Creative agencies usually aren’t, well, very creative when it comes to charging for their work. Often the billing model is as simple as 50 percent down and 50 percent upon delivery — no matter the project or client. Lather, rinse, repeat.
However, if you are more flexible and adjust your fee and billing practices for different projects or circumstances, you can avoid taking on unnecessary risk and even create a more profitable and reliable revenue stream.
How You Charge is as Important as the Price You Charge
Any time you are taking on new work is an opportunity to look at the different pricing mechanisms available. No single approach will suit all of the work all of the time, so don’t lock yourself into a static model.
Before you decide on a price and fee structure for your next engagement, consider what makes the engagement unique. The client, the project, where you are in your business, the economy, your current staff, and other factors can all affect pricing and payment terms.
For example, video production has considerable upfront costs for equipment and talent, so a fixed fee with 75 percent down might make sense. A long-term arrangement with a steady stream of deliverables might mean using a retainer arrangement. And if you’re doing software development or ad creation, an hourly billing model might work best.
A Comparison of Fee Structures for Agency Work
Each fee structure has advantages and disadvantages depending on the situation. Whatever fee model your agency uses, there’s always flexibility in how you price your work, bill for it, and collect on it.
So let’s take a closer look at how you can consider charging for your work, some situations where they tend to work best, and some sample language for payment clauses in contracts.
Hourly Fees: A Simple Approach That Makes Sense for Repeatable Work
Agency clients tend to like an hourly fee because it’s so straightforward: work an hour, get paid for an hour. The bill comes at the end of month.
Also known as time and materials or T&M, hourly fees are common in coding for websites or design productions where the work is commoditized. Hourly fees are also common in software development where there is an iterative process or changes in priorities.
Hourly fees are easy as long as you have good time tracking systems. T&M can also be measured in other units like work days or work weeks. At the end of the month you bill your client for time incurred, payable net 30 days or however it’s specified in your contract.
While this approach is straightforward enough, a reliable revenue stream on an hourly fee can be tricky, especially when taking on a new client. If you start Jan. 1, work throughout January and then bill at the end of the month net 30 (or sometimes longer), you might not get revenue in the door until March 1 (or later). You’re not a bank, but you are effectively financing the work for your client.
Instead, consider a refilling deposit where you get $X,XXX at the beginning of the month and you apply an invoice against that amount immediately at the end of the month. The client pays the difference and “refills” the amount each month so that you always have money in your coffers to cover staffing costs.
Another downside of hourly fees is that it can be more difficult to capture the strategic value of your work. Let’s say you’re making a new brand system for a Fortune 500 financial institution. Maybe the new logo or tagline comes to you in a few hours, but that winds up being a huge value to their business.
You should be compensated for that value, so sometimes a fixed fee makes more sense than hourly for a project like that.
Even though hourly fees can vary, most clients want an estimate that won’t be exceeded without the client’s approval. The following sample clauses can help do that
Sample hourly fee clause:
The total fee for this project is estimated to be $__________ (the “Estimate”) and will be invoiced on an hourly basis plus expenses. Agency will invoice you at the end of each month for hours incurred plus applicable costs. Invoices are due within 30 days of receipt.
The Estimate is nonbinding based on Agency’s experience, the complexity of the Project, the information provided by you, and other factors. The Estimate is not a cap. Because Agency expects certain details, specifications, and priorities to evolve over the course of the Project, it is not possible to estimate the fees and schedule with absolute certainty. As factors arise that may affect Agency’s estimates, Agency will notify you and provide a revised Estimate.
Fixed Fees: A Consistent Approach You and Your Client Can Depend On
A fixed fee payment structure means you have established a price for a specific scope. It’s not an estimate; it’s what it will cost.
Many agencies bill fixed fees as 50 percent down and 50 percent on delivery, or some variant of those percentages. That still can mean a considerable gap in payment times. So consider structuring payments in fixed amounts at fixed times over the course of the project, almost like rent.
A fixed fee approach separates the value you are providing from the time it takes thus allowing you to capture the strategic and perceived value of your work. Just be sure you define and manage your scope appropriately so you can preserve your desired profit margins. Fixed fees can be difficult if your agency isn’t good at project management. .
Try to avoid describing your fixed fee as an “estimate”. We see agencies do this as a passive way of managing scope. But this just confuses things for a client. Be clear that your fee is fixed and what is included. When a client asks for things outside of scope, that doesn’t mean your fee is wrong. It just means you need a change order to adjust the fee
Sample fixed fee clause:
The total fee for this project is $___________. 50% $___________ of the fee is due at signing before work will begin. The balance is due in two installments of ($_____ each) on [date] and [date], respectively.
The total fee for this project is $___________. The fee will be paid in 6 monthly installments of $___________ due on the first day of each month starting [month]. Timely payments are due as provided in this SOW regardless of whether or when invoiced.
Retainer Agreements: A Good Fit For Longer Engagements
A retainer is most commonly used when a client buys hours in bulk to be used over a specific time period or when the agency will be producing a consistent set of deliverables at a regular cadence. If you’re working with a client in these ways for 6 – 12 months (or longer), a retainer agreement might work best.
The mistake we see most often in retainer agreements is language like, “Over the next 12 months, we’re going to charge $10,000 a month for X number of hours per month. That’s our retainer.” The problem here is the client can bail at any time during the project.
A more effective retainer would be a 12-month arrangement where the total fee is $120,000, payable in monthly installments of $10,000. That way if the client wants out in the middle of a project, you have a different conversation about kill fees (more on this later) and who is owed what. A good retainer should also make clear that there are no refunds if the retainer is underutilized by the client
In a retainer arrangement, your client is buying services in advance, typically at a discounted rate. But they should only get that discount if they complete the entire 12-month term. If they cancel in the middle, they will owe the prorated rate that you would have charged for a shorter engagement.
Sample retainer agreement clause:
Client is engaging the Agency for 12 months for a total fee of $120,000. Client shall pay the fee in 12 equal monthly installments of $10,000 on the 1st day of each month in advance. The first installment is due on January 1, 2023 with the remaining payments due on the same day of each month thereafter until paid in full. Timely payments are due as provided in this SOW regardless of when invoiced.
The fee entitles Client to receive up to 50 hours of professional services per month on included services. Work in excess of 50 hours in any one month will be billed at [our normal hourly rates (see attached rate sheet) / a studio blended rate of $200 per hour]. Hours unused at the end of any month or at the end of the retainer term may not be carried forward, applied to other SOWs, or refunded.
Kill Fees: When a Fixed Fee or Retainer Engagement Goes Sideways
Both parties enter into a fixed fee or retainer engagement with the best of intentions to see things out to the end. But in the event your client ends things abruptly, a kill fee can come in handy. Basically, a kill fee is the price a client pays for the convenience of being able to terminate an SOW for its convenience.
Ostensibly, a kill fee is meant to make up for whatever was lost if a project goes uncompleted. You may have extra staff transition time, missed opportunity costs, or downtime.
A kill fee can be written in many ways. We typically recommend expressing a kill fee as a percentage of the canceled portion of the project. So, if a project is canceled early on, the fee would be higher. If it was canceled later, it would be lower.
If Client terminates this SOW other than for Agency’s uncured material breach, then, in addition to all amounts due under our agreement, Client shall pay an early termination fee equal to 25% of the fees that would otherwise have been due for the portion of the project that was terminated.
Varied Fee Structures Give You and Your Clients More Options
Every project has different risks and opportunities. Consider taking a new approach to your fee arrangements to manage risk and take advantage of those opportunities. If you’d like to talk more about what fee structure works best for your agency, we’d love to hear from you.