Expert: Peter Gabany - 11/11/2009

Question
A question was asked back in 2007 and I was hoping for a little more info.

Q--I currently work for a small advertising agency of 12 people with an array of
clients. Most of these are on retainers for billings. The problem is these
clients have gone way over their retainer agreements and we as an agency
haven't had the time to review all billings and assets a new retainer
agreement, which is usually done at 6 months or a years. A number of our
large clients are way over their amounts, thousand  of dollars over. The group
here seems to think we can't bill them for any of the overages. That we can
only address that at a future review and up the retainer in the future. What is
the best way for us to formula a retainer agreement with a client? Is it a 100%
swap for services at our regular billing fee? Should a client be billed for any
hours over their monthly retainer cost for hours? Any clarity would be
appreciated with trying to overhaul our billing process.

A--Heck yea - this is how you make money and I assume that you are in business to make money? Sorry to be so tongue in cheek about this but I have seen this problem a lot.

A retainer answers two important things.

1./ It helps to even out cashflow for both you and the client. It should never be a replacement for overall billings.

2./ It keeps people honest. The client maintaining their budget and the agency for responsible for utilizing the overall budget effectively and responsibly.

Maintaining the retainer budget is NOT a simple task and unfortunately it takes some time to manage each retainer account.

Here are some pointers.

1./ The retainer billing should go out at least 2 weeks prior to due date and due the first of each month. When we send out a retainer billing we prepare a BCR - Budget Control Report.

2./ The BCR is a must tool to cover your ass while delivering on the expectations of the client.

Let's use a simple account. $150,000 account. We determine that we will create a retainer of 70 of the total or (for this explanation) say that 70 is $120,000/annum or $10,000/month.


We start the BCR budget at $120,000 and send out a bill for $10,000 - thus deducting $10,000 from the total. Since no work has been done yet the client has used $110,000 of their overall retainer budget.

At month end it comes time to reconcile accounts. Let us say that you did 53 creative jobs of $2,500 apiece and place $5,000 of media for a total of $12,500.

By now you will have received $10,000 for the retainer. The client has a billing overage of $2,500.

Your BCR should read something like

Budget (annual Retainer budget) - $120,000

Media (for the month                   – $ 5,000

Creative job #1                            - $ 2,500

Creative job #2                            - $ 2,500

Creative job #3                            - $ 2,500

Total (this month)                        - $12,500

Less Retainer (paid)                     - $10,000

Amount due                                 - $2,500

Remaining Budget for 2007         -108,000

Please remember that there is a $30,000 slush amount that is not within the
BCR. You do this because you know that clients change their mind. That the account manager (if they are doing their job) is working to grow client spending.

An invoice goes out at the end of each job (NOT at month end) and accounting applies the unspent retainer to these invoices.

This is probably as clear as mud but I have decades of experience at this.
DO NOT NOT bill for your work. Also, at the end of each year - reconcile the entire years spend on a BCR and determine if there are any additional $$$ that need to be billed for.

When doing your work ensure that you get signed estimates. if the client ads an illustration, a photo or additional copy or 5,000 extra brochure - send out a a change order for the job. Get all of these approved. If you have approval, you have permission. I you have permission  your client can NOT start a billing question with BUT.

Follow up ??  Can you explain a little further what you mean by
1.  An invoice goes out at the end of each job (NOT at month end)
2.  DO NOT NOT bill for your work.

I'm on the accounting/finance side of the business and I was a bit confused by your answer.

Thanks in advance.
Stacey

Answer
Stacey,

People seem to do parts of the retainer formula and not all of it. I for 1 cannot understand why agencies would set a budget amount, work past the budget and NOT bill for it. Why are you in business? If you are that free with your money please send me some. I will appreciate it more than some of these clients which should stand for something.

Seriously, if a client has a set budget and has NO restriction to that budget for work contracted then I need a list of all the agencies working this way. I will sign a contract immediately with all of them for $25,000 each and only expect them to deliver $100,000 of work or value. This is how some people seem to be working the retainer -isn't it?

The key is simple. Take the entire year's client budget, $200,000. Reduce it to 70% - a safety margin. Why? Clients have a budget for a reason. Most agencies work directly with middle management. they have not real power or decision making power. THEY CANNOT GET MORE MONEY simply because they want it. They have to PROVE through sometimes difficult processes that the additional expenditure is of value. We all should know this. So, unless you are dealing with the CEO who has the authority to grant the agency more money without approvals (and even they have to report to the board, then we should NOT expect a brand manager to be able to pull over budget funds out of thin air.

