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:
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It takes time to research suppliers and arrange goods/services.
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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.
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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.
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There is time spent by internal staff or an outsourced bookkeeper/accountant on setting up suppliers, processing invoices and making payment instructions.
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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?
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Attempt to negotiate to allow markups.
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Ensure that the expected time costs for sourcing and arranging goods/services are included in the project fee and resourcing plan.
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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.
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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.
