Your job cost report shows 36% gross margin on a $15,000 reroof. Then the sales rep's 8% commission clears payroll, lands in a general payroll account, and never touches the job. The report still says 36%. The real number is 28%, and the gap repeats on every job that rep sells.
Why Commission Is a Job Cost
Test it with one question: if this job had never been sold, would this payment exist? For a commission the answer is no. That makes it a direct cost of the job, the same as shingles and crew labor. Rent and the office manager's salary exist either way, which is why they belong in overhead.
When commissions sit in overhead, three things break. Job margin is overstated. Rep performance cannot be compared on margin dollars, only on revenue. And your markup targets are set against a cost base that leaves out one of the largest line items.
Worked Example: One $15,000 Reroof
All figures are illustrative. A rep sells a $15,000 reroof under an 8% commission plan.
| Line | Amount |
|---|---|
| Contract price | $15,000 |
| Materials | $5,100 |
| Crew labor | $3,900 |
| Disposal and other direct costs | $600 |
| Gross margin before commission | $5,400 (36%) |
| Sales commission (8% of price) | $1,200 |
| Gross margin after commission | $4,200 (28%) |
If this company closes 100 jobs a year at that average, it pays $120,000 in commission that never shows against a job. Add the employer share of Social Security and Medicare (7.65% of wages, up to the wage base) if the rep is a W-2 employee, which is $91.80 on this commission, and the true cost is higher still. Whether workers' comp applies to commission wages depends on your state and carrier, so confirm with your insurance agent.
When a Commission Is Earned
Write this into the commission plan, because the books follow the policy. The usual options are paid at signing, paid at completion, or paid when the customer pays. Many roofers split it, with part at signing and the balance when cash arrives, so a canceled or unpaid job does not leave you funding a commission on revenue you never collected.
Decide the commission base too. On a financed job, an 8% commission on the $15,000 price is $1,200. On the $13,650 you actually receive after a 9% dealer fee, it is $1,092. That $108 difference is a plan decision, not an accounting one, so state it in writing. Ask your CPA how commissions should be treated for payroll and for 1099 reps.
Tracking It by Job in QuickBooks
- Create a Sales Commissions account in cost of goods sold, not payroll overhead.
- Assign each commission to the customer and project it came from. For W-2 reps, allocate the commission portion of the payroll run. For 1099 reps, code the bill directly.
- Pull margin after commission by rep and lead source each month, alongside true job cost.