Do pass-through client costs belong in your agency's margin?

An agency may buy production services for its own deliverable, arrange a supplier that contracts directly with the client, or pay a reimbursable cost on the client's behalf. These arrangements are not interchangeable. Keep the client agreement, supplier contract, purchase approval, and invoice together.

Whether amounts should appear gross or net in financial reporting depends on the relevant accounting framework and the facts, including the agency's role in providing the service. Ask the accountant to assess the contract. Calling a charge pass-through in a spreadsheet does not settle its accounting treatment.

For management reporting, show professional fees and associated delivery costs separately from outside costs that distort the comparison. Preserve a reconciliation to the financial statements and label the view as a management analysis rather than a replacement for the ledger.

Consider an illustrative engagement with an $8,000 agency fee and $20,000 of approved outside production billed at cost. If the report shows $28,000 of revenue, a fee-based staffing ratio will look very different from one based on $8,000. Neither denominator should be used without explaining what it contains.

Record the amount the client approved, the purchase order issued to the supplier, the supplier invoice, and the amount billed back. Review costs incurred before client approval and expenses that exceed the allowance. Identify who can approve an overrun before the supplier performs more work.

A reimbursable invoice can still create a cash gap if the supplier is paid before the client. Put both dates in the project cash forecast. Do not assume that being recoverable makes the cost financially neutral during delivery.

At project close, reconcile open supplier commitments, received invoices, client billings, and credits. Check for late supplier invoices after the final client invoice has already been issued. Decide who owns any remaining recovery discussion with the client.

Use the completed review to improve the next scope: clearer approvals, direct client contracting where appropriate, deposits, or a defined handling fee. Confirm the legal and accounting consequences before changing the arrangement. Keep any reporting adjustment traceable to the original transactions rather than deleting pass-through activity from the records.