A subcontractor cost should reach the client through an agreed pricing rule, not as an improvised copy of the supplier bill. Choose reimbursement at cost, cost plus markup, or a client-facing fixed price before the work begins.
Three pricing methods
| Method | Client price | Best fit | Main risk |
|---|---|---|---|
| Pass-through at cost | Supplier cost | Transparent reimbursable expenses | Your coordination time is unpaid |
| Cost plus markup | Cost x (1 + markup) | Variable third-party work you manage | Markup is confused with margin |
| Fixed client price | Agreed selling price | Defined output with supplier risk under your control | You carry overruns |
Markup is not margin
A subcontractor charges 4,000. You add a 25 percent markup, so the client price is 5,000. Profit is 1,000.
Markup = profit / cost = 1,000 / 4,000 = 25 percent.
Gross margin = profit / selling price = 1,000 / 5,000 = 20 percent.
If you want a 25 percent gross margin, divide cost by 0.75. The price is 5,333.33, not 5,000.
Define what the margin pays for
A markup is defensible when you select the subcontractor, scope their work, carry quality risk, coordinate delivery, finance the bill before the client pays, and remain accountable for the result. Explain the value as project delivery rather than apologizing for a hidden percentage.
If the client contracts directly with the specialist and you only forward a receipt, at-cost reimbursement may be more appropriate. Your coordination work can be a separate fee.
Contract terms to settle first
- Whether subcontracting is permitted and needs approval.
- Whether costs are included, reimbursed or marked up.
- The currency and exchange-rate rule.
- A cap that requires client approval before more cost is committed.
- What evidence the client receives.
- When the client pays relative to the supplier due date.
- Who owns rework caused by the subcontractor.
Keep the accounting path visible
- Create or approve the vendor and purchase commitment.
- Record the supplier bill against the correct project and cost category.
- Confirm completion before approving payment.
- Create the client invoice line under the agreed pricing rule.
- Do not net the supplier bill directly against client revenue.
- Review project revenue, subcontractor cost and margin together.
Netting hides the size of the work. Record the full client revenue and the full subcontractor cost so project gross margin is measurable.
Handling tax and currency
Your purchase tax and sales tax may follow different rules. A supplier’s tax does not automatically become the tax on your client invoice. Likewise, a foreign supplier cost can move between purchase and client billing dates. Follow the contract and local tax advice rather than passing labels through blindly.
Using Invoice Crowd
Keep subcontractors in Vendors, their costs in Bills, and the customer work in Projects. Time logs and project-linked documents provide the facts needed to compare revenue with delivery cost. The pricing decision remains yours, but the trail should make it possible to explain every margin line.
Frequently asked questions
What is a normal markup on subcontractor costs?
There is no universal rate. It should reflect coordination, quality responsibility, financing, rework and commercial risk. Calculate the resulting gross margin and confirm the contract permits the method.
What is the difference between markup and margin?
Markup divides profit by cost. Margin divides profit by selling price. A cost of 4,000 sold for 5,000 has a 25 percent markup but a 20 percent gross margin.
Should I show the subcontractor bill to the client?
Follow the agreement. At-cost reimbursement often includes evidence. Fixed-price or managed-delivery work may not require disclosure, but the price and inclusions should still be clear.
Can I add tax to a marked-up cost?
Tax follows the rules for your sale, not a mechanical copy of the supplier bill. Purchase tax recovery and sales tax can differ, so confirm the local treatment.
Should subcontractor costs reduce revenue?
Usually they should be recorded separately as cost of sales or project cost. Netting them against revenue hides gross activity and makes project margin harder to measure.
How do I stop subcontractor costs exceeding budget?
Use an approved purchase cap, require a change before more work is committed, record bills against the project, and review cost-to-complete rather than only cost already invoiced.
