Cost of delivery
also known as cost of services · cost of goods sold
The direct cost of producing client work - mostly the billable time of the people doing it, plus any project-specific expenses.
For example, a $20,000 project that takes 90 hours of staff time costing $11,000 has a cost of delivery of $11,000. Subtracting it from the fee gives the gross profit, which is what tells you if the project was actually worth doing.
Why it matters to agencies: cost of delivery is the number you subtract from revenue to see real project profitability, and the foundation of gross margin. Tracking it per project - via time tracking - reveals which work and clients are profitable and which quietly lose money despite looking busy.
Direct delivery cost - the people and tools doing the work - typically runs ~35-50% of the fee for a healthy gross margin; much above that and margin suffers.
- Leaving out non-salary delivery costs like tools and subcontractors.
- Not tracking it per client, so loss-making accounts hide.
- Confusing it with overhead.
What is cost of delivery?
The direct cost of producing client work - mostly the billable time of the people doing it, plus any project-specific expenses.
What is included in cost of delivery?
The billable staff time spent on the work, plus any project-specific costs like subcontractors or materials - not general overhead.
What is the difference between cost of delivery and overhead?
Cost of delivery is tied to producing specific client work; overhead is the general cost of running the agency regardless of any project.
How does cost of delivery relate to gross margin?
Gross margin is revenue minus cost of delivery, as a percentage - so the lower your cost of delivery, the higher your margin.