Chapter 4
Budgeting
Here are some key factors to consider when pricing a design job:
• Scope of Work
What exactly are we doing? What services are we providing? What are the deliverables? In what format?
• Resources
Who will do the work? Do we have to supplement our team with additional designers? With what skills? How much do they cost? Do we need our senior or junior designers to do the work?
• Scheduling
How much time do we have? How much time do we need? How much time does each team member need? Do we need to juggle several projects simultaneously? How does that affect us?
• The Client
Have we worked for this client before? Are they decisive or prone to revisions? Are there layers of management that must be appeased or is there one decision maker? How available is that person?
• Collaborators
Beyond designers, who else needs to work on this project? What will they do? What will it cost? How much will be provided directly by the client?
• Quality
What are the client’s expectations? Are they willing to pay for it? Have we done something like this before? Will there be a lot of research, or can we immediately get to work?
• Expertise
Do we have it? How steep is the learning curve if we don’t? How will we know when we have a great design for this client?
• Cash Flow
What other jobs are in-house right now? How much money do we need? Design is a business, and all businesses have real financial requirements and obligations. What are ours?
The answers to these questions have cost implications. The more experienced a design manager is at answering and anticipating these tough questions and the better his or her documented records are on previous projects, the more accurate the design manager will be in pricing and budgeting projects.
Pricing Factors
It keeps coming back to time and money. A design firm has only so many hours per week to sell. For many firms, pricing the work comes down to
Of course, straight time is not the only factor in establishing a design fee. Here’s what else to consider:
• Expertise in this area: Are we the leaders in this category of design? What is our track record? Can we charge a premium because of that?
• Historical records: What have we charged for similar jobs in the past? What will the market bear?
• Value of the work: It’s subjective, but what will the market bear? What do you think this client will pay?
• Page rate: This is a per-page fee that’s good for publications or print websites based on estimated time or perhaps what you’ve charged another client.
• Client’s stated budget: Sometimes, the client will tell the designer exactly what they are willing to pay. Believe them.
• Serendipity: What does your gut say? Or maybe, what kind of income do we need now?
Considering all of these things together will provide a well-rounded exploration of what the price should be. Losses on a particular job due to incorrect pricing can be absorbed, but a constant stream of work that is priced improperly, with the designer losing money or barely breaking even, will ultimately affect the firm’s financial stability. Watching and continuing to learn in this area of design project management is critical.
Determine Your Rate
You can determine an hourly rate for design services in several ways. Many design organizations worldwide have published this kind of information as a reference. For example, in the United States, the AIGA publishes an annual wage and salary survey. You can divide the average annual salary reported in the survey by the number of billable hours in a year (1,500 hours is a good round-number average to use). This calculation gives you an hourly rate based on the organization’s member submission information. A discussion with peers and colleagues may yield a ballpark idea of what they charge per hour. However, many people shy away from this kind of conversation and often don’t tell the truth. If they trust you, and don’t directly compete with you for client business, they may reveal this information.
Calculation Based on Real Needs
Here is a formula for determining your hourly rate based on your actual costs of staying in business. It’s not the only way to determine an hourly rate, and it doesn’t factor in the value of the work to a client’s business or a premium for your expertise; it’s merely based on actual economic needs.
Reviewing Pricing
Designers must know their hourly rate to set their fee for particular design jobs—both the breakeven hourly rate to understand the lowest fee they should charge, and the published hourly rate to allow for profit and tax obligations (see page 95). Calculating a fee using both sets of rates shows you where the job must be priced (breakeven) and what is an optimum price (published hourly rate). However, it is hard to know exactly how many hours it will take to do any design project. Therefore, any estimate based on hours is just that: an educated guess on the duration and complexity of the work. As such, pricing jobs strictly on hourly rates is not a 100 percent accurate approach.
Evaluating Your Calculations
To get a more well-rounded view of pricing, review the project total you calculated using your published hourly rate and ask yourself the following questions:
Does this total reflect the value of this work to the client? Does it reflect the expertise we bring to the project?
Can we get more money for this job based on who the client is? In other words, is this client a small regional startup company or a well-funded multinational corporation? Little businesses typically have little budget, and big businesses should have a big budget. What have we charged for similar projects in the past? How is this project the same or different from those? Is that reflected in this price calculation?
What do we think our competitors would charge for this project? Why do we think that? Can we discuss our calculation with anyone?
(Talking about pricing design with a colleague or two is fine. Note, however, that in most countries, banding together as a profession and determining an industrywide price is illegal. It’s a form of collusion called price-fixing. This is why design organizations as a group rarely discuss in public or publish pricing information.)
