What Is a Good Gross Margin for a Trade Contractor? Why 80% Is the Floor and How to Get There
MOZI 6 Framework — The theory of constraints says there is exactly one bottleneck limiting your business right now. This series helps you find it, fix it, and find the next one.
Find your constraint →Built on Alex Hormozi's constraint-first framework — adapted for trade contractors.
Most trade contractors run 55–65% gross margin and have been told by their accountants that this is normal for the industry. It is normal — and normal is broken. The floor for a service business according to the Hormozi framework is 80%, and the gap between where most contractors are and where they need to be explains why cash is always tight despite strong revenue. M3 — gross margin — is the metric that sits beneath every other financial metric in the business: it constrains LTGP, owner pay, cash reserves, and growth capacity. This post is for HVAC, plumbing, electrical, roofing, and general contracting owners who want to understand what their gross margin is really telling them — and which of the three available levers will move it fastest.
When Marcus Rivera pulled his gross margin from QuickBooks, it came in at 61%. His accountant had told him that was "pretty normal for HVAC." And it is normal — but according to the MOZI framework, normal for this industry means the business model is structurally underpowered.
Gross margin is the most upstream financial metric in your business. Every downstream number — LTGP, owner compensation, cash reserves, growth capacity — runs through it. A 61% margin constrains all of them simultaneously. Fixing it is the highest-leverage financial move most contractors can make.
What Is a Good Gross Margin for a Trade Contractor?
The target gross margin for a service business where humans deliver the product is 80% or higher. This is the floor — the minimum required to have enough gross profit to cover overhead, pay yourself properly, build cash reserves, and still have room to grow.
Here's why the gap between 61% and 80% matters so much in practice. Assume 40% overhead as a percentage of revenue — a realistic number for most trade contractors covering rent, insurance, admin, software, and marketing:
Labor, materials, subs, job expenses
Rent, insurance, admin, marketing, software
Same revenue, same overhead, COGS reduced to 20%
The difference between 21% net margin and 40% net margin on $875K of revenue is $166,250 per year. That's the dollar value of the gap between where Marcus is and where the floor says he should be. It doesn't come from working harder or taking on more jobs — it comes from restructuring the cost and pricing of the jobs he already has.
What Is Included in Gross Margin for a Contractor — What Counts as COGS?
This is where most contractor P&Ls are misconfigured — either misclassifying overhead as COGS (making margin look worse than it is) or burying direct costs in overhead (making margin look better than it is). Neither gives you a number you can act on.
What counts as COGS for a trade contractor: field labor (technicians, installers — people doing the job, not your office), materials and equipment installed on that specific job, subcontractors used on that specific job, and direct job expenses like fuel for service trucks, permits, and disposal fees.
What does not count as COGS: your office manager's salary, rent, insurance, software subscriptions, marketing spend, your own owner compensation, or any cost that exists regardless of whether you take on a specific job.
The test: if you turned down a job tomorrow, would this cost disappear? If yes — it's COGS. If no — it's overhead. Most contractors have at least two or three line items in the wrong bucket, which means their true gross margin is either better or worse than their QuickBooks reports show.
We audit your chart of accounts in the first session — because if COGS and overhead are miscategorized, every downstream metric is wrong before we start.
Book a Clarity CallWhy Is Gross Margin Low for HVAC and Trade Contractors If Their Revenue Looks Strong?
The most common trap: confusing high-ticket jobs with high-margin jobs. A $30,000 commercial HVAC installation looks like a major win. But it comes with significant equipment costs, extended field labor hours, possible subcontractor coordination, and permit fees — often landing the gross margin at 45–55%.
Meanwhile, a recurring commercial maintenance contract at $1,200/month runs at 78–82% gross margin: the technician knows the building, the visit is scheduled, materials cost is minimal, and delivery is predictable. The revenue looks smaller. The margin is dramatically better.
Marcus had been optimizing for job size — prioritizing the big installation contracts because they felt like wins. His margin analysis told a different story: his commercial maintenance book was running 26 points above his installation work. The obvious move was to shift the mix — not necessarily stop doing installations, but stop treating them as the anchor of the business.
"I was doing residential installs because they felt like big wins — high ticket, visible, something to talk about. But they were eating my margin. My boring commercial maintenance contracts were twice as profitable per dollar of revenue. The business I wanted to build was the one I'd been ignoring."
What Are the Three Ways to Improve Gross Margin for a Trade Contractor?
There are exactly three levers. Every gross margin improvement strategy maps back to one of them:
How Do I Calculate Gross Margin for My Contracting Business?
