New Payment Terms A Recipe for Disaster

How The Shifting Economics of Production Threaten the Industry
19 March 2009 

      

          Matt Miller

By Matt Miller
Over the past few months, many issues have been raised about cash flow and the economics of production for production companies.  These issues have included sequential liability, sequential payment, payment terms, and timings of payment – forget you ever heard any of these phrases.  

At the core, all of those terms are part of a systemic problem – timely payment by agencies to production companies.  Many agencies, particularly those under the Omnicom umbrella, are using contract language that’s meant to protect them in the event of a bankruptcy filing on the part of their clients as a means to evade and avoid the payment terms of a production contract.  From what we know, this has been handed down as policy from Omnicom to all of its agencies. 

Traditionally, contracts between agencies and production companies have included a portion of the payment (sometimes 75% or 50%) up front, before shooting commences.  This structure was adhered to consistently because a production company is, on average, out-of-pocket a significant amount of money prior to the first shoot day.  (See the chart to the right and below for an example of how costs and payments impact production companies on a typical job.) This commitment has been something that agencies have understood to be a true economic factor.

While the last payments have tended to drag a bit in recent years (according to the latest AICP Membership Survey, 43% of final payments were more than 15 days late), the first payment was a given—this was for good reason.  Because of labor laws in various states, companies are required to pay approximately 55% (the cost of labor) of the entire job within 10 days of the final shoot day. Additionally, certain location and vendor payments are due prior to and during the production.  Other costs are due within days of the completion of the shoot.  This is what makes a firm payment schedule so important – and that first payment so key to the process. 

Conversely, agencies and their clients are engaged in long-term business arrangements, and an agency knows when it will receive payment, based on their billing schedules.  With production companies, there are no ongoing guarantees of billings and there are no ongoing financial relationships with marketers or agencies.  And while most production companies have limited lines of credit, they exist mainly to bridge small amounts of cash, not to finance full productions.

Under current payment scenarios, production companies can compound debt quickly if payment terms are not adhered to. 

One has to truly think of a production in the same way that you think of commissioning a work of art or contracting a builder. Production companies create a customized product each and every time they produce a piece of marketing communications. From the time an agency says "go," money is being spent—crews are being booked, locations scouted and secured.  An agency not paying a production company that first payment is a huge paradigm shift in the way business is conducted, and is not consistent with sound business practices that ensure a healthy cash flow and a healthy production industry. 

A production company would have to be throwing caution to the wind to operate under these terms. For an agency that does make its first payment upfront, knowing that a production company was doing work under Omnicom's terms, there would be a major concern that a), the company has already tapped their credit line; and b), that their upfront payment was being used to finance a competitor’s commercial.

The sustainability of the production industry – and its ability to offer its services to agencies and marketers – depends on a healthy and predictable cash flow. By attempting to upend standard industry practice, agencies and marketers who do not respect the economics of production put us all at risk.

If agencies believe that they will not be able to meet the terms outlined in their contract, there are two possible remedies to the current situation: the full production fee may be placed in an account (i.e. escrow, where it bears interest, and is doled out according to a schedule).  The second is that, knowing they have production work in the pipeline,  agencies should ensure that they receive the full cost of production from their clients prior to awarding the job.  

Matt Miller is President and CEO of the Association of Independent Commercial Producers.

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