Pass-Through vs Markup:
How to Bill Subconsultant Costs to Clients the Right Way
Every architecture and engineering firm that uses subconsultants has to answer the same question: Does consultant work flow to the client at cost, or with a markup? The answer affects revenue recognition, profit margin, financial reporting, and how the firm appears to its clients. Most firms default to one approach without fully understanding what they've chosen. Here's how each method works and how to make the decision deliberately.
Two Methods, Very Different Implications
When a subconsultant performs work on an A/E project, the firm has to decide how that cost appears on the client invoice. There are two options.
Pass-through billing invoices the client for the consultant's fee at cost, the same amount the firm will pay the consultant. The firm acts as a conduit. The money comes in from the client and goes right out to the consultant. No margin is added.
Markup billing adds a percentage to the consultant's fee before billing the client. The firm invoices the client for the consultant's fee plus the markup. The markup is the firm's revenue from managing and coordinating the consultant relationship. The consultant is still paid their base fee. The difference belongs to the firm.
Both methods are legitimate and widely used in A/E practice. The choice between them is not primarily a financial-optimization question — it is a question of what the firm is being compensated for, what the client expects, and how the arrangement was presented in the proposal and the contract.
What most firms get wrong is not choosing the wrong method. It is choosing one by default, applying it inconsistently, or failing to understand the downstream implications for financial reporting.
Why the choice matters more than most firms realize
The pass-through vs markup decision affects four things simultaneously:
The client invoice — what the client sees and what they are paying for. A client who was told consultant costs would be passed through at cost and then receives an invoice with a 10% markup has a legitimate reason to push back. A client who agreed to a markup and receives a pass-through invoice may not complain, but the firm has left revenue on the table.
Revenue recognition — pass-through consultant costs are not the firm's revenue. Markup is. A firm that includes pass-through amounts in its revenue total is inflating the number without adding any corresponding margin. The distortion compounds across a portfolio, making year-over-year comparisons unreliable.
Net multiplier calculation — the net multiplier that benchmarks A/E firm financial performance is calculated on net revenue, not total revenue. Pass-through consultant costs must be excluded for the calculation to be meaningful. Firms that include them understate their true multiplier if consultant costs are large relative to total billings.
Tax and accounting treatment — pass-throughs and markups are treated differently for certain tax and accounting purposes. This is a conversation for the firm's accountant, but the billing method in the project management system needs to be set up consistently with how the firm's financials are being reported.
Pass-through consultant costs are not the firm's revenue. Including them in the revenue total inflates the number without adding margin.
A firm billing $2M in total revenue — $600K of which is pass-through consultant costs — has $1.4M in net revenue. That is the number that measures financial performance. Firms that don't make this distinction are measuring the wrong thing and comparing themselves against a distorted benchmark.
Pass-Through Billing: How It Works and When to Use It
In a pass-through arrangement, the firm invoices the client for the consultant's fee at cost. The firm collects that amount and pays the consultant the same amount. From a revenue and margin perspective, the transaction nets to zero — the firm neither gains nor loses from the consultant cost itself.
The accounting treatment
Pass-through costs are typically recorded as both revenue and expense on the firm's income statement — the client payment is revenue, the consultant payment is an offsetting expense. The net effect on profit is zero.
Alternatively, some firms record pass-throughs off the income statement entirely — treating them as reimbursable costs rather than revenue. This approach produces a cleaner income statement by removing transactions with no margin impact, but it requires consistent setup in both the project management and accounting systems.
Either approach is acceptable as long as it is applied consistently across all projects and reflected accurately in how the firm calculates net revenue for performance reporting.
When pass-through billing is appropriate
Pass-through billing is the standard approach in most A/E contracts — the AIA standard agreements treat consultant costs as reimbursable expenses billed at cost unless otherwise agreed. Most clients expect pass-through billing unless a markup has been disclosed and agreed to.
Pass-through is also the right choice when:
- The firm's fee already includes compensation for consultant coordination — the markup is embedded in the firm's professional services fee rather than added to the consultant cost
- The client has specifically requested cost transparency on consultant billing
- The project type or delivery method makes markup billing unusual or difficult to justify
- The firm's competitive positioning is built on transparent fee structures
The liability implications of pass-through billing
One nuance worth understanding: with pass-through billing, the full cost of the consultant appears on the client invoice as a line item. When that invoice is paid, the corresponding portion of the collection belongs to the consultant — and the firm's accrued liability should reflect that immediately.
For accrual-based tracking to work correctly with pass-throughs, the system needs to know that the pass-through line items on client invoices trigger consultant liability — not just the professional services fee portion. A system that accrues liability only against the firm's own fees and ignores pass-throughs understates the firm's consultant obligations.