The retainer is a moderating tool. It allows the agency operating cash so as not to rely on a line of credit. It allows the agency peace of mind so that they know the bills are paid. It allows the client peace of mind as they know what their monthly cash flow obligations are. Alter that and you break the system, break the trust possibly loose the client.

So back to 70% of $200,000 or $140,000 or roughly $11,500/month. This is your retainer billing. This is what you bill at the beginning of each month. That is all you bill at the BEGINNING of each onth and it is due 30 days from billing. When you start a contract, upon signing, you receive a signed retainer agreement, a cheque for $11,500 and they (the client) gets a copy of the signed agreement, a PAID retainer invoice for the $11,500 and a subsequent retainer invoice that is dated that day to receive payment within 30 days or at the start of the next month. AND YOU HAVE NOT DONE ANY WORK YET.

What is the money for and what is the invoice for the next month for? The money is payment for what you will do the first month under agreement to your client - at least 70% of it. At the end of the month you will either have expended some all or more of the budgeted allotment of $11,500. What would you expect at this time? You would like to see an accounting of what you spent your money on and what you received - correct? Let is presume that you did work valued at $13,500. $2,000 over the retainer amount. Guess what? Are you over budget? No. Remember you are using 70% of the overall budget. You actually have over $3,000 in reserve. This is why we use a 70% cap.

So, #1 how do you bill this, #2 how do you reconcile this and #3 how do you get that extra $2,000?
The answer is simple. Each day you complete a job, bill it. Bill it, bill it, bill it. Billing is the lifeblood of the agency. It is a must.

To reconcile the retainer payment with the billing activity you indicate what you normally indicate in a job invoice and apply the bill to the retainer payment already received. So bill #001 for creative meeting with client might have a value of $3,500. Placing it against the retainer payment received would give you a $0.00 balance invoice. This you would send to your client with a direction NOT to pay the invoice as there is $0.00 owing. Send a 2nd and 3rd invoice and you will eventually run out of retainer and there will be a payable balance left to the bottom of the invoice - the client IS EXPECTED TO PAY THIS AMOUNT. Why wouldn't they. A./ you have done the work, B./ you billed for it, C./ it is within the original budget and D./ you have provided a BCR (Budget Control Report)

The BCR is a great tool. It is a simple spreadsheet. It shows a start budget of $200,000 at the top. This amount changes month to month as the budget diminishes. From the example above you would start with the $200K (we break our BCR into three areas - media at the top, creative, and management fees) Some people have a 4th category for 3rd party expenses - we do not. We place couriers etc under fees and we place printing and web and similar under creative..

So
$200,000
less Inv #001 – $3,500 – less retainer received on account – Amount owing - $0.00
less Inv #002 – $  500 – less retainer received on account – Amount owing - $0.00
less Inv #003 – $1,000 – less retainer received on account – Amount owing - $0.00
less Inv #004 – $4,500 – less retainer received on account – Amount owing - $0.00
less Inv #005 – $5,400 – less retainer received on account – Amount owing - $2,000.00
Budget balance forward – $186,500

This type of tool and this practice should keep you and the client satisfied with how their money is spent. It demonstrates that you are managing the budget and there are no surprises. And you are billing for everything.

So one last question as I know it is coming. What do you do when the client decides to spend $50,000 in the first month? This happens all of the time. You MUST address this up front and document it. This is NOT the account executive's job to manage this, but the Sr account director or President to work with the AE, approach the client and determine if these fees are to come out of the overall budget or is this over and above the expectation of the overall budget?

The answer is typically to take it out of the annual budget, take it out of the retainer. In that case, simply use the BCR, submit the bills most of which will be in excess of the retainer collected and once the work has passed, meet your client again to demonstrate that they only have $150,000 left to their annual budget.

And to you last question - can you bill for the additional work outside of the retainer collected thus far. ABSOLUTELY! And if you don't please send me some of that extra money you seem to have hanging around.

How do you do this. You and you account team need a BCR for each month, copies of all the bills and an annual reconciliation and a meeting with the CEO, the director of finance and the brand manager on the client side of the business. Do this sooner than later. Also, have a current BCR and demonstrate how you are using this tool to better manage their account and keep them on track.

Thank you for your question,

Pete