Legal Definitions - pass-through

The term pass-through describes a situation where a seller, service provider, or lessor (the party providing a good or service) transfers specific costs they incur directly to the buyer, client, or lessee (the party receiving the good or service).

Instead of absorbing these expenses themselves, the original party charges them separately to the other party, effectively "passing them through" to be paid by the end recipient.

• Example 1: Commercial Lease Agreement

  Imagine a small business renting office space. Their lease agreement might state that while the landlord initially pays for property taxes and building insurance, any increases in these costs beyond a certain base amount will be charged directly to the tenant. If the property taxes go up by $500 in a year, the landlord will add this $500 increase to the tenant's monthly rent payments. Here, the increased property tax is a pass-through cost from the landlord to the tenant.

• Example 2: Professional Consulting Services

  A company hires a marketing consultant for a project. The consultant's contract specifies an hourly rate for their time, but it also includes a clause that "out-of-pocket expenses" will be billed separately. During the project, the consultant incurs costs for specialized software subscriptions, travel to a client meeting, and printing of presentation materials. These specific expenses are then added to the final invoice presented to the client, distinct from the consultant's hourly fees. These are pass-through costs, as the consultant is transferring their direct project expenses to the client.

• Example 3: Online Retail Shipping

  When you purchase an item from an online store, the retailer incurs a cost to ship the product from their warehouse to your home. Many online retailers choose not to absorb this entire shipping expense themselves. Instead, they charge a separate "shipping fee" to the customer at checkout, which directly covers or partially covers their cost of postage and handling. This shipping fee is a pass-through cost, as the retailer is transferring the expense of delivery to the buyer.