What counts as a pass-through cost?
Anything the agency buys for the client from a third party and rebills at the amount paid. The largest is usually paid media: search, social and programmatic spend that runs on the agency's card or a managed account. Print runs, influencer and creator fees, stock licenses, event costs and software billed at cost are the other common categories.
The test is whether the agency added labor or took on risk. A designer's hours are agency work. A $2,000 print invoice the agency paid and rebilled at $2,000 is a pass-through. A freelance copywriter the agency hired, managed and rebilled with a markup is direct labor, not a pass-through, because the agency took responsibility for the output.
- Paid media spend across search, social, display and programmatic
- Printing and production runs
- Influencer and creator fees paid by the agency on the client's behalf
- Software, data and tool licenses purchased for the client at cost
- Travel, event and venue costs incurred for the client
Should agencies mark up pass-through costs or bill at cost?
Both models exist and the choice should be explicit in the contract. Billing at cost is the cleanest: the client sees the third-party invoice amount, the agency earns its fee separately, and there is no argument about hidden margin. Media management is then charged as a retainer or as a percentage of spend stated on its own line.
Marking up is common for print and production, where the agency carries payment risk and quality responsibility. A 10 to 20% markup is typical. When the agency marks up, only the markup is agency revenue. A $10,000 print job billed at $11,500 produces $1,500 of fee revenue, not $11,500.
Why must pass-through costs be excluded when computing margin?
Because they inflate revenue without adding profit. A $15,000 retainer with $40,000 of media billed at cost produces $55,000 in gross billings, and $8,125 of labor cost against $55,000 looks like an 85% gross margin. The real gross margin is on the $15,000 fee, and it is 45.8%.
The distortion runs the other way too. An agency with a large media book might report 20% net margin on gross billings when its net margin on fees is 60%, or report 3% on gross billings when the fee business is a healthy 18%. Neither number is useful for deciding what to charge or who to hire. Margin on fee revenue is the only comparable figure.
Verbial tracks pass-through costs as a separate invoice line type and excludes them from revenue in profitability reports by default.
How do pass-through costs appear on invoices and in revenue recognition?
On the invoice, pass-throughs sit on their own lines, labeled as reimbursable or media, with the third-party invoice or platform report attached. Sales tax treatment often differs from fees, and clients' finance teams need to code them differently, so mixing them into a single fee line causes disputes and slow payment. Many agencies bill media in advance so the agency is never funding spend from its own cash.
In the books, pass-throughs billed at cost are recorded as a reimbursement or a liability, not as revenue, under both US GAAP and IFRS when the agency acts as an agent rather than a principal. When the agency marks up, the markup is revenue and the underlying cost is cost of sales. Recognition timing follows the underlying activity: media is recognized as it runs, print when delivered.
Worked example
A 12-person agency runs paid media for a client on a $15,000 monthly retainer. In August the agency spends $40,000 on ad platforms from its own account and pays a $3,000 influencer fee. The invoice shows three lines: $15,000 management fee, $40,000 media at cost, $3,000 influencer fee at cost, for $58,000 total. Fee revenue is $15,000. The team logged 125 hours at a loaded cost of $65 per hour, or $8,125. Gross margin on fees = ($15,000 less $8,125) ÷ $15,000 × 100 = 45.8%. Computed on gross billings by mistake, it would read ($58,000 less $8,125) ÷ $58,000 = 86%, a number that would lead the agency to under-price the next client.
Questions
Is media spend revenue for an agency?
Not when it is billed at cost. The agency collects it and pays it to the platform, so it is a pass-through and is recorded as a reimbursement rather than as revenue. If the agency charges a percentage of spend for management, that percentage is revenue and the spend itself still is not.
Should an agency bill media spend in advance?
Yes, wherever the client will accept it. Billing next month's planned spend before it runs keeps the agency from financing the client's advertising, which on a $40,000 monthly budget is a serious cash exposure. The alternative is running media in the client's own ad accounts on the client's card.
How should pass-through costs be shown on an invoice?
On separate lines from fees, labeled by type, with the supporting third-party invoice or platform spend report attached. Clients' finance teams code reimbursables differently from services, and clear separation shortens approval time.