The formula: (Revenue − Cost of Goods Sold) ÷ Revenue
Rivera HVAC: $875,000 revenue − $341,250 COGS = $533,750 gross profit. $533,750 ÷ $875,000 = 61% gross margin.
Pull this number from QuickBooks using the Profit & Loss report filtered to a 12-month period. Check your chart of accounts first — if field labor is categorized under payroll rather than COGS, your report will show an inflated gross margin that doesn't reflect reality. Correct classification is the prerequisite for a usable number.
Once you have the aggregate, run it again by service line or job type. The aggregate number tells you the problem. The breakdown by service type tells you where to fix it.
Frequently Asked Questions About Gross Margin for Trade Contractors
What is a good gross margin for a trade contractor?
The target gross margin for a trade contractor service business is 80% or higher. This is the floor recommended by the Hormozi MOZI framework for service businesses where humans deliver the product. Most HVAC, plumbing, and electrical contractors run between 55% and 65% gross margin and consider this normal — but at that level, every downstream metric (LTGP, owner pay, cash reserves) is constrained. A 61% gross margin leaves 21 cents of net profit per dollar after 40% overhead. An 80% margin leaves 40 cents. That 19-cent difference is the gap between a business that absorbs bad quarters and one that doesn't.
What is included in gross margin for a contractor — what counts as COGS?
For a trade contractor, Cost of Goods Sold (COGS) includes only the direct costs of delivering a specific job: field labor (technicians and installers on the job, not office staff), materials and equipment installed, subcontractors used on that specific job, and direct job expenses like fuel, permits, and disposal fees. COGS does not include overhead costs such as rent, insurance, software subscriptions, marketing, your office manager's salary, or your own compensation as owner. Those come out of gross profit to produce operating income. Misclassifying overhead as COGS inflates apparent COGS and deflates your true gross margin.
How do I calculate gross margin for my contracting business?
Gross margin is calculated as: (Revenue − Cost of Goods Sold) ÷ Revenue. For example, if Rivera HVAC generated $875,000 in revenue and had $341,000 in direct job costs (labor, materials, subs, job expenses), gross profit is $534,000 and gross margin is $534,000 ÷ $875,000 = 61%. To calculate this accurately, your chart of accounts must correctly separate direct job costs from overhead — which requires clean bookkeeping and correct account classification in QuickBooks or your accounting software.
What are the three ways to improve gross margin for a trade contractor?
There are only three levers for improving gross margin: (1) Raise prices — the fastest lever. A 10% price increase on $875,000 of revenue adds $87,500 in gross profit with no change in costs. (2) Reduce direct costs — negotiate better material pricing, improve labor efficiency through better scheduling and job estimating, and reduce subcontractor dependency where possible. (3) Shift the service mix — analyze gross margin by service type and client type, then prioritize the work that actually produces 75–85% margins and deprioritize the work dragging the average down. Most contractors find that their commercial maintenance contracts significantly outperform their installation or residential work on margin.
Why is gross margin low for HVAC and trade contractors if their revenue looks strong?
Trade contractors often confuse high-ticket jobs with high-margin jobs. A $30,000 HVAC installation job looks like a big win but may carry significant labor, equipment, and subcontractor costs that drive the gross margin down to 45–55%. Meanwhile, a recurring commercial maintenance contract at $800/month may run at 78–82% gross margin because delivery is systematic, labor is predictable, and materials cost is minimal. The revenue looks smaller but the margin is dramatically better. Contractors who optimize for job size rather than job margin consistently find themselves cash-poor despite strong revenue numbers.
Where Does M3 Connect to the Rest of the MOZI Framework?
Gross margin is the foundation metric — everything downstream depends on it. Once M3 is clean, the next critical metric is M4: Lifetime Gross Profit (LTGP) per customer, which takes your per-job margin and extends it across the full client relationship. Together M3 and M4 are the inputs that make M7 — your LTGP:CAC ratio — meaningful. The full metrics series is on the blog. Gross margin also has a direct tax dimension: the service mix shift (from installation to maintenance) affects revenue timing, deductible expenses, and taxable income in ways that connect to your tax strategy. And because improving gross margin is the single highest-leverage financial move most contractors can make, it's always the starting point in our Fractional CFO work.
Pull Your Gross Margin This Week. If It's Under 80%, That's the Conversation to Have First.
Most contractors are 15–20 points below the floor — not because they're doing anything wrong, but because no one showed them the benchmark or which lever to pull. That's what the first session is for.
The 19-cent gap between 61% and 80% margin is $166,250/year on $875K of revenue. That's not a rounding error — that's your growth budget.
