Pass-through costs modular builders forget to bill

Most modular builders have a nagging feeling that some costs never make it onto a customer invoice. They’re usually right. Pass-through costs are the vendor costs your contract says the customer pays for. They are the easiest money in the business to lose. Nothing on the P&L tells you they’re missing.

What a pass-through cost is in a modular contract

A pass-through cost is a cost you pay a vendor and then bill to the customer, because the contract says so. You bill it at cost or with a markup the contract spells out.

Here are the pass-through costs we see most in modular contracts:

• Transport and freight to site
• Crane, set crew, and equipment rentals
• Permits, plan review, and inspection fees, including third-party or state inspections
• Sitework services: grading, excavation, drainage, concrete, masonry, demo, utilities, and waterproofing
• Temporary site services
• Sitework and logistics labor, including per diem, travel time, and mileage
• Upgrades the customer picks, or change-order materials
• Material price increases, if the contract allows it

It’s almost always spelled out in the contract. If the company does sitework, it should share the sitework budget. Unless there are change orders, that budget shows almost exactly what the sitework and pass-through spend should be. And there’s always a markup. It’s often a small 5% to 15%. That covers the company’s fee for managing the subcontractors who do things like sitework and cleanup.

Why they get missed

• The bill lands in AP, and nobody tells billing. AP enters the bill and pays it. It’s coded to the job. Nobody says it should be billed back out.
• Nobody re-reads the contract. The terms were set months ago. The person entering the bill has never seen them.
• Waiting for month-end. Someone plans to “catch up the pass-throughs” at close. Close is busy, and some of them never get caught.
• The customer invoice already went out. The milestone invoice was sent before the vendor bill showed up. Nobody is in the habit of sending a follow-up invoice.
• Labor hours weren’t approved. Sitework and logistics hours can’t be billed until the foreman or supervisor signs off on them.

Under all of these, it comes down to communication. The people who wrote the contract, built the sitework budget, and talk to the customer are not the same people who get the bills or make the invoices.

It can feel easier to bill big pass-through invoices all at once after a few months of sitework. But that’s often the mistake. You’re floating the vendor payments yourself instead of sending them on to the customer to pay.

There’s no trick to getting customers to pay faster. Some pay fast. Some nickel and dime every little thing. That’s just how it goes. So control what you can control. If you can send the invoice, send it. The customer will pay it how they pay it. The one thing you control is when their payment clock starts.

What it costs

You don’t see it as a loss. The cost sits on the job. The margin looks a little worse than you expected, and everyone thinks the estimate was off. But the contract said the customer would pay for it.

It shows up in your monthly numbers too. If you don’t send the pass-through invoice when the vendor bills come in, that month’s margin looks much worse. You have the costs, but you’re missing the revenue that should cover them.

A simple tracker

You don’t need new software. You need one list, kept up to date every week:

The PI # column is the key. That’s the purchase invoice number, and it ties each cost back to the bill in your ERP.

A simple list like that is perfect. Some companies take it one step further. They set up a pass-through project for each customer in their ERP, and the POs for that work go on that project. Then anything on that project is a pass-through. It could be a permit fee or a vendor bill for a concrete slab. And you can pull the support for it all in one place.

Here’s how it works. A sitework budget gets made and handed to the procurement team. They create POs on the pass-through project in your ERP. When a vendor sends an invoice, the PI is created against those POs. Then you export the PIs on the project into your list and bill the new ones as pass-through. That’s it. Keep it simple, and do it the same way on every project.

The rule is simple: when a vendor bill comes in that’s coded to a job, someone asks “is this billable?” the same week, not at month-end.

The Friday AR list

Once the invoice is out, your sales team and customer reps own the relationship and the follow-up. What helps them is a clear list every Friday: what’s been invoiced, what’s overdue, and who needs a call.

We set up the list so it looks like it came from your business. And it really does, because we work inside your business, right next to your team. The list shows each invoice sent to the customer, the date it was sent, and the due date. If it’s overdue, it shows how many days. It also marks any invoice that’s paid, partly paid, has late fees, or has a credit. And it shows the date each payment came in. We can make this for every open invoice and every customer. Your sales team and customer reps decide whether to send it out each week. Either way, it takes the guesswork out of knowing where each account stands.

Where billing and AR support fits

Our Billing and AR support service prepares your invoices from your contracts, bills pass-through costs as soon as the vendor cost arrives, and sends your team an AR statement every Friday. Your team keeps collections and the customer relationship. If we already handle your AP, pass-through costs get billed the same week they’re entered.

If you want your pass-through invoices to go out on time, book 15 minutes.