Is there any published information on pricing for this type of work? For example, the Graphic Artist Guild’s Pricing and Ethical Guidelines publishes rate information. The organization polls its members, has them price certain kinds of projects, and then publishes that information. It can legally do this in the United States because it is a trade union, and it operates under different laws than nonprofit design (arts) organizations.
Does this price calculation seem high or low based on your gut instinct? How should it be adjusted?
Two design firms can have the same published hourly rate and calculate two different project fees using that rate. For example, one design firm may work slower or have more people involved; this means it estimates more hours into a project and it charges more. Only by keeping very good records, especially time sheets, on all projects and then comparing estimates to actual costs can designers price their work accurately over time.
A trusted client may be candid and tell the designer what competitors would charge on a particular job, particularly if the designer lost the job to a competitor. It’s important to learn why a design firm lost out on an opportunity, but remember that it isn’t always a question of money.
Another useful strategy is to develop relationships with other designers that can include discussions of money.
Remember that big fees don’t necessarily mean big profits. It all comes down to how the project is run. How long did the designer work on the project to earn that fee? Maybe we spent very little time on the project, but the work was tremendously valuable to the client’s business. These things are unique to every design project. It is why most designers are always wondering whether they charged enough on a job and whether they could have made more money.
Old Republic designed by Larsen / Minneapolis, Minnesota, and San Francisco, California USA
Old Republic Title Company
Tim Larsen founded Larsen in 1975 with a desire to stand for graphic design excellence—in the work his firm produced, the people he collaborated with, and the results he achieved. Three decades later, Larsen has built an international client list, attracted some of the best creative talent in the industry, and created award-winning branding, interactive, print, and environmental graphics work. Larsen has produced work for more than 140 clients worldwide, from entrepreneurial startups to Fortune 100s, across a variety of industries.
Since 1997, Old Republic Title has partnered with Larsen to design its annual report. By listening to the client and developing an understanding of the insurance business, Larsen has established a high level of service and expectation. The company appreciates how Larsen’s creative solutions tell the story the insurer wants to share. Through visually stunning design, attention-grabbing concepts, and direct messages, Old Republic Title’s annuals acknowledge challenges and demonstrate economic optimism and stability. Year after year, this consistent brand attitude conveys trust and wins devotion for the company. With their elegant design and engaging copy, the annual reports also serve as excellent marketing pieces, appealing to real estate agents, loan processors, lenders, and attorneys.
OPPOSITE, LEFT TOP
Why is title insurance important? That’s the simple but powerful question Old Republic Title posed in its annual report. Larsen’s use of rich photography and targeted messaging provides the evocative answer: “It protects what matters most.” Through this theme, Larsen helped Old Republic Title command the attention of key audiences with colorful, penetrating photographs of the people it serves, paired with compelling headlines.
OPPOSITE, RIGHT TOP
Simplicity, flexibility, strength, and comprehensiveness: How to say it all in a way that makes customers act? Keen for the challenge, Larsen created a series of visually intriguing images for Old Republic Title with the theme “Good Things Come in ____ Packages.” Each image attempts to package the intangible by filling in the blank and using ironic and imaginative line drawings combined with photographs of typical Old Republic Title clients.
OPPOSITE, RIGHT BOTTOM
It may be easy to take title insurance for granted, but imagine losing a home or business. Without the right title insurance coverage, it’s a very real possibility. “Because you have a lot to lose” addresses this issue with a unique combination of original photography and illustration. The bright color palette reinforces the positive benefits of choosing Old Republic Title.
BELOW
The copy-driven approach to this annual report showed how quickly little errors can confuse something as simple as a headline—or as complex as a property title. The report’s flawed headline is edited error by error over four introductory spreads, depicting how Old Republic Title finds and corrects errors on the titles it insures. Energetic colors demonstrate the firm’s vitality, and the report’s sign-off—“We do good deeds”—simply and effectively restates the value proposition.
BELOW, LEFT
The year 2006 was tough for many title insurance companies, but unlike its competitors, Old Republic Title saw plenty of reasons to be optimistic about the future. Larsen captured and communicated that confidence in “Looking Up.” Affirmative front-of-book copy and an engaging blend of original photography and illustrated stars were combined in a welcoming booklet format.
BELOW, RIGHT
In the midst of the real estate crisis, Old Republic Title wanted to convey strength and confidence. The metaphor of a door—a real estate icon—symbolizes “opening the door to opportunity.” Intense primary colors provide a sense of optimism and hope while custom illustrations and playful die-cut pages emphasize the door concept, revealing a new benefit to working with Old Republic on every page.
