Budgets, contracts, how to estimate our work. PART 1

Budgets, contracts, how to estimate our work. PART 1

by David Wright (dwright@artmaze.com) - Artmaze (http://www.artmaze.com)

Over the past years, many people have asked me the same question over and over again. I’ve also seen the question repeatedly come up in other areas: on Internet boards, in magazines and in casual conversation: “Should I charge, if so how much should I charge, and how do I arrive at that amount?” This is a very common question among many of us.

Clearly this is a complex subject. A portion of it is subjective, and the remaining factors are directly related to your local economy and your particular situation. Generally, a person in Mexico will charge a lower fee than that charged by a firm in downtown Manhattan. I do not plan to dictate how much you should charge for your work, but what I hope to do is to explain how to calculate an appropriate rate - how to value your work.

For this edition, I will advise on a personal level and not on a corporate level; corporate cases have the same raw factors, but we could write books about the subject if we were to go into every detail.

First of all, it is necessary to believe that our ‘time’ has value, that we deserve compensation, and abundance; that we deserve to be paid and that we don’t harbor any guilt about it. If we agree that our time has value, we may now proceed, whatever the value is. We must also agree that our value is not something limited to barely paying the rent or mortgage; this value has to include more than that, more than extras such as being able to afford a romantic dinner. It must include some amount for savings, both at a personal level and for the business, it must cover in part business fees and expenses, future updates, Internet access, and everything else you find yourself spending your money on, and finally, a pure and clean profit.

Many people have no idea how much to charge for a job, at least not a precise figure. Most use intuition or ask around, but many people within this and in other industries do not calculate their own private value. The best way to determine this is to calculate a value for yourself that includes all living costs, business costs, expenses of all kind, and from there estimate a per-hour cost; in other words your real rate per-hour. For example let’s look at Joe’s case:

Joe Doe’s Monthly Expenses:
A) Rent US $600
B) Food US $290
C) Health Insurance US $150
D) Phone & Cellular US $100
E) Computer Lease US $95
F) Internet US $55
G) Cable TV US $30
H) Miscellaneous US $100
I) Car Insurance US $100
J) Car Loan US $120
TOTAL: US $1,640

Do you believe that Joe’s expenses are accurate, or at least close? If so, you are incorrect. These numbers are not really high enough, even though Joe’s estimate may sound like a good average. He is ignoring many other costs that it is easy to forget. Joe didn’t take into account that he went to The Gap 3 months ago and bought US $129 worth of clothing; he also forgot that he had auto maintenance bills of US $220, a 30-thousand-mile engine check 4 months ago, he got two parking tickets way back, that same month he bought SimCity4 computer game for US $49, and he also had to purchase the expensive Microsoft Windows XP upgrade for close to US$200. Oh! We forgot about some books he bought eleven months ago, and the list goes on. As you can see, calculating your burn rate per month is not accurate; there are many expenses that do not occur on a monthly basis, such as some types of insurance, car-related expenses, annual fees, and many small items that we do not note in our memory such as coffee, pastries, and the like.

The only alternative is that you have to budget for the year in advance, and be as realistic and inclusive as possible. Include everything, from your coffee that you buy here and there to big expenditures; this exercise will bring you down to earth and you will, perhaps (as I did), also gain a much better insight into where your money is going.

Talking to many of the people I know, in this industry and others that are similar, I very often see this miscalculation of estimating monthly costs (personal burn rates). When you make proper calculations and investigate Joe’s lifestyle, Joe perhaps expends somewhere in the range of US $2800 per month on average, and he is probably not aware of it; I am sure that lack of budgeting at a personal level explains in part, why so many people residing in the US are living on credit.

Coming back to our business, this error makes Joe believe that his actual cost is US $10/hr and not US $16/hr or more (for this simple example), and this does not even include saving plans such as retirement, college funds, practice insurance, expansion and so on.

I will not offer step-by-step examples on how to do this, nor do I claim to be an expert on the subject. The good news is that there are plenty of books, as well as other sources, to help people to budget their year in simple terms. Keep in mind, the yearly budget must be calculated first, then you need to determine how much you cost per month, and from there you can calculate your per-hour rate.

By now you are probably asking, “What does this article have to do with Architectural Rendering?” Well, if you don’t have a budget for your own personal life, I wonder how well your business is managed… If you don’t start with a personal budget, your business will certainly be affected; for those that are already running a company with some employees, I am sure you must know all this already; it would have been impossible to get there without it.

