First off, congratulations on taking the step to hire an ops manager. This is a huge milestone for any business. Your instincts are spot on to get the math nailed down before tying someone else's paycheck to it.
Let's break this down into two parts: the accounting side of Gross Margin, and the compensation piece.
The Core Distinction
Gross profit (or gross margin) captures the cost of delivering your service, which is what it actually takes to do the work once you sell it. Everything else, like the costs of running the business, selling, and managing, lives below the line in SG&A. GAAP formalizes this as the difference between Cost of Goods Sold and operating expenses, but the practical test is simple. Ask yourself if this cost would exist if you didn't perform this specific job. If the cost only exists because you are doing the work, it belongs in COGS. If it is a cost you carry regardless of job volume, it belongs in SG&A.
It is worth noting that where exactly the line gets drawn can vary meaningfully from one business to the next. The right answer depends on your business model, how your crews are structured, and how you want to use gross margin as a management tool. Some businesses also layer in overhead allocations, assigning a portion of indirect costs like shop space, equipment, or supervisory labor into COGS on a systematic basis, which can give you a more complete picture of true job profitability but adds complexity to the methodology. Getting this defined correctly upfront is something we work through with contractors regularly, and it is one of those things that pays dividends well beyond just having clean financials.
Your Specific Items
- Mileage for technicians: COGS. This is a direct cost of getting to the job.
- The runner's labor: COGS, assuming their role is entirely field support. They are enabling production just like a technician.
- Workers' comp: Split it. The portion covering field and production employees belongs in COGS, while the portion covering office staff belongs in SG&A. Many contractors just put it all in COGS if they are field-heavy. This is acceptable as long as you remain consistent.
- Sales commissions: SG&A, full stop. Under ASC 606, these are contract acquisition costs, not contract fulfillment costs. Keeping commissions out of gross profit is especially important here since you are tying someone's pay to that number.
- Office repair materials: SG&A. Facility maintenance has nothing to do with job delivery.
- Portion of the ops manager's salary for field work: This is nuanced, which brings us to the next section.
The Compensation Piece
Since someone's paycheck is now riding on gross profit, the classification methodology matters more than usual for both accuracy and trust.
Regarding the ops manager salary split specifically, the field portion can absolutely go into COGS. However, you need a documented, consistent method for determining that split before the first paycheck goes out under this plan. Timesheets are the cleanest approach. A fixed percentage works well too if their role is predictably split, but "fixed" means it does not move unless their role actually changes. You cannot adjust it month to month based on feel.
The broader principle here is to lock down your COGS definitions in writing now, before performance is measured against them. Be clear on which costs are in, which are out, and how mixed costs get allocated. If that methodology shifts mid-year, even for legitimate reasons, your ops manager will wonder if the goalposts moved. That creates a trust problem regardless of who is technically right.
Happy to dig into your specific setup in more detail if you want to share more about how your business is structured. Feel free to shoot me a message or email me at daniel@contractorsledger.com
