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edition
4: January 10, 2003
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happy
new year
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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.
p3
- helping people achieve commercial purpose through creative
process
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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.
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searching
for the 'best'?
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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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or order your printed version at our website www.p3.com.au
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| p3biz
top 10 |
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'p3biz
top 10' is ready for distribution. It highlights
the most common ways to ensure financial compliance from
your agency.
Look
out for it later this month.
If
you're not on our mailing list and would like to receive
the set of three 'top10' checklists, order your copy
at our website www.p3.com.au
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