Voodoo accounting vs. true-cost prizing (Part 1)

About costs and profit

Calculations for Film and Video – Read and Understand Between voodoo accounting and true-cost pricing: Calculations for Film and Video – Read and Understand

On this we all agree: excessive expenditure does not exist, neither from the perspective of procurement nor from that of the producer. There are only costs. Understanding a film calculation or budget for film and video requires a concentrated amount of expert know-how.

But there are other obstacles. Depending on the originator, the calculation not only contains a total amount but also additional costs, seemingly detached from the actual film production. These are surcharged to the production costs as costs of action, profit or as so-called mark-ups (surcharges).  Numerous ordering parties ask themselves what exactly these costs entail and why they are not always disclosed and, if they are, why are they listed under different names?

Based on best practices and customs, this two-piece article attempts to shed some light on the jungle of calculation terminology in connection with the communication of film and video.

Terminology

Costs of action are defined differently depending on the sector. In this regard, a trade company would understand these costs as those incurred in order to render a trade service, whereby the subscription price and costs of action result in the cost price. Costs of action in production companies are defined differently. The administrative overheads (at best, together with the sales and/or acquisition costs) are specified as costs of action.

In this case, costs of action and project costs result in the manufacturing costs.

Terminology is more uniform when it comes to profit. Without exception, profit is defined as the surplus of yields above expenses. Its self-evidence is intersectoral. The total of project costs, costs of action and profit results is the price offered to the customer.

In contrast, the term  mark-up in film budgets is unfortunately neither used as the sum of costs of actions and profit, nor as a synonym for costs of action.

1. Mark-Up

In the explanations below, mark-up is understood as the sum of (total) costs of action and profit. For the recipient of a film calculation, which only specifies one mark-up, it is hardly possible to assess how the two totalled budget items are actively and truthfully interrelated.

Schematic display of a calculation with mark-up:

ServicePreisPriceTotal
Services100.-2200.-
Subtotal200.-
Mark-up 21%42.-
Total  242.-

 

Budgets with mark-ups are specifically found in films and videos invoiced in Cost-Plus mode.

Cost-Plus means that all effective costs are revealed to the customer and forwarded with a percentage surcharge.

Consequently, this type of calculation never has the character of a flat-rate budget and the mark-up is solely understood as binding in its percentage amount. The absolute amount of the payable mark-up is only revealed upon project completion. The risk of exceeded costs therefore lies with the ordering party. As bearing these risks only makes sense when the risk bearer has the necessary know-how regarding risk and project control, mark-up models in the film industry are almost exclusively used whenever the project’s partial orders are outsourced to subcontractors, for example when filming abroad.

2. Costs of action and profit

The typical costs of action in a film budget contain a percentage of administrative and infrastructural costs, which may be required for the production of the film but were not charged to the project as direct costs in advance. Typical cases for costs of action include office rentals, financial accounting, contract management or write-offs from the machinery used for image and sound processing.

Schematic display of a calculation with costs of action and profit:

ServicePriceQuantityTotal
Services100.-2200.-
Subtotal 1200.-
Costs of action10%120.-
Subtotal 2220.-
Profit10%22.-
Total242.

 

Calculations with specified costs of action and profit are the most transparent form of budgeting. Those calculating their film in this mode and those able to transparently justify the values used for costs of action and profit to the customer act not only professionally but also convey safety, long-term orientation and sustainability to their customers. Only romantic economists may assume that a company without clean cost calculations and adequate profits is able to be held accountable for its own service promises.

3. Included presentation

Calculations for smaller projects frequently allocate costs of action and profit directly to the individual project costs.

This will always make sense when the simplicity of the project would either guarantee the transparency anyway (for example, for web video series) or if the producer offers the customer a flat-rate budget and therefore risks the costs of action and profit.

Schematic display of a calculation with costs of action and profit included in prices:

ServicePriceQuantityTotal
Services121.-2242.-
Total242.-

 

The market for commissioned films occasionally gives rise to calculations which tragically do not specify costs of action and profit (or mark-ups) because the consignor lacks the necessary basic entrepreneurial know-how. It is therefore not surprising that around 40% of the newly founded video and film productions disappear from the market again five years after their founding. It is surprising however, that even internationally active companies will still place their bets on projects and providers with doubtful service offers –  with the incorrect belief that their own legal department would be able to assert the implementation of the contract in a worst case scenario. Those wanting to assert their claims to a no longer existing or no longer tangible contract partner will quickly learn that not even lawyers cannot do magic.


Conclusion

Film calculations do not only have a price but also a value. Agreed: a calculation is a planning tool for the allocation of funds.  Not only that, it also shows whether the professionalism of the film partner goes beyond the artistic and cinematic trade and is therefore an important indicator for trust and transparency. Conversely however, those customers pushing the costs of action and profit of their suppliers through the preferred tool of the meat industry, the grinder, may not expect beef filet in return.


A continuation of the articles series “Between Voodoo Calculations vs. True-Cost Prizing” will soon appear in Videothink. Part 2 will explain how to read and describe a film budget correctly, what a budget is able to do – and what not. Part 3 will explain examples of the most common trapdoors dealing with film and video budgets.

About Maurus Eugster
Maurus Eugster is Head of Finance and Member of the Management Board at Condor Films.

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