Dear Sean,

I read your article on losing big jobs to design-build firms. You’re obviously passionate about changing the way interior designers get paid, but can you explain why that is? And how do I implement the advice of operating my business in a way that’s totally unrelated to a client’s cash?

Heart of the Matter

Dear Heart of the Matter,

I am a Capricorn. We are goats climbing a mountain. As such, I am all about the practical—and actually truly believe that offering an opinion without a solution is useless and distracting.

I hinted at the practical in this paragraph from my last column:

Get paid before undertaking work, ahead of the cash always. Be unrelated to a client’s money. Get what you need—no more, no less. Be paid for design first, production second. Define the path to joy and get paid for the singular moments on that path. Take proper design, financial and time risks and be rewarded (or punished) for it. Do not take risks you did not accept. Make the end inevitable, not the definition of success.

To answer your question, designers first need to have a sense of value based on pricing from the top down for every project. What they should not be doing is trying to figure out how much they can get from every project—calculating things like how many hours they can bill and how much commission they can make.

Everyone has a number that they need to be happy with their lives: to travel, live, eat, and save to their heart’s content. Let’s say that number is $250,000 a year. Let’s also say that to get that $250,000, you need to spend an additional $250,000 on costs like staff, an office, your car, service professionals, and so on. That means you actually need $500,000 in annual income.

Now think about how hard you want to work. For this example, let’s say that you want to work on five projects a year. To make it straightforward, let’s assume every project signs up on January 1 and is done on December 31. That means you would need $100,000 from each project to reach your $500,000 benchmark. (Yes, I know there are tons of variables, but this is the foundation of how you should be thinking about getting what you need—no more, no less.)

The basic premise is that for each $100,000 you charge, you aim to keep $50,000 at the end, covering your costs ($250,000) as well as your “joy number,” or whatever you’d like to call your desired-and-required salary.

Now let’s discuss the theory driving how you get that $100,000 per project. How you get paid is first about what goes toward design (what, when, where and how you intend to spend your client’s money), and second about what goes toward production (helping your clients actually spend their money). In my opinion, what you should not be doing is taking commissions or selling any product as a designer, instead remaining agnostic to the cost of production.

As to the breakdown between design and production, that is up to you. But let’s call it 40 percent for design and 60 percent for production. If design takes four months and production eight months, I would suggest that you get $20,000 as an engagement fee and then $20,000 when you complete design (defined as the moment your client approves how you intend to spend their money). You would then get $7,500 on the first of every month for eight months of production. You would receive the production budget (including all expenses—costs like taxes, shipping, storage and tariffs, but notably not your fees) in a separate account for you to spend down. Your goal is to make a profit of at least 75 percent on design ($30,000) and 30 percent on production ($20,000).

Here is what I mean when I say you have to be ahead of the cash: I believe that your talent, wisdom, experience, and commitment to the process of the project has value in and of itself. This value is the engagement fee of $20,000, which is earned when paid—as in, not a retainer, deposit, or other monies that would have to be paid back if you did not do the work. Heaven forbid, if you are not successful with design, you will not be hurt financially. Your total cost of design is $10,000 (25 percent of $40,000), and you have $20,000.

Of course, if you flunk design, you will not receive the balance of your fees ($80,000), get to finish the project and photograph it—which is a huge deal. That is proper design risk: truly putting your money where your mouth is. To be plain, if you are not willing to bet on your ability to create an amazing design that your clients adore, why exactly should you be able to keep going? And why exactly should you be in the design business?

Once you have successfully completed design, you have won the proverbial game. When your client showed up, they had the project and all of the money. When design is finished, you should have all of their money and all of the power to spend it as you see fit. There should no longer be any financial risk for your firm. You will get $7,500 per month to spend their money, and if the project goes long, you still are receiving that $7,500 every month—which does not keep you whole, but reduces the time risk you face dramatically. (Think about it: In an hourly-plus-commission model, you would be losing far more than $7,500 per month for a project that encounters delays.)

The architectural piece of the equation is just an extension of the same model: an increased design fee with a payment upon completion of interior architecture, then a project management fee during construction. The rest stays.

For those of you who are determined to stay on hourly-plus-commission, there should be a different rate for design and production (for you); an agreement to the minimum spend for decor regardless of construction cost; and a locked-in production percentage based on that estimate, with an understanding of when decor design will happen in the construction process and what happens if construction goes long.

In that model, your engagement fee should never be less than an estimate of roughly 20 percent of your overall fees. So in our example, if you add $30,000 for architectural design and $3,000 per month for project management for nine months, that would be another $57,000, for a total fee of $157,000. Your new engagement fee would be $31,400. (And if you refuse to charge a different rate for design and production, just make your engagement fee larger.) No matter what, design must be compensated when it is earned. When you are back-ended with hourly-plus-commission, waiting for profit to come from eventual product sales, part of these monies is going to pay for the value of design. No bueno.

What I have just laid out is a practical example of how you flip the script so that you can make promises and then get paid when you keep them. For those of you who feel safer and more secure by charging hourly plus a commission—thinking of it as insurance in the event of unforeseen delays, scope creep or otherwise—consider this: If the project takes twice as long and costs twice as much as estimated, your bottom line is thriving. You, the designer, and your client? Not so much. It’s a broken model that rewards inefficiency (since more time equals more money) and inflated cost of goods (since more-expensive furniture equals more income for you). Instead, I advocate spending as much time as is truly needed to create exactly the home you envision for your client, with the cost of furnishings as an aside, not a driving motivator.

Getting paid what you need (no more, no less), always ahead of the cash, with the proper design, financial and time risks—that is how you establish constraints that will define your professionalism. From there you will be recognized for the work you are doing when you are doing it, and your voice will be the one that matters most. Always.

____________

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.