Marking up third-party costs
I have noticed when reviewing terms over the past couple of years that an increasing number of large company clients are stipulating that agencies must not recharge third-party costs with markup.
That might be fair enough for certain costs to be recharged such as travel, however for most third-party costs there are various reasons why agencies should be able to markup costs:
It takes time to research suppliers and arrange goods/services.
The agency takes on all the risk as the client is not a party to the supplier contract. The client won't be involved if there is a dispute between the supplier and agency.
The agency's cash is often tied up as suppliers need to be paid before clients pay and there is a risk that the client won't pay at all.
There is time spent by internal staff or an outsourced bookkeeper/accountant on setting up suppliers, processing invoices and making payment instructions.
The agency could end up storing the goods/materials for some time.
Marking up on recharges is a significant revenue stream for certain agencies such as those in events and reselling media/advertising. Other than not arranging goods/services on behalf of the client, what can be done if you find yourself contractually unable to markup third-party costs?
Attempt to negotiate to allow markups.
Ensure that the expected time costs for sourcing and arranging goods/services are included in the project fee and resourcing plan.
Especially with independent suppliers to whom you are likely to give repeat business, try to negotiate a volume rebate or commission. Later, you will profit without breaching any client terms. For clients which do allow markup, you will benefit additionally.
Instead of recharging costs, include an allowance in the project fee which will more than cover third-party expenses.
A typical markup is between 15% and 17.5% which will provide a profit margin in the region of 13% to 15%.
Please get in touch if you would like to learn more about how we can help you manage your recharges, project costs and accounts payable function.