Expert: Peter Gabany - 4/5/2009

Question
After you read this you are going to think that I am the world's worst negotiator....I would explain more but I want to spare you those details and remain somewhat private at the same time, so suffice it to say, there was more to this than meets the eye and the most important issue was that we needed the business!!!!!

I have a retainer client and a really difficult situation that I could use your advice on.  I have an in-house background which is why I don't know a great deal about retainers.  This was my first retainer arrangement and I now realize I made some mistakes.  The client set the retainer amount he wanted to pay and I've been billing against that HOURLY.  Retainer = $X per month divided by $85 = Y (where Y is the # of hours the client gets each month) (which is another problem....as the $85/hour is a discounted hourly fee and we usually charge $95/hour for design work and more for programming and copywriting). I realize that was a bad move.  

OK so here are the questions - there are several:  Should the retainer have been billed on a flat rate basis instead on an hourly basis?  One problem with hourly billing is that the client gets too involved in questioning the time it takes AND so we feel constant pressure to keep the number of hours down EVEN IF more time was spent. Especially because this client has questioned the fees in the past and said "that couldn't have taken 6 hours, it should only have taken 3!".  (a debate ensues with me trying to explain to the client's secretary that good creative takes time and that we are not "recent design school graduates" or a free magazine layout department that outputs trash, no offense to younger graphic designers but we've been in advertising for over 25 years...just in the "in house" area of it.) But that's not the worst of it - He has refused to pay for overages.  He says that if he pays me for overages then if he has a month that's UNDER the # of promised hours that I have to agree to write HIM a check for a refund EVEN THOUGH I'VE AGREED TO GIVE HIM "ROLL OVER HOURS" and he originally agreed to that in the contract (i.e., each month, if he doesn't use all his hours, I will let him add those unused hours to the upcoming month).  BUT this is really a NON-issue at the point because in the first 6 months of working with them we have NEVER had a month where he has NOT been over.  We calculated THREE MONTHS worth of time OVER in the 6 month period! (in other words if he gets 50 hours a month, he has over 150 hours over from the last 6 months)

I tried to tell the client that I can't agree to pay for underage hours (if there should ever been any) AND agree to allow him to ROLL OVER unused hours - as that would mean that I'd be paying him twice for the same set of hours.  Either he gets to roll them over OR I would have to pay him for the unused hours. I think he's saying he wants me to pay him for unused hours INSTEAD of giving him the roll over hours IF he should agree to pay me for the overage hours. I  realize after the example that he's set from the last 6 months that I should be LESS paranoid about agreeing to REPAY him for unused hours, since he's never had one month where he has not used all or more of his hours.  BUT I'm afraid to make a commitment like that because we are very small and we don't always just happen to have that spare CASH lying around here to give back to him.  

After trying to talk to him since BEFORE Christmas he has finally agreed to meet with me to talk to him about this (he would always send us orders via his assistant and then he was just impossible to get in touch with). So I want to go into this meeting with the right information and saying the right thing to renegotiate this contract.  I think I should suggest that he increases his monthly contract amount, that's for sure. And I'd like to ask him to agree to this contract for at least 6 months (because I forgot to mention this is a 30 day contract...he wouldn't sign anything longer than that at the time of the orig. contract). BUT I don't know what to tell him about the overages issue.  Do you have any advice?  I realize that this was the worst negotiation in the history of mankind....and i knew that at the time.  I just told myself that we needed the business and that it was worth it to me to have that amount coming in on a consistent basis because WE NEEDED IT!!! (at last one piece of good news is that I have another meeting this week with a new client that I'm 99.9% sure is signing up with us and going to do a retainer.  So not only do I want to fix the old retainer account as much as possible but I also want to make this new one BETTER (which is another reason I want to discuss the issue of whether we should be billing against the retainer on an HOURLY vs Flat rate basis). On that one I also need to figure out what their overall Marketing budget should be - which I think makes more sense to do AFTER I've written a marketing plan for them - but i hate to delay the signing of a retainer contract to do that work, because I know it's better to do it now while the "iron is hot".  (for THAT account i was thinking I could set them up on a retainer amount and then we could edit that amount if we see they need more).