With pass-through billing, the full consultant cost on the client invoice triggers a consultant liability — not just the firm's fee portion.
A system that accrues liability only against the professional services fee and ignores pass-through line items is understating the firm's total consultant obligations on every invoice it issues.
Markup Billing: How It Works and When to Use It
In a markup arrangement, the firm adds a percentage to the consultant's base fee before billing the client. The markup percentage varies by firm, project type, and negotiating practice — 5–15% is the common range in A/E practice, though some firms apply higher markups for consultants who require intensive management or coordination.
What the markup compensates for
A markup is compensation for the firm's role in the consultant relationship — selecting the consultant, negotiating the agreement, reviewing the work, coordinating delivery, carrying the liability between client invoicing and consultant payment, and managing the consultant relationship through the life of the project.
In complex multi-consultant projects, that coordination role is substantial. The markup reflects the real cost of that work and the risk the firm assumes by entering into separate agreements with each consultant.
Disclosing the markup
The markup must be disclosed to the client and agreed to before it appears on an invoice. The standard place to do this is the proposal and the contract — a clear statement that consultant costs will be billed at cost plus a defined percentage.
Applying a markup that was not disclosed in the agreement is not a billing method. It is a billing error — one that creates legitimate client disputes and potential contract violations.
The disclosure does not need to be complicated. A single sentence in the proposal — "Subconsultant services will be billed at cost plus 10% for coordination and management" — is sufficient to establish the arrangement and protect the firm's right to apply it.
How markup affects revenue and margin reporting
The markup portion of each consultant invoice is the firm's revenue. The base consultant fee remains a pass-through. For revenue and margin reporting, only the markup should be included in the firm's net revenue — not the full billed amount, including the consultant's base fee.
This is a common source of reporting confusion in firms that track total billings as their primary revenue metric. A $100,000 consultant invoice with a 10% markup results in a $110,000 client invoice. The firm's revenue from that transaction is $10,000 — not $110,000. Including the full $110,000 in the firm's revenue figure significantly overstates performance.
When markup billing is appropriate
Markup billing makes sense when:
- The firm is providing substantial coordination, review, and management services for the consultant — services that have real cost and that are not already compensated in the professional services fee
- The client relationship and contract support transparent fee disclosure
- The project type makes markup standard practice — certain delivery methods and project types have established norms around consultant markup
- The firm's overhead includes costs specifically associated with consultant management that are not otherwise recovered
The markup is the firm's revenue. The consultant's base fee is not.
A $100,000 consultant invoice billed with a 10% markup produces $110,000 on the client invoice and $10,000 in firm revenue. Including the full $110,000 in the firm's revenue figure overstates performance tenfold on that transaction. Across a portfolio with significant consultant spend, the distortion compounds quickly.
Making the Decision and Applying It Consistently
The pass-through vs markup decision should be made deliberately for each project — not defaulted into based on habit or convenience. The factors that should drive the decision:
What the proposal says
The billing method for consultant costs should be stated in the proposal and reflected in the contract. Whatever was agreed upon applies. If the proposal is silent on the matter, pass-through at cost is the default assumption for most clients and most standard agreements.
What the project requires
A project with a single structural engineer whose work is straightforward and well-defined requires minimal coordination with consultants. A project with eight specialty consultants requiring weekly coordination, drawing reviews, and schedule management is a different situation. The coordination burden should influence whether a markup is appropriate and what percentage makes sense.
The client relationship and market context
Some clients routinely accept consultant markups as standard in A/E contracting. Others push back on any markup and expect cost transparency. Understanding which situation applies — and having the conversation at proposal time rather than invoice time — prevents disputes that are harder to resolve after the fact.
Applying the decision consistently
Once the method is established for a project, it should be applied consistently across every consultant and every phase. A project that passes through structural engineer costs but marks up MEP engineer costs — without a clear rationale — creates invoice inconsistency that clients notice and question.
The system should enforce consistency automatically. When the billing method for each consultant is set at project setup, the invoicing module should apply it without requiring manual adjustment on each invoice. Manual overrides create errors. Errors create disputes. Disputes cost time that the markup was meant to recover.
Reviewing the method at project completion
At project closeout, the method applied should be reviewed against what was agreed — confirming that all consultant costs were billed at the correct rate, that no pass-throughs were inadvertently marked up, and that no markups were accidentally dropped.
This review also creates the data that informs future decisions. A project where the coordination burden significantly exceeded what the markup compensated for is a signal that either the markup percentage or the coordination scope needs to be reconsidered for similar future projects.
→ Read: How to Price Architecture Services: A Bottom-Up Approach
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