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Cost of Goods Sold (COGS)
What is Cost of Goods Sold (COGS)?
Cost of Goods Sold (COGS) in the construction industry represents the direct costs associated with the production of goods or services that a company sells. These costs may comprise the cost of raw materials such as lumber, steel, concrete; direct labor costs; storage costs, and direct utility costs. It can also include direct expenses like subcontractor costs, labor burden (i.e., benefits, insurance, taxes related to employee wages), material costs, and equipment costs that are directly attributable to a project's completion. COGS does not include indirect expenses such as sales and distribution costs or overhead costs such as office rent and utilities. In essence, COGS in construction is directly tied to specific projects and is a key factor in determining a project's gross profit and thus a company´s profitability.
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Other construction terms
What is a Balance Sheet?
A Balance Sheet, in the context of the construction industry, is an essential financial statement that provides a snapshot of a construction business's financial condition at a specific point in time. It summarizes the company’s assets, liabilities, and shareholders' equity, thus helping to reveal the financial health of the company. For instance, assets may comprise structures in progress, equipment, buildings, and land. Liabilities are what the company owes, including loans, accounts payable, and accrued expenses. The difference between the two, when subtracted, indicates the equity of the shareholders. This vital financial document is indispensable in decision-making processes involving potential investments, lending, and credit. By presenting a clear picture of the company's capabilities, the balance sheet also aids in risk-assessment and financial planning.
What is Section 179?
Section 179 of the Internal Revenue Code is a deduction designed to help certain businesses recover part of the costs associated with the purchase of qualifying equipment, including machinery, vehicles, or computer software. Within the construction industry, this can be a vital tool, allowing construction firms to write off the full purchase price of equipment they have bought or financed during the tax year. Whether it’s for acquiring a new excavator, a truck, or upgrading software, the Section 179 incentive directly strengthens financial capabilities of the companies in the construction sector. This, in turn, encourages business growth and economic development. Claiming this deduction can significantly impact a construction company’s overall operating costs, providing potential major tax relief.
What is Profit Fade?
Profit Fade, in the construction industry, refers to a situation where the projected profit margins on a project decrease as the project progresses. This typically occurs when actual job costs exceed the initial estimates, resulting in a decrease in the anticipated profit. For instance, unforeseen complications, increased material prices, labor overruns, or errors in bidding can all contribute to profit fade. It's essential for construction firms to have systems in place for tracking job costs and updating profit projections to manage profit fade effectively. Proactive financial management can minimize the impact of profit fade and maintain project profitability.
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