What Is a Good Gross Margin for a Manufacturing Company?

A good gross margin is one that pays for your overhead and still leaves the profit you want. That's the short answer. There isn't one right percentage for every manufacturer.

Here's how to think about it. Gross margin is what's left from each sales dollar after you pay for the materials, shop labor and shop overhead that went into the product. Out of what's left, you pay for everything else: sales, office staff, your own salary, insurance, rent on the office. Whatever is left after that is your profit.

So if your overhead below the gross profit line runs 18% of sales and you want to keep 10%, you need a gross margin of at least 28%.

One thing before the numbers. Every benchmark in this post is a general average. Your company, your location, your niche and your customers can move your gross margin a lot. Use these numbers as a rough guide, not a grade.

What is the average gross margin for manufacturing?

The best free data on gross margin comes from public companies. NYU Stern professor Aswath Damodaran publishes it every January:

Industry (US public companies)	Average gross margin
Machinery	37.5%
Specialty chemicals	35.1%
Electrical equipment	31.8%
Building materials	30.9%
Electronics	26.8%
Packaging	24.3%
Food processing	23.2%
Aerospace and defense	17.5%
Auto parts	15.8%
Steel	12.3%

Source: Damodaran Online, Margins by Sector (US), January 2026.

I'd use these carefully. These are big, often global companies with scale and pricing power. A 40-person shop is a different business.

For smaller companies, the Census Bureau reports operating margin, which is what's left after all overhead. It doesn't report gross margin. But it tells you where profit tends to land:

Manufacturers by size (total assets)	Operating margin, 4 quarters to June 2026
Under $10 million	7.9%
$10 million to $25 million	7.3%
$25 million to $50 million	6.4%
Fabricated metal, under $50 million	10.6%
Food manufacturing, under $50 million	5.5%

Source: US Census Bureau, Quarterly Financial Report, Q2 2026.

That's the number I'd anchor on. To me, gross margin is only "good" if what's left after overhead lands where you need it.

How do you figure out a good gross margin for your company?

Work backward from the profit you want.

Target gross margin = your overhead below gross profit (as % of sales) + the profit margin you want

Your overhead (% of sales)	Want 8% profit	Want 10% profit	Want 12% profit
12%	20%	22%	24%
15%	23%	25%	27%
18%	26%	28%	30%
22%	30%	32%	34%

A fabricator with a lean office might be fine at 24%. A company with a sales team, engineers and a bigger office needs 30% or more to end up in the same place. Both can be healthy. It depends on how the business is built.

If you're under your target, I'd look at pricing first, then product mix, then the shop floor. Pricing is often the quickest to change. It only takes a new quote.

If you carry a lot of debt, set your profit target high enough to cover loan payments with room to spare. Your bank will look at that, so we should too. Our fractional CFO work usually starts here.

What happens if your gross margin stays low for years?

One thin year is survivable. Several years in a row changes the business, and it usually happens slowly enough that nobody notices until it's hard to fix.

• The people you can hire. Gross margin is what pays for good people. If it's thin, you can't match the wages other shops pay. Your best machinists and supervisors leave, and you hire whoever is available. Training costs go up and quality goes down.
• The quality of your product. When margin is tight, maintenance gets pushed off, tooling gets stretched and jobs get rushed to hit the date. Scrap and rework go up, which squeezes margin even more.
• Your real growth. Growth takes cash. New equipment, more capacity, a salesperson, more inventory for a bigger customer. With a low margin there's nothing left to invest, so you borrow to grow or you don't grow at all. Revenue might go up, but the business doesn't get stronger.

That's why I'd treat a low gross margin as more than an accounting number. If yours has been under target for a while, I'd fix pricing before you try to grow out of it.

How does inflation squeeze your gross margin?

Costs are rising fast right now. The Producer Price Index, which tracks what businesses pay, was up 6.3% for the 12 months to September 2026. That's the biggest jump since 2022. Goods were up 9.8%, and energy was up 35.4%.

When your costs go up and your prices don't, gross margin gets squeezed. It doesn't happen all at once. It shows up a little on every job.

Many shops price on cost-plus: take the cost and add a markup. Cost-plus can work when you quote and build in the same month. It also works if you keep improving efficiency and raise prices regularly in line with the market.

However, I'd be very careful with cost-plus on work that ships six months or a year from now. You're quoting today's costs. You're paying next year's.

Here's an illustrative job quoted today and built nine months later:

$100,000 job (illustrative)	Cost when quoted	Cost when built
Materials	$45,000	$49,500 (up 10%)
Shop labor	$20,000	$21,000 (up 5%)
Shop overhead	$10,000	$10,400 (up 4%)
Total cost	$75,000	$80,900
Gross profit	$25,000	$19,100
Gross margin	25%	19.1%

Same price, same job. Almost six points of margin gone, and the job made about 24% less profit. Nobody on the floor did anything wrong.

