What are pass-through costs in consulting?

Pass-through costs in consulting refer to expenses that a consulting firm incurs on behalf of a client and subsequently bills to the client at the exact amount incurred, without adding any markup for profit. This arrangement ensures transparency in the billing process, as clients can see the direct costs associated with the services rendered. By utilizing pass-through costs, consultants can effectively manage expenses related to specific projects without complicating their fee structures with markups, thus fostering trust with clients who may appreciate the clarity in cost allocation.

In the context of consulting practices, this method allows firms to recover costs such as travel, materials, and other necessary expenses incurred specifically for a client project. Clients typically prefer this model because it provides a clear understanding of what they are paying for and allows them to assess the necessity and reasonableness of the incurred costs.

Other options reflect different concepts that do not accurately describe pass-through costs. Costs incurred with a markup are standard profit-based billing methods, which diverge from the straightforward recoupment of expenses represented by pass-through costs. Expenses fully absorbed by the consulting firm disregard client billing altogether and imply that the firm takes on all costs without compensation. Fixed costs that do not vary with service delivery pertain to overhead or administrative costs, which are unrelated to the