Pass-through fees: Overview, definition, and example
What are pass-through fees?
Pass-through fees refer to costs incurred by one party that are directly transferred to another party without any markup or adjustment. These fees typically arise in contracts, service agreements, and leases, where the service provider or vendor passes along expenses such as regulatory costs, third-party charges, or taxes to the client or customer.
For example, in commercial leases, landlords often impose pass-through fees on tenants for building maintenance costs, property taxes, or insurance premiums, ensuring that tenants share the financial burden of operating expenses.
Why are pass-through fees important?
Pass-through fees are important because they ensure fair cost distribution between contracting parties while maintaining transparency in financial obligations. Businesses use pass-through fees to recover expenses without inflating costs, allowing them to remain competitive while ensuring that customers or clients cover applicable charges.
For customers and clients, understanding pass-through fees helps prevent unexpected costs and allows for better financial planning when entering contracts. Clearly defined pass-through fee structures help avoid disputes over additional charges.
Understanding pass-through fees through an example
Imagine a cloud computing company that provides data storage services. The contract includes a pass-through fee clause, stating that if electricity costs increase, the company can pass those additional costs directly to customers without markup. This ensures the company does not absorb unexpected expenses while keeping base service rates stable.
In another scenario, an event management company books venues and vendors for corporate events. The client agrees to reimburse pass-through fees, such as venue rental fees, catering charges, and AV equipment costs. These fees are billed at cost, ensuring that the client pays the exact amount charged by third-party vendors.
Example of a pass-through fees clause
Here’s how a pass-through fees clause might appear in a contract:
“The Client agrees to reimburse the Service Provider for all pass-through fees incurred in connection with the Services, including but not limited to third-party vendor costs, regulatory fees, and government-imposed charges. Such fees shall be billed at actual cost, without markup, and shall be payable in accordance with the payment terms outlined in this Agreement.”
Conclusion
Pass-through fees help businesses recover expenses while maintaining transparency and fairness in contractual agreements. They ensure that costs related to regulatory compliance, third-party services, or operational expenses are properly allocated without hidden markups. Understanding pass-through fees in contracts helps businesses and customers manage costs effectively and avoid disputes.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.