edition 4: January 10, 2003

happy new year

Welcome or welcome back to the first issue of 'p3 news' for 2003. This month we're looking at the two accepted remuneration methods for paying film companies in Australia, and the traps and pitfalls associated with each.

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are you paying more than you need for your TV productions?

There are two standard payment arrangements when it comes to paying for film productions.

1. Pay to Estimate - the most common method.

2. Cost Plus - an alternative many are unaware of, or have heard disaster stories that make this seem only for the brave hearted.

Let's define the two alternatives.

Method 1: Pay to Estimate

The agency briefs the film company on the project and the film company comes back with an estimate to produce the scripts. On approval of the estimate the advertiser pays the agency 50% of the film company costs prior to the shoot. (You may also be asked to pay 50% of the agency's estimated costs up front.) Then the 50% balance is invoiced on delivery of the final master, to be paid within 30 days. With this method, the agency and advertiser cannot audit the film company or claim a rebate for any unspent funds once the estimate is accepted.

Advantage

Firstly, the film company declares their profit margin, which resides under the heading "production fee" on their estimate. Can't argue with it as everybody is in business to make a profit and its there for all to see.

With this method you know what the film company's cost is before you start. This does not mean that the final cost will not be higher if you make changes to the brief during the production, but it does mean the film company will carry the cost of any unforeseen problems that may arise.

Disadvantage

Any film company that has been in business more than a year knows the idiosyncrasies of both agencies and advertisers and will factor a margin into their estimate to cover these predictably "unpredictable" factors.

However, trouble can also arise when the film company has a profit share incentive above and beyond the standard director and producer fees, which encourages extra profit taking. Take the film stock budget. A prudent director can shoot well under the allocated film stock by exercising restraint. Using less stock than estimated means less processing cost, less telecine cost and less digitizing costs. The result is the film company profit increases.

Options

Ensure that before an estimate is approved it is thoroughly and critically reviewed. Identify all contingencies within the estimate and ensure the film company and agency justify any excessive costs..

Method 2: Cost Plus

This alternative has the film company quote the job with an agreed markup or profit margin.  On completion, the film company has to disclose all their actual costs then the mark up is added. In this case the advertiser and the agency have the right to audit the film company costs.

Disadvantage

It's in the film company's interest to spend as much money as they can with their suppliers, as this will increase their own profit margin. A savvy director can shoot well over his or her allocated film stock budget to drive up the profit.

The stock budget overrun (along with the crew overtime required to do so) is often justified with "We had to do sixty takes to get the magic we were after". Of course, the advertiser never gets to see the fifty-nine takes that weren't quite "magic" enough. Nor do they get to make up their own minds as to whether the "magic" is all that "magic' after all, whether it was worth all that extra cost, and whether it makes the communication any more effective?

Advantage

At the end of the day you only pay for what was spent on the production plus the pre-agreed profit margin for the film company.

Options

The only way an advertiser can win with the Cost Plus method is to have their own watchdog at all stages of the production, questioning unnecessary costs. It goes without saying that the watchdog has to know production inside out and that some tension in the process is inevitable but manageable.

Conclusion

Many of the production choices made not only have a huge effect on budgets they are also incredibly subjective. The best way for an advertiser to curb costs is to articulate precisely what they require and leave nothing up to subjective interpretation, because many suppliers making a subjective choice on the advertiser's behalf will always chose the most expensive alternative.

Of course, this is only the tip of the iceberg when it comes to the ways agencies and film companies maximize profit extraction. The methods are varied and many and we would be happy to discuss these further with you at any time.

searching for the 'best'?

 

One of the biggest problems faced by advertisers in relation to production costs is the judgment call on quality.

It's like selecting wine in a restaurant. Most people who know nothing about wine and are afraid of being exposed as ignorant or uneducated to their fellow guests (or even an intimidating waiter) will chose an expensive wine believing that cost equals 'best'.

If someone else is paying, then the "It's not my money" syndrome comes into effect. This has been known to affect an advertiser's own staff just as much as the agency or film company. At the center of this is a culture that believes the best product is made from the most expensive ingredients. The truth is that the best product is made with the right ingredients, not always the most expensive.

Without any research, quality control or benchmarking, many people resort to applying the wine in a restaurant rule, and who ends up picking up the tab at the end of the meal?

The advertiser.

If you're searching for the 'best' and looking to improve the knowledge of your marketing team in the tv, print or creative process, email us at people@p3.com.au for more information.

 
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"The great mistakes are made when we feel we are beyond questioning."
Bill Bernbach,
Doyle Dane Bernbach (DDB).


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