Let us pretend that that we finally know what our personal costs are. Coming back to Joe, we will calculate that his cost is US $18 per hour. By this I mean that he has to charge this figure per hour, at the very minimum, from start to finish on a regular 40-hour week, or US $720 per week. Now, imagine Joe is hired to render one still, due in two weeks for US $1,500. At first, that sounds like a great gig, US $1,500 for two weeks’ work! Well, actually, it sounds like Joe is getting US $60 profit, right? Wrong. Joe forgot that he spoke to the client via telephone earlier for one hour in total; he also drove 20 miles to the client’s premises, paid $4 in bridge tolls and basically took the whole morning for that meeting, and let’s not forget the cappuccino he ordered; he also overlooked the fact that he was working 11 hours per day, and 14 over the last few days of the project. Now we are looking at a loss. Joe may say, “Well, that's not much,” but I would point out, that could be Cable TV and Internet charges for a whole month. In addition, a year later he’ll get a US form 1099 (for those live outside the US, this is a tax form). For US $1500 for this job, Joe may find later that out of that amount he owes perhaps US $225 on taxes for that particular job.

That last paragraph illustrates, in my opinion, a major problem with this and other industries; Joe’s error harms not only himself, but also the industry as a whole. A proven example outside of our industry is with psychotherapists. In California and many other states, unlicensed psychotherapists need to earn hours towards getting their state licenses; in other words, they must work hard to get legal so they can have their own practices or become supervisors in the future. Many of them end up working for free just out of graduate school. Many employers, including several non-profit agencies, hire and need these workers. Often, they will work for no pay, because the employers can claim that they need to be legally supervised. What is awkward is that many work in organizations that help those in need: those on the verge of homelessness, and those in extremely stressful or sometimes dangerous situations, and some organizations even charge the psychotherapists-in-training (yes, instead of paying them) for receiving the employer’s supervision. And guess what: they still do it. This self-abuse spreads, and now employers take for granted that their employees should not get paid, or for the lucky ones, should get paid very little. In addition, salaries tend to be lower later on, proof that this personal abuse affects society.

The same sort of thing could happen to us, as architectural renderers. Keep in mind it’s not how much Joe charges, it is whether or not Joe can pay his basic business expenses and expansion or a simple straight profit; if not, Joe may be cheating himself, and eventually he may burn out.

Perhaps later on, Joe may find out that his true costs and therefore value are ’high‘ compared to others. It could be that Joe’s costs are actually high, or it could be that others are undercutting him (and themselves), or both. In any case, the best way to be competitive is to cut unnecessary costs, find ways to do things faster, improve workflow, and so on, instead of just looking at your bid and simply dropping the numbers. It is ok to drop numbers on a bid, but you must ether drop your hours or your costs, and never cheat yourself. This will keep you, and the industry, profitable, and can help protect people from burnout.

Now I am going to move to other common mistakes in billing for services that I have frequently seen:

1- “I will not charge on the first contract with this new client because I am sure I will get a second contract after this one.” What is the problem? First, he is not really investing, he is betting; and second, he is sacrificing the respect of the company he’s working for; they will consciously or unconsciously lose respect for him as a professional if he does not see his work as valuable enough to be paid for. Keep in mind that your client is getting paid, possibly far more than you are. A good exercise to avoid this error is to imagine your client’s checks. Not only your client’s paycheck, but also your client’s client’s check. Yes, it most likely has multiple zeros. Finally, you may find that charging for a second contract will be difficult, since you did the work on the first one for free. Keep in mind that money is something that flows from one place to the other; it has to, if not we are all in big trouble.

2- “I will charge less for the first contract so my new client will come for a second job.” This is a similar case to #1, though slightly better. At least Joe is charging for his services, but there’s still no need for this behavior; work is work and clients should be charged for it. Believe that you deserve it.

3- “I will charge whatever it takes just to get the job.” This is an amateur approach toward being competitive. It is perfectly acceptable to be competitive, but as was mentioned earlier, real competition comes from faster work, improved workflow, better quality, being cost efficient, and so on. What this case really means is that Joe is falling into the mistake described in #2 and he is in denial.

4- “I will not charge all of these ’out of scope of work’ changes; this may upset my client.” This happens to all of us. It’s part of the job, and most of the time it stems from a communication problem - a lack of being clear in the contract and verbally to the client. You have to be clear both verbally and in writing about what constitutes a change. Architectural offices are changing your supplied drawings daily, and it is your task to make it clear that the rendering will be done as per file ABC.dwg with a date. Before you require an amendment to the contract, make sure that the change is justified and is not viewed as being your fault. In a future article I plan to discuss contracts more widely.