What I'd do about it:

• Keep quotes short. Make quotes good for 30 days, not 90.
• Add escalation language on long jobs. For example, the price adjusts if steel moves more than a set percentage before you buy it. Have your attorney review the wording.
• Buy material at award when you can, so the cost you quoted is the cost you pay.
• Raise prices regularly. Small increases in line with the market are easier for customers than one big one.
• Keep improving the shop. Less scrap, faster setups and better scheduling offset some of the increase.
• Re-cost open jobs every month. If a job is sliding, you want to know before it ships.

Our post on when to raise prices without losing customers covers how to have that conversation.

Why your margin can look nothing like these averages

Two companies in the same industry, with the same sales, can have very different gross margins. Here's what usually drives the gap:

• Your company. How old your equipment is, how full your schedule is, how much rework you do and how well you quote.
• Your location. Wages, rent, utilities and freight differ a lot by region.
• Your niche. Certified or highly engineered work usually supports higher prices than commodity work that buyers shop on price.
• Your customers. This is the one I'd look at first. A customer that dictates price, asks for rebates, pays slowly, orders small runs or expects free engineering can pull your margin down. A customer who values your quality and lead time can carry a much better margin on similar work.

What you sell matters too. A machine shop or metal finisher mostly sells labor and machine time. A structural fabricator or food plant mostly sells material:

Industry	Materials (% of sales)	Payroll and benefits (% of sales)
Machine shops	35.2%	37.4%
Plating and finishing	27.1%	39.7%
Structural steel fabrication	54.0%	16.4%
Machinery	52.1%	22.2%
Food manufacturing	62.9%	10.8%

Source: US Census Bureau, 2022 Economic Census (EC2231BASIC). Payroll includes office staff.

A material-heavy business feels steel and ingredient prices first. A labor-heavy shop feels wages and an empty schedule first.

Is your gross margin even comparable to someone else's?

Often it isn't. It depends on what goes into your cost of goods sold. The standard way, called absorption costing, puts materials, shop labor and shop overhead in COGS. Some smaller companies only put materials there.

$10M manufacturer (illustrative)	Standard way	Materials only
Materials	$4,000,000	$4,000,000
Shop labor and overhead	$3,300,000	Below the line
Gross margin	27%	60%
Profit	$1,100,000	$1,100,000

Same company, same profit. If someone tells you their shop runs at 55%, ask what's in their COGS before you worry.

I think the standard way is the right way. It's what your CPA and bank expect, and it tells you whether your jobs really cover the cost of the shop. Our post on how to determine COGS walks through it.

When can a good gross margin fool you?

• You built inventory. Some shop overhead sits in inventory when you produce more than you sell. Margin looks better. It reverses later.
• You only count inventory once a year. The other eleven months are estimates.
• Your standard costs are old. The variances land in one bad month.
• Your mix changed. A big month of low-margin work drags the average down.

Look at a rolling three-month number before reacting to one month.

A monthly gross margin checklist

• Compare gross margin to your own target, not a published average
• Break it out by product line and by customer
• Compare quoted margin to actual margin on your biggest jobs
• Check open long-lead jobs against current material and labor costs
• Note any supplier price increases since you last updated your quotes

Breaking it out matters most. A blended 28% can hide one product line at 40% and another at 12%. Contribution margin by product shows which work pays for the shop. Our posts on gross profit vs. contribution margin and markup vs. margin go deeper.

The numbers in this post are general. They're a starting point, not an answer for your company. If you want to know what a good margin looks like for your business and what's holding it back, book a free call. We'll go through your financials with you, break margin out by product and customer, and give you an analysis built for your business. That's part of our pricing and margin analysis work. Happy to jump on a call if helpful.

Frequently Asked Questions

What is a good gross margin for a manufacturing company?

One that covers your overhead and leaves the profit you want. Add your overhead as a percent of sales to your target profit margin. With 18% overhead and a 10% target, you need 28%.

What is the average gross margin for manufacturing?

Public US companies ranged from about 12% in steel to about 37% in machinery in January 2026 data. Small manufacturers vary even more, depending on what's in their cost of goods sold, their niche, location and customers. Treat any average as a rough guide.

What is a good operating margin for a manufacturer?

US manufacturers with under $50 million in assets averaged 7.2% over the four quarters to June 2026, per the Census Bureau. Small fabricated metal companies averaged 10.6% and food manufacturers 5.5%.

How does inflation affect gross margin?

If your costs rise and your prices don't, your margin shrinks on every job. It hurts most on work quoted months before it's built. Short quote windows, escalation clauses and regular price increases help protect it.

Should direct labor be included in cost of goods sold?

Yes. Shop labor and shop overhead belong in cost of goods sold along with materials. Leaving them out makes gross margin look much better than it is.