This is a question we recently received from one of our clients:
“I have a question regarding the fact that we pay the agency 50% of TVC production costs upfront prior to production, and I wanted to know whether this is possibly an area of opportunity. Have you seen other clients either not paying this upfront and only allowing the agency to invoice once the production is completed, or where the 50% is billed upfront, but is then subject to the standard payment terms?
This is an increasingly common question and as TrinityP3 pointed out:
This is a standard industry practice and the reason is that the first 50% pays the film company and the talent. Both of these have terms of 7 and 14 days and therefore the agency needs the payment up front so as not to bank-roll their client on the short term money market.
Why do the film companies and actors have such short payment terms?
This is because:
1. Actors are usually individuals who rely on these payments for their livelihood. Much like a salary and so demand payment on reasonable terms for a salary or wage.
2. The film companies engage a large number of subcontractors who likewise demand either payment on delivery of services or 7 – 14 days as they are also small businesses that rely on this cash flow.
On that basis we have not seen any company challenge this. What we have seen is a film company decide on the day before the shoot to pull the shoot as payment had not been received and then passed on the cost of postponement to the client as per the contract entered into on behalf of the client by the agency.
From TrinityP3’s perspective what needs to be paid prior to commencing a production is 100% of the allocated talent fees and 50% of the production house quote, not a full 50% of the agency estimate.
It should be understood that the driver for this is the SPAA agreement, which nearly all production houses use as their default terms and conditions. The SPAA contract does not apply to the agencies costs.
The SPAA contract states that the remaining 50% of the payment should be made on delivery of the finished master.
Many production companies are prepared to negotiate the terms of the final payment with the agency.
In most cases the production house is not paid their final 50% until the advertiser actually pays the agency this can be up to 90 days. If the client pays promptly this does not always mean that the agency will follow suit, many agencies can still hold out paying the production company for the 90 days.
One opportunity does exist here and that would be for the advertiser to ask for a reduction of the mark-up percentage for prompt payment. Perhaps 75% up front with the remaining 25% paid on delivery of the master for a 2.5 – 5.0% reduction in mark-up, depending on the mark up.
What is important to note that is that the use of the SPAA agreement that drives this 50% payment up front is not obligatory. But through agency and client apathy, and / or ignorance, the SPAA agreement has become the default contract.
TrinityP3 suggest that television commercial production costs could be reduced with a client based contract that is fair and reasonable, and is not as biased toward protecting the interests of the production house as the current SPAA contract.