5- “The time spent talking to your client when pitching for the job should not be billed.” This is tricky; you have to include this in your fees in some way. If not, you are losing time and money. Some scenarios will permit you to charge for this, in some others, you may need to include these numbers in your proposal or contract.

6- “The time you take to write a contract should not be billed.” This has to be indirectly billed; if not, you are losing time as explained in #5. Clearly these are really operations costs, but you have to be paid for them – in the same way that termite inspectors or house assessors charge for their reports, if you look closely those reports are their contracts.

7- “The client is requesting more drafts than I thought they would.” You must specify when drafts are due, how many are acceptable, and you have to use drafts as a communications tool. Drafts are the gateway from what you thought the project would be and what the client envisioned; make your client detail them, mark changes on the drafts, note material changes - absolutely everything, and finally, make your client sign the draft. After signing, quickly write a small report / email that briefly notes all changes to be done, don’t rely solely on verbal communication. Keep in mind that it is your responsibility, not the client’s, to be clear and to communicate well. If you committed to two drafts, don’t show three, thinking that your client will be happier; clearly your client will be happier, but if you do it without planning in advance, you are changing your plan, you will receive more changes, and your workflow will be interrupted or changed. The best way to deal with this would be to write the contract with 2 drafts, but plan ahead for 3.

8- “Joe got a great job that will pay him for the next 2 months, but he will be paid 30 days after delivery.” This is a tricky situation, and it all depends on who the client is. Don’t think that just because your client is big and famous that they will be prompt payers. In a case like this, Joe (or better, his lawyer) should write the whole contract. If you accept such conditions, you must have a clear understanding that all copyright and licensing of the work shall start as soon as you get paid 100% of the fees; in other words, your client does not have the right to use the work until you get paid in full. If you can’t avoid this scenario for the first contract with a client, for the 2nd or 3rd job you can most likely trust in them, clearly you can trust, but always make sure to have a strong contract. One last tip: remember that normally 30 days means 30 working days.

9- “The project was canceled in the middle.” Yes, this can and may happen, so to avoid conflicts you should always be paid in advance. Especially with new clients, you should collect sufficient funds to cover your costs (or most of them). Perhaps your contract can be written as a work-for-hire by the hour; under those circumstances you should not have any problems.

10- “More than one person is calling me with changes.” It is a dangerous scenario when many people are involved with reviewing drafts; there is nothing wrong with that on the client side, but your contract and your communications should channel through a single person, and you must specify this in the contract.

11- “I cut the price on the bid, but the client wants the same amount of work.” Part of Joe’s work will fall again into # 2, charging less for a job in hopes that the client will come back for a second job, and eventually this really falls under # 1, betting on the client returning. Joe must find a way to reduce the amount of work to fit the bid. Joe must also communicate to the client that he is doing so; if he does not, consciously or not Joe’s client will think that Joe was overcharging since Joe eventually agreed to do it for less.

12- “I agreed to work on a contract that does not pay what I think I deserve.” Simply put, don’t accept the work. Joe may feel that doing so is wrong, especially now in the midst of a worldwide recession. However, Joe has options: he may negotiate to work less, or he may find ways of doing for the job with less work, while still maintaining the client’s satisfaction. If there is no way out, my strong recommendation is not to accept the job. Imagine that your client is contracted to build a house, but the owner wants a 4000-sqr-foot house with a pool. The builder has sufficient cash to realistically build the house at 3000-sq-ft with a pool, or 4000 without it. Do you really think the builder would do both? Of course not. But, he may find multiple solutions for the problem and one of those compromises may be acceptable to the owner.

Let us protect our industry. This is not to say you must charge more or less for your work, but remember that by valuing your work and helping to grow the industry, you contribute directly to your self-worth, and to our group-worth. Money needs to flow, we all deserve it, and it is also connected to responsibility. The more you respect it, the more it will flow through you; don’t be afraid of it, and remember to be true to your figures. I am sure this information is nowhere near comprehensive; as I mentioned earlier, there is sufficient material to write books about, but perhaps this will motivate some of you to buy a book about budgeting, contract writing, or a similar subject. Just remember to note the cost of the book so you can add that into your next budgets!

David Wright is a long-time LightWave 3D user and CG artist and has succeeded in the A/E/C (Architectural / Engineering / CAD) market with Artmaze becoming a leading provider of integrated 3D animated visuals and multimedia services. Coments or suggestions about this article are welcome; David can be reached via email at dwright@artmaze.com.