Dear Sean,

I often feel like my business is incredibly vulnerable to forces beyond my control. I have heard you talk about getting paid for the risks we take as designers, and I want to understand exactly what you mean, because I don’t think that’s something I’m doing right now. How do you recommend I protect my firm from so many unknowns?

Risky Business

Dear Risky Business,

All businesses take a risk. They hope to sell something—be it a product, service or instrument—and there is no guarantee anyone will buy it. That’s risk. The truth is that when risk is introduced into your business, knowingly or unknowingly, someone is paying for it. And if you do not discuss it, account for it and decide who owns it, guess what? It’s you who pays for it.

For those in service businesses, there are two huge risks: financial and time. However, for designers, there is a third added to the mix: design risk.

Financial risk is the chance you will not be paid enough to do the work you are tasked with doing. That can come from scope creep when you charge a set fee, or underbilling for hours worked if you’re charging hourly.

Time risk involves a delay for which you will not be properly compensated. If there is a construction delay and you charge hourly plus a markup, there is not much money coming in, but you still have to dedicate resources to the project in order to be ready when it is ready for your attention again. The more time goes on, the more you lose.

Design risk is about the ability to do your best work. To me, this is the most important of the three. If you are stuck with what is there—say, an apartment with no possibility of real renovation—you can only do what you can do. But what if you are shut out of the renovation process and left with less-than-optimal results versus what would have happened if you were a part of the process? Your chance of success with no input is less than if you were involved. That is a real risk that has to be paid for..

If you are diligent about protecting yourself from undue financial risk (for example, not permitting scope creep or not taking on additional work from a third party without proper compensation), you can be relatively safe from this surprise. Read on to talk about protecting yourself from the other two.

The axiom “Time is money” is profoundly true for designers, but not really for the reason you think. (Fair warning: economics geekiness ahead!) If a business can shift resources easily, then the risk of delay is not that big of a deal. Think about a big accounting firm, for example: If one area of business slows down, it can reallocate those resources to an area that is busier, and then redistribute again once the pipeline changes, because the work typically involves concrete, hard skills that are easier to replicate and apply to new projects. To put it another way, they can optimize their resources efficiently.

Compare the accounting firm to your design firm working on four or five projects. If there is a delay in one, you likely cannot move the professionals working on that project to another because of the specialized skill set required in design (a hybrid of soft and hard skills), plus the deep knowledge well involved for any given project and client that makes onboarding and off-loading a major undertaking. In that scenario, you would have to scramble to finish the delayed project and keep the current one going.

Clients will often say, “Well, you are not doing anything during the delay, so why should I have to pay you anything?” But if resources have to remain dedicated to the project to ensure that you can deliver what you promised (a transformative design), then your clients have to pay for that. But most designers do not acknowledge this risk in their models (or contracts). As a result, they wholly bear the risk of delay, and the pain is oh, so real.

You asked what I recommend, so here is a summary for time and financial risk: Charge a flat fee for design and be vigilant about scope creep to control financial risk, then charge a flat fee for production (which covers both financial risk and time risk since payments do not stop until the project is over), all paid before you do your work so that you are always ahead of the cash. When you do the math, you will likely be less expensive in the end than a designer who charges hourly plus markup, and the reason is risk. The hourly-plus-markup model exposes you to unforeseen financial and time risk, which means you have to charge more than in a scenario where the client knows they are paying for both.

Last and most important is what most designers get backward with regard to design risk. If you have a chance to reduce your design risk by having a seat at the table, you need to make that investment—meaning that, on a relative basis, you would get more expensive if you did not have a seat at the table because of the cost to you and your work in the event that your voice is not included.

Let us say that your expertise in interior architecture is as valuable as your interior design, and let us also say that your fee for each stand-alone service is $10, totaling $20. If you charge hourly, the easiest way for your client to save money is to cut you out of interior architecture. However, you now have to take the risk of bad choices and get paid less—meaning getting paid less to do a harder job.

On the other hand, if you use a flat fee, you can set your design fee at $17. (Consider that $3 you would have made in the hourly model your investment in having a seat at the table.)

Does this mean charging a flat fee for design is the only profitable model? No. But if you charge hourly on a new build or renovation project, you must use a different rate if you are involved in both interior architecture and decor than if you are only involved in decor. Just for fun, say $250 per hour for both and $400 per hour if just decor, and do the math for yourselves. This demonstrates how to shift design risk to your clients where appropriate, and by doing so, give yourself a better chance to do better work.

Understanding risk is real and has to be appreciated by everyone involved in business transactions, as it is the foundation of a great relationship with your clients. Risk is the basis for your pricing; accounting for it ensures responsibilities are shared fairly and appropriately.

Sure, risk might not be the sexiest thing to think about, but that does not make it any less important for you to know why you do what you do and to explain it to those who need to know. Good luck.

____________

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.