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  • Writer's pictureJoel White

Apples to Apples

Take a look at what is called "pass-through costs" in your pricing and contract templates.

If you label items as "pass-through costs" but those items actually embed profit, you need to re-review these items from a contractual and ethical standpoint.


Contractual

Most contracts define pass-through costs as expenses a service provider incurs on the project and invoices to the customer at cost. In practice, the provider can support invoicing the customer a $500 pass-through amount by providing the invoice or expense report the provider received and paid for the $500.


But if the provider charges the customer for an item as pass-through that can't be supported with such documentation, and has profit embedded in the charge, the provider has a contractual problem. Smart customers audit what they've been charged, and the result would be a legitimate critical finding potentially ruinous to the relationship.


Ethical

If the provider labels a budget item as pass-through, the provider implies the eventual charge to the customer is the cost to be incurred for that item. The customer assumes there is no profit margin for that item and that they will be invoiced exactly what the provider incurred (plus any agreed markup factor). If, instead, the provider labels and invoices profit-generating items as pass-through costs, the buyer is misled, creating a potential ethical conflict regardless of actual intent.


The irony is this mislabeling rarely occurs from bad intent, and is typically done to help customers make budget comparisons "apples to apples" for items that most others in the industry treat as pass-through. And it's not unethical to embed profit on something most others pass through at cost- the ethical question is whether you're giving the customer an honest account of the charge.

There are many ways to accurately present these items without hurting competitiveness or opening your books to your customers, and it's worth the time to do so.

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