Thank you so much for your input....as I said, I really just want to do what's right and be fair about this with the OLD client and try to do a better job for US with the new client.  AND, I want to keep my business alive in this really difficult economic era, at the same time!  Thank you very much.

Answer
Mimi,

Thank you for your note and boy do I feel your pain.

#1 - this is a D grade client. I can only assume that you do good work and deliver in a timely fashion.

You need to reset the ground rules with this and every new client.

A retainer is for two purposes only - it allows the client to have predictable billing month to month.

It allows the agency to have predictable cash flow.

Beyond that it is an accounting practice.

I saw lacking in all of your correspondence one key ingredient – the estimate.

Without the estimate you have nothing but an invitation for argument.

A client that wants to or thinks he can manipulate your invoices is not a client to have- it is one to hand over to your closest competitor - sooner rather than later.

So where is my advice. Document, document, document.

1./ I only hope that you use estimates. If not - start today religiously.

2./ Your billing fees? Yikes! How dd you set your pricing. In this business there is only 1 key performance indicator - $ per billable hour.How many hours do you yourself bill in a given year? of the 2080 hours we have available to us, take of vacation, sick time, weekends and we have about 1,800 hours per year and no one that I know can do that unless it is a real sweat shop. And when you consider $95/hour that is only $150,000 per year.

Now factor in rent, heat hydro, the purchase of new computers and software and the cost of new business development. For a Senior partner trying to make ends meet and negotiate new business and take non-billable time to direct work I bet you would find it difficult to bill 960 hours - you minimum to stay solvent.

So bottom line - raise your price - to what? I would start with $150/hour. Oh my that is ludicrous you might say, but $150/hr for 960 hours is - guess what – shy of $150,000. Work less, work for more, work smarter.

And how about the rest of your staff? The rule of thumb is easy. take their hourly rate + any government contribution you make on their behalf + their benefits and use a multiple of 3 - great - that is their base charge out rate. Any less and you are in the tank.

Now if one of those people are senior people, spend time managing, are more valuable creatively then you must charge them out higher.

A great Creative Director should be billed out about the same as yourself (maybe you are that person) The art director - maybe can only bill 1,200 hrs/annum then they should be charged out at $125./hr.

3./ As per hourly vs flat rate - there is no choice here - your business model is $/person hour.

If you take 6 hours to do a job then it takes 6 hours. Either you are efficient or you are not. If you take 6 hours and someone else can do it in half the time then you had best find out why it takes your people so long. if on the other hand it takes a solid 6 hours then bill 6 hours and DON'T let any client tell you how long something should take. Your are the professional not them. Other wise they would be doing it themselves.

4./ Go back and create a memory log for each of the jobs that you have performed for (can't live without him) your problem client. Get the job description, the estimate, the emails that you used to communicate the estimate, the time sheet break out that explains your billing and the invoice. Do as many of these as you can prior your meeting. break them down by job number - appear as organized as possible. Do not allow the client to beat you up over this. The service you performed was ordered by them. now pay for the service.

Your retainer was say for $5,000 per month. That allows for about 59 hours of work. Did they exceed the 59 hours? Then demonstrate that. Did you perform less than that then show this.

Each invoice should show hours billed at the rate you bill for a total. And then for every invoice submitted you want to write the retainer off against the invoice. So if you have 6 invoices in total - $1,000 each, you will undoubtedly have 5 of those invoices as $0.00 invoices and they are written off against the retainer. Only the last invoice will have $$$ owed and it will be for the hours worked + taxes.

I can write for a month about this stuff. It would be best to call me
to discuss further. 905-885-9895. It is a hard place to be. You are most assuredly in the right, now you have to be strong, appear buttoned down with all of your facts laid out and then you have to confront the client head on. Keep emotion out of the negotiation. This is business. Go in for the money owed you, forget about retaining the client. If you are strong, organized and professional it will do one of two things. Build respect for you as a business person and you will retain the business on your terms - but no more discounts. Or you will lose a trouble client, one that causes you angst, sleepless nights, your staff to be upset and the work will suffer (for certain) and you will lose time trying to establish additional opportunities to get better clients.

Call me,

Pete