What is cost recovery?

Cost recovery is the practice of billing clients for expenses incurred on their behalf, including travel, materials, software licenses, and subcontractor costs, either at actual cost or with a markup. For professional service firms, cost recovery policies determine which expenses are reimbursable, the required documentation, and whether a markup applies. Clear policies prevent disputes while ensuring the firm does not subsidize client-specific expenses from its own margins.

Key characteristics

• Bills clients for expenses incurred on their behalf

• May be at actual cost or with an administrative markup

• Requires a clear policy on what qualifies for recovery

• Needs documentation and approval processes

• Should be specified in engagement agreements

• Common items: travel, materials, software, subcontractors

Why it matters for professional service firms

Unclear cost recovery erodes margins through subsidized expenses. A consultant spending $1,500 on client travel that is not recovered directly reduces the project margin. Multiplied across many projects and expenses, the impact is significant. Clear cost recovery policies ensure clients pay for costs incurred on their behalf. The policy should specify what is recoverable, documentation requirements, any markup, and approval thresholds. Engagement agreements should confirm cost recovery terms before work begins to prevent collection disputes.

Real-world example

Lisa's firm had informal cost recovery: some consultants billed expenses, others absorbed them, creating inconsistency and client confusion. Analysis showed $67K in unbilled recoverable expenses over 12 months. New policy: all client-specific expenses over $50 are billed at cost plus a 10% administrative markup; travel expenses over $500 require pre-approval; subcontractor costs are passed through at cost plus 15%. Policy documented in engagement letters. First year: recovered $58K previously absorbed plus $6K in markups. No client objections because the terms were clear from the outset. The recovered costs were added directly to the bottom line.