Glossary
Pass-through cost
A pass-through cost is a third-party expense a business pays on behalf of a client and bills to that client at the amount paid, with no markup added.
What counts as a pass-through cost
Common examples are media spend, stock images and footage, printing, travel, software licenses bought for a client, and fees for freelancers or subcontractors.
A pass-through cost is separate from billable labour. The business charges for its own hours at its rates. The pass-through line recovers money the business paid to someone else.
Pass-through cost vs markup
The contract decides which applies. If the contract says third-party costs are passed through, the client pays the amount on the supplier invoice. If it allows a markup or handling fee, the business adds a percentage to the cost before billing.
Businesses often mark up subcontractor and production costs and pass media spend through at cost. Both can appear on one invoice, as long as each line is billed the way the contract describes.
Pass-through amount billed = Amount paid to the supplier
Example: a $6,000 media invoice passed through is billed to the client at $6,000. The same invoice with a 15% markup would be billed at $6,900.
How pass-through costs affect revenue and margin
Pass-through costs raise the invoice total without adding profit. A business that bills $40,000 in fees and $60,000 in media spend has $100,000 on its invoices and $40,000 of income from its own work.
Businesses commonly report margin on revenue net of pass-through costs for that reason. Counting pass-through costs as revenue makes the percentage margin look low and hides changes in the profitability of the business's own hours.
Common billing mistakes
The most frequent mistake is not billing the cost at all. A supplier invoice is paid, nobody attaches it to the project, and the client is never charged. The business absorbs the cost in full.
The second is billing the cost in the wrong form, such as adding a markup the contract does not allow or folding the cost into hourly fees. A client who finds an undisclosed markup on a supplier cost tends to question the other lines on the invoice as well.
Example
A business runs a campaign for a client. The invoice has three lines. Service fees are 80 hours at $150, or $12,000. Media spend is passed through at cost for $6,000, matching the platform invoice. A freelance illustrator who charged the business $2,000 is billed at $2,300, with the 15% markup the contract allows. The invoice total is $20,300. The business's income from the job is $12,300: the fees plus the $300 markup.
