The summer between my freshman and sophomore years in high school, I was given one of my most fun babysitting jobs. A professor at the University of Arizona had two boys who needed to be cared for while she was off teaching. John and Joe were both delightful, blond-haired, blue-eyed, rambunctious two-year-olds. Yep, twins. Identical twins. Impossible to tell apart. That is, impossible to tell apart until you got to know them. After that, well . . . it was easy to see that Joe would never be caught up in the shenanigans that John was always pulling. And John didn’t have time to waste on the thoughtful activities Joe was drawn to.
In the construction business, there are some twins called COGS and OPEX. Getting to know them helps distinguish them.
Cost of Goods Sold (COGS) vs Operating Expenses (OPEX)
Sometimes, construction contractors look at COGS and OPEX and see two things that look very much alike – until they get to know them.
Here’s how they’re alike:
They are sets of expenditures incurred by a construction business while running its daily operations.
Both sets are subtracted from the construction company’s total sales or revenue figures.
Both are recorded as line items on a construction company’s income statement.
Here’s how they’re different:
COGS are expenses directly related to the production of a product, such as direct labor, materials, subcontractors, equipment, and miscellaneous cogs (i.e., permits, portable toilets, or fence rentals.)
An easy way to determine whether an expense should be included as a COG is to ask, “Would the cost exist if no products were produced?” If the answer is no, the cost will likely be recorded in COGS.
OPEX is expenditures that are NOT directly tied to the production of goods or services. This includes things like rent, utilities, office supplies, and legal costs.
An easy way to determine if an expense should be included as an OPEX is to consider costs incurred in day-to-day operations, regardless of whether any product is sold.
COGS and OPEX Have Different Jobs
Allowing each of these “twins” to carry out their assigned jobs is good accounting practice and will save a boatload of hassle. Look at it this way: when you know that Joe loves eating peas and John will spit them out every time, there is less food waste and certainly much less problem involved in cleaning up the mess.
Ambitious Construction Contractors look to The Profit Constructors to provide advocacy in dealing with:
Clients and customers
Employees and subcontractors
Vendors and service providers
Governmental entities
Working with The Profit Constructors gives Construction Contractors the means to organize their operations in ways that help them:
Remain informed
Avoid hassles
Reduce risks
Be future-ready
Ready for action? Or want to know more? Get in touch today to schedule a complimentary discovery call. 866-629-7735
Comments