What Are Pass-Through Costs?
Pass-through costs are amounts an agency pays a third party and recovers from the client at cost. Media spend, print, stock licences, contractor fees billed on without markup, and travel are the usual entries. The money moves through the business without becoming the agency's own income.
They matter because every meaningful profitability number is calculated after they are removed. An agency that includes media spend in its revenue figure will report growth it never earned and margins far thinner than the work actually produced.
The formula
Net revenue = Gross revenue − Pass-through costs billed at cost
Every margin and multiplier is measured on net revenue, not gross
What counts and what does not
The test is whether you added value or moved money. If you bought something on the client's behalf and recovered exactly what it cost, it passed through. If you marked it up, the markup is your revenue and only the cost portion passes through.
- Usually pass-through — paid media budgets, print runs, stock photography, domain and hosting bought at cost, event costs, client-approved travel
- Usually not — your own software subscriptions, salaries, rent, and anything you would pay whether or not this client existed
- Depends — subcontractors. Billed on at cost, they pass through. Billed with a markup that covers your coordination and risk, the markup portion is yours
Media is where most of the confusion sits, because the numbers are large enough to distort everything. A shop billing $2m of media against $400,000 of fees has $400,000 of net revenue, and describing itself as a $2.4m agency will produce a margin figure that looks like failure.
Why they leave before margin is measured
Margin measures what the agency earned on its own effort. Pass-through spend involves no effort beyond the administration of buying it, so leaving it in the denominator makes a healthy business look sick.
Take a studio with $820,000 of gross billings, $190,000 of it media and print rebilled at cost. Net revenue is $630,000. A $200,000 profit is a 31.7% margin on net revenue and a 24.4% margin on gross, and only the first number is comparable to another agency with a different media mix.
This is why revenue per employee and the net multiplier both specify net revenue in their definitions. Benchmarking either one on gross billings produces a number that cannot be compared with anybody.
Handling them on the invoice and in cash flow
Show pass-through costs as their own section on the invoice, separate from fees. Clients read a combined total as your price, and a line that says media spend at cost prevents the conversation where a $2m relationship is remembered as a $2m agency bill.
The cash risk is larger than the margin risk. You often pay the supplier before the client pays you, so a large pass-through is an interest-free loan from your working capital to theirs. Bill media in advance where you can, or match your payment terms to the client's rather than the supplier's. The runway calculator shows how quickly that gap consumes a cash buffer.
Where pass-through work is done but not yet invoiced, it sits in work in progress alongside unbilled fees, and it should be tracked separately so the WIP figure does not overstate what you have actually earned.
Where pass-through costs sit against related terms
| Term | Meaning |
|---|---|
| Gross revenue | Everything billed, including pass-through costs |
| Pass-through cost | Third-party spend recovered from the client at cost |
| Net revenue | Gross revenue less pass-through costs. The basis for every margin |
| Agency gross income (AGI) | Another name for net revenue in agency reporting |
| Markup | Any uplift you add to a bought-in cost. Yours, not pass-through |
Frequently asked questions
What are pass-through costs in an agency?+
Pass-through costs are amounts an agency pays a third party and recovers from the client at cost, with no markup. Media spend, print, stock licences, travel, and contractor fees billed on at cost are the usual entries. The money moves through the business without becoming the agency income.
Are pass-through costs revenue?+
They appear in gross revenue but are removed to reach net revenue, which is the basis for every meaningful margin calculation. An agency that counts media spend as its own revenue reports growth it never earned and margins far thinner than the work produced.
Are subcontractor fees a pass-through cost?+
It depends on the markup. Billed on at exactly what you paid, they pass through. Billed with a markup covering your coordination time and risk, the markup portion is your revenue and only the cost portion passes through.
How should pass-through costs appear on an invoice?+
As their own section, separate from fees, labelled at cost. Clients read a combined total as your price, so separating the two prevents a large media budget being remembered as a large agency bill.
Why does net revenue matter more than gross billings?+
Because margin measures what the agency earned on its own effort. A studio billing $700,000 gross with $136,000 of rebilled media has $564,000 of net revenue, and only the net figure can be compared against another agency with a different media mix.
What is the cash flow risk with pass-through costs?+
You usually pay the supplier before the client pays you, so a large pass-through is an interest-free loan from your working capital. Billing media in advance, or matching your client payment terms to the supplier terms, closes the gap.
Related calculators & guides
Work the same numbers from the next angle.
What Is Agency Gross Income (AGI)?
Billings less pass-through costs. The basis for every agency benchmark, and not the AGI on a tax return.
Open toolAGI per FTE Calculator
Benchmark agency gross income per full-time employee against healthy bands — the core productivity metric.
Open toolAgency Target & Net Multiplier
What target multiplier and net multiplier mean, and the benchmark range for agencies.
Open toolSubcontractor Markup Calculator
What to bill a client for subcontracted work to stay profitable after coordination time and risk.
Open toolGross Margin vs Net Margin
One is what is left after delivery cost, the other after overhead too. Which question each answers, with a worked example.
Open toolWhat Is a Rate Card?
The published price per role that every quote is built from. What goes on one, and when to quote a project fee instead.
Open toolKeep the pass-through spend out of your margin.
Ascend keeps project costs and billable hours against the same record, so the fee side and the rebilled side stay separable when the invoice goes out. The free tier covers one client end to end.
Start with Ascend free