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Vendor Markups - To Do Or Not To Do?

We had a question come up here regarding the appropriateness of marking up vendor production invoices to clients who pay in advance. More specifically when the client has approved an overall "program" budget that would be billed in equal payments over the term of the program. They are paying in advance each month for the work to be produced (time & materials) that month.

Marking up vendor production invoices by 20-25% has been our standard procedure. The question has been raised as to why wouldn't we pass through vendor invoices net to the client since we were being paid in advance of incurring the vendor cost.

Greg Weir Bravo Zulu! Interactive

Our answer to why it's appropriate to mark-up outside vendor costs is that we enjoy "wholesale" costs from our vendors by virtue of the amount of work we send their way. A single client going directly to a vendor probably wouldn't have that advantage. It applies not only to pricing, but our vendors will go the extra mile for us in terms of meeting tight deadlines, offering payment terms, etc. because of the volume of work we give them. I think this justifies marking up the costs to "retail".

In addition, we oversee the vendors' work in terms of quality, deadlines and costs. We work with many vendors out of the area, so our clients may never has "discovered" these vendors without us. We also obtain bids from several different vendors to ensure that our client is receiving the best value.

Dorinda Sample COO Janzen IdeaCorp

If you charge a "program" price, and have considered all outside costs in your budget, then who cares if you mark-up the vendor invoice or not?? It appears as if you are giving the client a break on buy-outs, but are charging higher for creative & production time...did I understand the question?

But if you are asking if you should pass along buy-outs net to client because they pay in advance, but not adjusting your program price to compensate for the loss of the mark-up, I'd say: absolutely not!

Your margins protect your short term ability to pay obligations. But they also protect your long term ability in keeping your agency solvent. We never gave away mark ups. We banked the profit, and are now keeping our agency alive in today's climate on yesterday's profit margin.

BUT - today's climate has clients price sensitive. If the client can't swing the mark-up in their budget, you shouldn't carry the paper. You are not a finance company. Maybe you need to act as "agent" instead... Just a thought.

Roxanne Cowan

The advance payment by a client and the income derived with marking up hard costs are totally separate issues. Advance payment by a client ensures that an agency does not finance the advertising activities of its clients and provides that the agency can pay the vendor's invoices within the terms and conditions set by the vendor, whether that is upon receipt, net 10 or net 30. Mark up on hard costs is a form of cost-based agency compensation. The two have nothing to do with the other.

Joey Pless Controller Nerve, Inc.

Do you bill your buyer's time to the job, or are they an overhead cost. If you bill every person's time to the job, perhaps you would let them pay you net, but then you still have administrative time in the accounting department processing the invoice, and management time signing the check to the vendor.

If your client wants to pay net, perhaps the vendor should send the invoice directly to the client.

Carol Stano Controller Drone & Mueller and Associates

Not a bad point about the markup covering non-revenue producing staff. All other time is posted against the job and billed at set rate/hr. Of course the billable rate is suppose to accommodate overhead.

I think the best rational (or at least one of many) is that it is just another way we realize income.

greg weir

Among other things the markup is added to help cover the administrative and accounting costs of carrying the invoice.

Shannon Ellis Business Manager Tackett Barbaria Design Group

We markup vendor invoices for those client who are not on a retainer.

Lynnette Kokomoor