Does ‘Gross Margin’ include the labor cost of your internal engineering staff?
When people refer to ‘gross margin’, they may mean:
- Sales Revenue less direct 3rd party cost
- Sales Revenue less direct 3rd party cost less allocated cost of internal labor
So which is it? You can argue either way, and what’s MOST important is that you KNOW what definition you are using, especially when collaborating with a co-worker or in a peer group like HTG or TruMethods.
In the Executive Briefing Service, we use very specific nomenclature to alleviate the problem. We use the terms:
- Contribution Margin: Sales Revenue – direct 3rd party costs
- Net of W2:
Sales Revenue – Direct 3rd Party Costs – Allocated Internal Labor Cost