessing.

Here's what to do instead:

Pull your revenue and your cost of goods sold (direct costs only) from your accounting software — QuickBooks, Wave, Xero, whatever you use. Calculate your gross margin monthly. Write it down. Watch it move.

If you don't have clean books that separate direct costs from overhead, that's the first thing to fix. Your accountant should be able to set this up. Or look at our post on the 3 financial SOPs every small business needs to get the basics in place.

Once you're tracking it monthly, you can start to ask better questions: Which job types have the best margin? Which crew runs the tightest? Which clients consistently push costs up?

That's where the real decisions get made.

Gross Margin vs. Net Profit — Don't Confuse Them

Gross margin is not your profit. It's the starting point.

After gross margin, you still have to pay:

Your own salary or owner's draw
Admin and office staff
Insurance, vehicle costs, tools
Marketing, software, accounting fees
Rent or storage

What's left after all of that is your net profit. If you want a full picture of profitability, read our guide on understanding your profitability as a small business owner.

But gross margin comes first. You can't fix net profit if the gross margin isn't there to begin with.

What to Do If Your Gross Margin Is Too Low

You have three levers. Use all three if you need to.

Raise your prices. I know — you're worried about losing clients. But most trades owners are undercharging by 10–20% and don't know it. A 10% price increase on a 30% margin job moves you to roughly 37%. That's a massive swing for doing the same work.

Control your job costs. Build standard operating procedures around how jobs are quoted, scheduled, and closed out. Sloppy handoffs and scope creep kill margin quietly.

Drop your worst jobs. Some job types, some clients, some service areas just don't pencil out. Once you're tracking margin by job type, you'll see it clearly. Stop chasing revenue that costs you money to deliver.

If you're also looking at the overhead side of the equation, our post on smarter ways to cut costs and grow your business is worth a read alongside this one.

Do This This Week

Pull your last 3 months of revenue and direct costs from your accounting software.
Calculate your gross margin percentage using the formula above.
Compare it to the benchmarks in this post — are you in the danger zone, workable, or healthy?
Identify your top 3 job types and estimate the margin on each one separately.
Pick the one lever — pricing, job cost control, or job mix — that would move your number the most, and make one change this month.

What is a good gross margin for a trades business?

For most trades businesses, a gross margin between 40–55% is considered healthy. Under 30% is a warning sign that you're either underpricing work or your direct costs are running too high. The right number varies by trade — service-heavy businesses tend to run higher margins than material-heavy ones like plumbing or electrical.

How do I calculate gross margin for my contracting business?

Take your revenue, subtract your direct job costs (labour, materials, subcontractors), then divide that number by your revenue and multiply by 100. For example: $10,000 revenue minus $6,000 in direct costs equals $4,000. Divide by $10,000 and multiply by 100 — that's a 40% gross margin.

What's the difference between gross margin and net profit?

Gross margin is what's left after paying the direct costs of doing the work. Net profit is what's left after you also pay all your overhead — insurance, admin, your own salary, software, marketing, and everything else it costs to run the business. Gross margin comes first. If it's too low, there's nothing left to cover overhead, let alone profit.

Why is my trades business not making money even though revenue is up?

This is almost always a gross margin problem. If your direct costs — labour, materials, subs — are eating most of what you invoice, adding more revenue just means doing more work for the same thin result. Track your gross margin monthly and look at which job types are actually profitable. More revenue isn't the fix. Better margin is.

How can I improve gross margin in my small contracting business?

Three ways: raise your prices (most trades owners are undercharging), tighten your job costing so you know where costs are running over, and stop taking on job types or clients that consistently underperform. Start by tracking margin on your last 10 jobs — the answer is usually right there in the data.

If you're not sure where your margin is leaking — or you want someone to help you build the systems to track and fix it — reach out to TradeBrain and let's take a look together.