“As designers, we have the skill and responsibility to help others make good choices about the marks they leave on the world.”
—Tim Larsen, president and founder, Larsen
“You’re mad as heck,” states the opening page of the annual report, referencing a year of economic challenges. An attention-grabbing cover presents a seemingly profane statement, !$#@%, which the report’s interior cleverly breaks down into individual messages of positive news. Constituents discover they aren’t alone in their frustration, and that despite a constant stream of negative news from everyone else, Old Republic Title still has good news to share.
Breaking Down a Budget
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.
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.
Here’s a budget worksheet mockup for the initial phases of a logo design project.
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.
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?
Sometimes, you may wish to negotiate pricing. Naturally, it needs to be in your best interest to do so. Here are some questions to ask:
• Can we have longer to work on the project, perhaps fitting this job in between other work?
• Will the project challenge us creatively and open new doors?
• Can we do research and learn new skills that are marketable to other clients by doing this job?
• Will we have a chance to work with some exciting new collaborators in brand new ways?
These factors may be interesting enough to you to make it worth dropping your prices to get the job.
Communicating with clients about revisions is a huge part of managing client expectations regarding money. The best strategy is to be clear in the designer–client agreement about how many revisions are included. That way, the client understands the meaning of revision and round of revisions, and when they will start receiving additional charges because of those changes.
For more information, see page 40–41.
Even with this clearly spelled out, many designers are unsure how to corral their client and alert them that they have exceeded the planned scope and revision allotment, for fear of losing the client. If the client has agreed to the terms in the designer–client agreement, it is okay to bill them. Just let them know what is happening in a professional manner.
Too often, designers are afraid to ask for additional compensation for additional work. This makes it harder for the industry to be treated fairly in this aspect of the business. When you practice without fair compensation, including receiving additional fees for additional work, you are hurting not only yourself, but all designers everywhere.
Designer Fault
Some designers hesitate to charge for revisions because they feel they caused the revisions. This may be true. An evaluation will reveal the cause(s) of a revision in a design project. If it is poor performance on the designer’s part, the designer should not charge it to the client.
Three Types of Estimates
You can use three major types of estimates to communicate costs to clients:
Ballpark Estimate:This is an initial rough estimate based on high-level client objectives, with a large margin for uncertainty. The deliverables, scope of work, and corresponding resource requirements may not be clear yet, so out of necessity, the estimate must allow for these things. Typically, a price range, rather than a fixed fee is stated.
Budgetary Estimate:This is a more accurate view of project-related costs based on a much clearer scope of work. It is contingent on a fairly accurate view of the work to be done, which still may be in a state of flux. As such, conditions and parameters should be stated—for example, “This estimate is based on available information, and will be reviewed based on approved design concept.”
Definitive Estimate:This is a time-consuming and detailed estimate created once the full scope of work, final deliverables, and detailed work flow are known. A full work breakdown structure (see page 66) is completed, the project is scheduled, and the team is assembled before the estimate is prepared.
Eight Payment Strategies
Sun Microsystems designed by Fibonacci Design Group, LLC / Los Angeles, California USA
Sun Microsystems
To quantify the intangibles of computer technology company Sun Microsystems’ culture, a visual language was developed and incorporated into an employee film. “The grammar of this language was built on the employee value proposition and positive team member experiences,” explains Fibonacci Design Group Partner Greg Mann. “The campaign engaged and motivated the team to ‘live the brand’ and help shape the future of Sun Microsystems.” The film focused on the strengths and beliefs already developed for Sun’s brand expression with a healthy dose of irreverence and fun.
BELOW
Fibonacci began work with a thorough brief from Sun’s senior director of Employee Communications and Communities, Terry McKenzie. The documents outlined brand attributes and values and defined goals for employee retention and recruitment.
The I Have the Best Job at Sun short film captured a genuine expression of Sun’s competitive difference as seen through its employees’ eyes. Top Sun executives used the video extensively at internal and external presentations. Screens from the video are shown below.
Fibonacci Design Group Talks Money
Greg Mann reveals some of the ways he and partner Sloane Mann think about money and pricing their design.
Q. How do you approach estimating a job?
A. We tend to think in terms of the value of the job. It’s very possible to design, say, an identity that requires x hours of time. If it is a high-profile client, that same logo has greater value than it would for a start-up that’s more of a mom-and-pop organization. That identity has the potential to generate far greater attention and revenue for the high-profile client. We tend to build proposals on project pricing, with specific parameters attached, and use the addendum of an hourly rate to help contain and focus the process. For instance, “proposal includes the presentation of five to seven concepts, with three to five rounds of edits. Additional exploration of concepts will be billed at $175/hour.
