April 12, 2012

Breaking Down a Budget

Budgeting for Design

Author: Terry Lee Stone

When thinking about pricing a project, it's logical to consider who will be doing the work. The members of a design firm are likely paid at different rates depending on experience and expertise. For example, a partner in the firm will typically have a higher rate than a junior designer. Therefore, in calculating a fee, consider what it costs the firm to do the work. If a junior designer is doing 75 percent of the work, the project can be priced lower. Alternatively, you can calculate the price by determining the average rate of all the designers in the firm. This is called a blended hourly rate or collective hourly rate.

Individual versus Collective or Blended Rates

Many design firms utilize their blended hourly rate when creating their published hourly rate. Often, they do this because in many projects, everyone on the staff is involved at some point, so rather than trying to determine the exact number of hours each person will spend on the project, the manager estimates the total number of hours the job will require. For some designers, this calculation is simply easier.

If the firm uses design project management software, it will be prompted to identify an hourly rate for an individual (presumably based on salary and benefit costs) and for particular tasks (e.g., strategy is more expensive than production of finished files). With these computer programs, it's easy to look at project costs from several different angles, which is always a good practice in pricing graphic design.

Pricing versus Budgeting

Pricing a job is, in essence, estimating: getting an overall sense of the fees and expenses a design project requires. These are the money numbers that go into a designer–client agreement. Budgeting a job is about allotting specific amounts of time and money, based on the approved fees and expenses in the designer–client agreement, for specific tasks that occur in the working of a project. Admittedly, these are somewhat arbitrary definitions of the terms. The view taken in this book is that they are related but different ways of thinking about design projects and money.

For budgeting, let the work breakdown structure (page 66) be the road map. Assign one person to each task, and identify the amount of time you think it will take to complete the task. When the job commences, make sure the person performing each task knows how many hours have been planned for the work. The person should alert the manager about any impediment to following this plan as soon as it occurs. With that knowledge, the manager has options: Extend the schedule, provide extra support, or even present the client with a change order, depending on the cause of the impediment.

There is a complex relationship between the project constraints of time, cost, and scope (see page 15) and reviewing budgets. It's always about juggling opposing constraints and making the best decisions possible. For example, if the budget allocates three hours for completing design concepts, but nothing good has been created in that period, the designer must recalculate the budget to spend more time to develop a great design solution.

Attitudes About Money Budgeting in design is another form of planning; an educated guess at a project's financial implications. Real-world circumstances sometimes turn these plans upside down. No designer can anticipate every possible factor that may compromise a budget, but designers can understand their own work ethic and philosophical approach to money that may aid or subvert their budgets.

Pricing Philosophy

Design firms generally are driven by three philosophical attitudes:

  • Client Demand Driven: Whatever the client wants, they get. Responsiveness is key. Going the extra mile to please the client, which often means rounds of revisions, is fine. This designer believes service is king and financial rewards will come over the course of the client relationship, not necessarily via one project.
  • Design Driven: Quality and creativity are at the forefront, not money. These designers work until they achieve excellence, even if they exceed their allotted time on the project. They believe that doing great work will bring more and better clients, and the money will simply follow.
  • Financially Driven: Cash is king for these designers. They believe design is a for-profit business; if the client wants more changes or enhanced quality, they need to pay more for it. These designers believe there are always more clients and more projects, but a bird in the hand is worth more than speculation about the future.

Budget Worksheet

A budget worksheet can help you to visualize your budgets and determine how your fees and expenses will be managed. To use it, multiply each task in each phase of work by a task rate, an individual's published hourly rate, or the firm's average blended rate. (Remember to include fees from any subcontractors working on the project.) This is how designers can translate rates into fees.

Clients and Money

Not all designers are driven by money. Scores of designers are much more interested in the artistic than the financial aspects of design. However, all designers need money to survive.

Reframing financial negotiations with clients means designers must be fully engaged in an active conversation with the client. They need to be confident about their ability to use design to meet their client's business goals; believe in the value of their work; and be willing to ask for fair compensation. Money often coincides with issues of self-worth, so you must believe in yourself and your abilities as a designer before negotiating fees in order to achieve the best outcome financially and creatively.

Tips for Dealing with Clients About Money

  • Be clear. What exactly does the price include?
  • Define payment terms. When do you expect to be paid? Upon completion? Within thirty days?
  • Stick to the fee. If you must raise the fee, explain the increase in a change order.
  • State the number of revisions and stick to them. Note any exceptions or additions in a change order.
  • Keep good records. Provide time sheets and expense receipts as a backup to your billing if the client requests it.
  • Integrate the schedule with regular cost reviews. Review these frequently, and communicate any problems or issues. Alert the client. Make sure you capture all time (e.g., telephone consultation, travel time, etc.).
  • Don't surprise the client. To get paid quickly, make your invoices match your estimates exactly.
  • Keep fees consistent. Base fees on a rate the client understands. No fire sales, no discounts, no arbitrary changes in pricing structure.
  • Get it in writing. Have anything related to money signed by the client, for legal reasons and to prompt a detailed conversation about money before any work gets underway.
  • Get all related client paperwork and financial information. Get a purchase order number if it's required. Include a vendor number on your invoices if you were assigned one. Introduce yourself to the contact person in accounts payable.
  • Stay in communication. Do this throughout the process, with the client contact and the accounting department, if necessary
  • Consider incentives. This can be a discount for prompt or fast payment of invoices, or a late fee as a penalty for slow-paying clients.

Questions for Negotiating

Sometimes, a client can't afford your fee. The question is: what is actually happening? Investigate further:

  • Will they ever be able to afford it or is it a temporary problem?
  • Do they want to work with you?
  • Can the scope to reduce deliverables be narrowed?
  • Can they provide you with referrals?
  • Will you get a great portfolio piece?
  • Will you gain recognition, credibility, or some other benefit besides money?
  • Is it worth taking the job?

Source: Managing the Design Process: Implementing Design