Should Tools Be Classified as COGS or Overhead?
A Contractor University Member recently utilized the Ask-The-Expert Q&A feature within the member dashboard by submitting the following question and received the response below.
Contractor Question:
“I am in the process of departmentalizing my financials. In the past, we categorized tools as overhead. To have accurate numbers, should we categorize tools as COGS?”
Contractor University Expert Response:
“In most HVAC companies, tools remain in Overhead, not COGS (Cost of Goods Sold) — unless they are purchased specifically for a single job or directly tied to a department’s revenue.
Here’s how to break it down.
General Guidelines
Type of Tool Example Typical Category Why Small Tools / Consumables Screwdrivers, drill bits, tape, screws Overhead Used across multiple jobs Department-Specific Equipment Pipe threader for install crew Departmental Overhead Improves department efficiency and accuracy Job-Specific Tool Specialty tool purchased for one project COGS Directly tied to job revenue Capital Equipment Trucks, recovery machines, diagnostic tools Overhead (Capitalized) Multi-year asset, depreciated over time Pro Tips for Cleaner Financials
- Set a dollar threshold (e.g. under $500 = expense, over $500 = capitalize or departmentalize).
- Track by department even overhead tools should be charged to Service, Install, or Maintenance for cleaner P&L visibility.
- COGS should represent only those expenses that rise and fall directly with job volume (labor, materials, permits, commissions, subcontractors).
Only reclassify tools as COGS when they can be clearly tied to a specific job or revenue stream. Otherwise, keep them as departmental overhead, ensuring each department bears its fair share of operational costs.”
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