Q. What are three main things you think about in pricing design?
A. We’ve got more than three things, we consider
1. Have we worked with the client before, and do we know whether they require a great deal of hand-holding, or tend to trust/respect our design sense, making the process more efficient? We’re fine with either, but the process in each case will be different.
2. What will be the usage/visibility of the end product?
3. Is this a client from whom we receive a regular stream of work, or is this a one-time engagement?
4. Are we actually going to be supplying more than just design in order to ensure the success of the project? For instance, will we be defining the marketing strategy for a client that is unable to do so for themselves?
5. How much do we love this project? Will it be an amazing experience or will it just be paying the bills?
Q. How do you know that you are charging a fee that is fair to the client and yourself?
A. We have, on occasion, asked a client for an honest assessment of comparable charges for projects that are specialized and within a given field. I think clients are often pleasantly surprised by this, and give honest, ethical answers (in part, because they know you are being mindful of their budgets). We have also asked fellow designers what they would charge for a project that we are bidding on, just to get a sense of where our numbers fall. We do, at times, also track hours on project priced design, just to make sure we are not falling below a minimum hourly rate.
Rights and Compensation
One thing designers must consider in terms of money and design is ownership of the work being created. Who owns what, and how the work may or may not be used, is a negotiating point that also has financial implications. This concept is tied to the designer’s intellectual property rights and the client’s right to use the work they commissioned the designer to create.
Intellectual property (a legal reference to the creations of the mind: inventions, literary and artistic works, etc.) is debated by lawyers worldwide. In the United States and Canada, for example, all creative work is owned by its creator until the creator transfers ownership in writing to someone else. This is the cornerstone of copyright protection (legal protection that gives the creator of an original work exclusive rights to use that work within a certain period). Other countries may take different views and have different laws, so designers must understand what is true and legal in the country in which they practice design.
There are some complex rights and usage agreements that can affect a graphic designer. For example, in the United States many clients require designers to work under a work-for-hire contract, which is a written (not verbal) legal agreement between the designer and client stating that the client owns all work developed by the designer under the contract. In essence, it legally makes the client the creator of the work and affords them all the related rights of a creator. This isn’t a bad thing, but it means the client is now undisputedly the owner of the work. As such, a designer might want additional compensation.
It is important that the designer and client know who owns the work and how it may be used. For example, when a client owns outright an illustration that a designer developed for a pamphlet, the client can use that image in any future advertisement or on their web page, without paying the designer anything additional. Therefore, a designer would want to charge more for this kind of complete transfer of rights and ownership. Alternatively, it could be a negotiating point: Charge a lower fee, but the client has restricted usage rights for the work.
Compensation and the notion of intellectual property is a good topic for a designer to discuss with an attorney. You can also seek information from various design organizations, and share this information with your peers. Know your rights, know your client’s needs, and know the laws at the intersection of these two things.
Factors to consider when thinking about the material worth of usage rights and your corresponding fee for a design include
• The value placed on similar work (perhaps even for other clients)
• The category or media in which the work will be used
• The geographic location or area of distribution for the work
• How the client will use the work (for what purpose)
• How long the work will be used
• How many items will be produced that incorporate the work
Honda designed by Wieden + Kennedy Tokyo / Tokyo, Japan
Honda: Drive Every Drop
Honda’s Drive Every Drop campaign targets consumers in the Asia Oceania market. Created by Wieden + Kennedy Tokyo in conjunction with sister agency Wieden + Kennedy London, the campaign features print, web, and broadcast spots. The concept in the campaign is to get people to think about the amount of fuel used on their journeys—drop by drop, rather than gallon by gallon—and specifically to consider the environmental benefits of Honda’s i-VTEC engine, which is designed to get the most out of every drop of fuel.
OPPOSITE
The Honda Drive Every Drop website leads users on three road trips: from Delhi to Mumbai, from Kuala Lumpur to Singapore, and from Sydney to Tasmania. The site also contains a set of TV commercials and print advertisements, along with an interactive, informative introduction to the technology behind the Honda i-VTEC engine.
ABOVE
Honda’s i-VTEC engine is the result of years of research and experimentation, following the dream of developing an engine that consumes less while keeping the power that Honda engines are known for. It is an intelligent VTEC system that switches the valve timing for maximum efficiency during startup and acceleration to achieve powerful performance, and then delays intake valve closure timing during cruising and other low-load conditions for improved fuel economy. The TV ads spotlight these engine features.