My cash flow dries up anytime we have procurement delays. How do I eliminate that risk?

Business Advice | Dec 12, 2023

By Sean Low

Dear Sean,

I take on large projects that can span a year or more. As a result, I only take a few at a time. I prepare my contract in phases: design concept, procurement and installation. The design fee is a retainer, which I collect in full upfront and work off of, keeping my client informed of the amounts used along the way.

Recently, two of my large projects ran into construction delays simultaneously for about six months. Whether it’s because of the contractor’s cabinetry delay or a permit holdup, it is out of my control—but it has dramatically impacted my company’s cash flow. I am at the mercy of when these projects will begin again so that I can get to the procurement phase, which is the next phase that has a fee after the design is approved. Taking on more projects to fill the gap could be a disadvantage if both projects start again soon, as I have committed my time and availability to these clients.

I want to have something in my contract to protect me from this again. Some designers say they utilize their company savings to bridge this kind of gap; others say they charge a startup fee once the project resumes. Neither of those sound like the best practice for consistent cash flow. How can I keep cash coming into the company when these projects are stalled? What is fair for my client? (After all, they aren’t the ones causing the delays.)

One solution I’m considering is to forget about the phases and charge a design fee, then collect a monthly retainer until the end of the project. This would cover my overhead, with some profit, until the job is completed. (A caveat: That may not be the best approach when getting clients to sign a contract.)

Dry Spell

Dear Dry Spell,

In 2012, The New York Times wrote an article on server farms and why they use so much power. The reason was (and is even more so today) that all of the servers run at full speed 24/7. Grandma does not want to wait 45 seconds for baby James’s photo to download, even though she has not looked at the picture for five years. Power usage would be cut almost 40 percent if the server could just go to sleep. This is the way of our world, and it is not changing anytime soon.

What does this example have to do with your business? Everything. All of your projects are really long-term, so it is simply not possible for you to shift resources away to another long-term project and then back when you need them. Lawyers and other professional service firms do not have this issue because the projects are relatively short (months, not years). So, like the server farms, you have to have staff dedicated to a project even if there are delays or just periods of relative inactivity. You have learned the very painful lesson that when you have no possibility of revenue either from commissions on product or hours to bill, you bear all of the risk of delay. It is just not right that your firm should have to accept this risk when delays are not weeks but months, if not years. If we’ve learned one thing from Covid, it’s not to tolerate unacceptable risks.

Yes, monthly cash flow is your solution. However, it runs far deeper than what you propose. I am assuming you are involved with the entirety of a project—from architecture to interior architecture to decor. You are also likely engaged in some sort of construction management to ensure everything having to do with interior architecture and finishes is done well.

Your design fee, then, covers all of your design work and—regardless of how you are billing that phase (hourly or flat fee)—it is not your issue here; it’s getting paid for construction management, procurement and installation. The value of your design work is what you say it is, and it is based on your talent, wisdom, experience and commitment to the process. It’s completely irrational, in that you are making it up. What you earn on production, on the other hand, is based on the resources necessary for you to complete the tasks of getting the design you have created from your head to their house. Commission on purchases have long been a back-of-the-envelope way of determining the cost of these resources for procurement and installation, and hourly rates are the typical way to charge for construction management. Neither charging model is effective today because information is now universally available as to what these expenses actually are, inviting comparison shopping and scrutiny. In other words, it’s time to reframe your thinking.

Where you are not solely in control of the work (for example, in the construction phase), a baseline monthly fee for a specific scope of work is in order. If the scope is broken, you can charge a penalty—say, an increased hourly rate for time spent beyond a certain set limit. Oh, and the monthly fee lasts from the start of construction until installation.

When you alone are in control of the work, such as during procurement and installation, your fee can be defined by what you need to do the work on average each month. You can calculate this number based on a percentage of estimated monthly revenue or on the average number of hours you and your team work to procure and install decor for similar projects. I like using a percentage of revenue, because it forces you to be clear as opposed to transparent. Yes, there’s a difference.

As this is my last column of 2023 (I will be back in January!), I’m going to spend a moment on what I hope every designer undertakes in 2024: Lose transparency and just be clear. Transparency is when you walk into your favorite grocer, see a bunch of bananas selling for $8 and then ask the manager to justify the $8 based on her wholesale price. Silly, right? Yet I see so many designers doing just that to justify the procurement and installation fees we are talking about today. Don’t do it.

Clarity, on the other hand, means sharing the relative importance and necessity of doing the work required. If your firm needs revenue of $70,000 per month to meet its revenue goals, then charging a client $14,000 per month for procurement and installation tells them that they are one of five and/or just how important this work is. And yet revenue goals are shared by no designer that I know of (other than my clients, of course). Why?

Projected revenue would be the first number you would need to share if you wanted a line of credit. It is the first number you look at when thinking about investing in any company. So, there is no reason for it to be a secret, and it is the number that will unlock everything you will need to receive ongoing compensation for the production work at hand. Telling a client that you need to devote X percent of firm resources per month to do your best work on their behalf is easily understood and appreciated. And if time extends through no fault of yours, so too does the dedication of resources.

You are on the right track with monthly fees for production. However, to get there, you are going to have to be far more specific and vulnerable as to what is required of your firm to procure and install your projects. It might mean that you actually make less revenue than you would if you continued with commissions and hourly charging. Then again, you will be able to sleep at night knowing next month is covered.

Let 2024 be the year you get what you need—no more, no less—and leave behind, once and for all, the fool’s gold of old design business models that are far beyond their sell date. Seek clarity, not transparency.

____________

Sean Low is the go-to business coach for interior designers. His clients have included Nate Berkus, Sawyer Berson, Vicente Wolf, Barry Dixon, Kevin Isbell and McGrath II. Low earned his law degree from the University of Pennsylvania, and as founder-president of The Business of Being Creative, he has long consulted for design businesses. In his Business Advice column for BOH, he answers designers’ most pressing questions. Have a dilemma? Send us an email—and don’t worry, we can keep your details anonymous.

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