Pass-Through Expenses is an important concept/term that is a crucial piece of the Agency Gross Income (AGI) formula.

Pass-Through Expenses are costs that your agency incurs to bring on external vendors required to deliver work to your end clients. Some examples of common Pass-Through Expenses are:

• white label partners
• ad buys
• print budgets

As long as these fees aren’t part of your ‘core service offering’, they would typically be considered Pass-Through. If for example, you’re slammed and need to add extra staffing to deliver the work you sold, and that team is performing a core service that you offer, that is when you would generally not consider that a Pass-Through Expense.

On the topic of Markup

One important note to mention here is that sometimes you are charging markup on these expenses and passing the expense on to your client. Markup that your agency retains remains as part of AGI, and only the Expense that you pay to your vendor is part of your Pass-Through.

Edge Cases

One source of confusion around this topic is choosing whether an expense is part of a Shared Delivery Expense or Pass-Through Expense. The convention we have around this (we use the word convention to imply that it’s typically how we look at it but not always how we look at it) is that if the expense cannot be attributed to a specific client project, rather, delivery as a whole, then it’s likely a Shared Delivery Expense.

There is an edge case that we can speak to, where a certain software or other kind of expense is purchased specifically for one of your service offerings, and you want to reflect this expense inside of the profitability of this service offering (and compare it to other services where you don't have to use this 'thing' that you're paying for). The way to think about this, is that if your expense is a flat fee, no matter how many client's you're servicing using the software, then it's a Shared Delivery Expense. If the expense was not flat, and varied based on however many clients were using it ($/seat, for example) then you can include this as a Delivery Cost on the project, or Pass-Through Expense if it fits the bill.