Pass-through expenses refer to costs associated with third party vendors on client engagements. Rather than paying for these expenses directly, clients pay the agency, who then pays the vendor. In this way, these expenses are related to income that is “passing-through” the agency, but ultimately is not intended for the agency.
Common examples include stock photography licenses, advertising spend, event space rentals, printing costs, whitelabel partners and in some cases subcontractors. While agencies handle the transaction, the client is ultimately responsible for covering these costs.
Pass-through expenses are typically separated from the agency’s service fees and are treated as reimbursable line items in invoices.
Many agencies will apply a markup to these pass-through expenses. In those cases, that additional markup would be retained as Agency Gross Income (AGI) and seen as part of their service fees.
Why it matters for agencies
Tracking and managing pass-through expenses accurately is essential for financial clarity, client trust, and internal reporting. Mismanaging them can result in lost revenue, confused financial data, or strained client relationships.
Here’s why pass-through expenses matter:
- Clarifies Agency Gross Income (AGI) Having clarity on how much income is actually passing through the firm allows firms to calculate their true Agency Gross Income (AGI).
- Improves budgeting: Setting internal budgets relative to Agency Gross Income (after subtracting pass-through expenses) leads to more balanced spending.
- Improved visibility into margins: By calculating AGI, firms can get a better lens into their margins and profitability, as well as how efficiently they’re earning revenue with their internal resources.
- Simplifies reporting: Cleanly separates Agency Gross Income from pass-through expenses.
- Supports audit readiness: Clear records help resolve any billing disputes.
How to manage
Pass-through expenses require strong documentation, communication, and process discipline. Agencies should have clear policies in place to avoid confusion or risk.
Here are some ways to optimize:
- Track pass-through costs separately: Use a distinct chart of accounts or project line items.
- Use purchase orders or estimates: Establish spending limits or pre-approval processes.
- Clarify in contracts: Define what constitutes a pass-through expense and how it will be billed.
- Regularly reconcile vendor receipts: Match actual costs with invoiced amounts.
By managing pass-through expenses carefully, agencies maintain financial transparency and protect both their margins and their client relationships.