PR Agency Billing: 6 More Must-Knows

In my last blog post, I listed the top four questions about PR firms’ billing practices. I promised Part 2 to elaborate further on this topic. Here are the other “must-knows” about how public relations companies bill.

If you spend less time than you estimated for your monthly minimum fee, do you refund the fee that wasn’t used?
Different companies have different policies about this, but generally speaking, no, most agencies do not refund the unused fee. As for Bridge Global Strategies, we budget in blocks of three months’ worth of time. If we estimate that the work will cost $10,000 worth of hours each month, and in the first month we have to go over that amount of time by $2,000 (with the client’s approval) the extra time can either be subtracted from the following two months’ time, or if the client doesn’t want us to cut back during the other two months, then at the end of the three-month period we will bill the extra $2,000.

By the same token, if we spend only $8,000 the first month, we will still charge for $10,000, and $2,000 worth of time will roll over to the second month. The rolled-over time can be used in the second or third month. Then we start fresh with the next three months’ budget.

If you spend more time during those three months, you charge more, but if you spend less, you don’t refund the fee. That seems grossly unfair!
It may seem unfair, but please keep in mind that if we take on your company as a client, we have reserved staff time to work for you, and we’ve given up the opportunity to work for one of your competitors. We make an agreement with you for a certain amount of work over a certain amount of time, and we have to pay our staff.

Do we have to sign a contract for a year, or can we make an agreement for less than that? Do you work on a project basis?
Again, different agencies have different policies about project work. All PR companies, including my own, are happy to work on a project basis. The differences from agency to agency lie in the minimum amount of fee charged for working on a project. Our minimum project fee is equivalent to our minimum monthly fee.

For ongoing work that flows from month to month without a finish date, a one-year contract is not necessary. We can make an agreement for six months, renewable automatically unless cancelled by either the client or us. Sometimes a six-month contract is a good idea in the beginning. It gives us a better idea of the actual time we will spend so it can be adjusted at the end of that time for the next six months. It also gives a client the chance to see some results, and gives us time to prove our value to the company so that ongoing spending can be justified.

What else besides your fee do we have to pay for?

We generally have outside expenses for services of vendors we hire on behalf of a client, and those are billed in addition to our fees. These could range from electronic wire services for distributing news releases, to printing, hotel space and food and beverages for an event, travel on behalf of a client, media monitoring fees, AV production fees, graphic design fees, and more.

Some agencies markup these outside expenses. Why? What is marked up and what is not? What is the common mark-up percentage?
Mark-up of outside vendors’ costs started in the advertising industry and found its way into the public relations agency world many years ago. We mark up services that we purchase and then spend time supervising. Example: we mark up news release distribution services and media monitoring services. We do not mark up travel expenses or office expenses.

The percentage of markup varies from agency to agency. Some do not mark up at all, and some agency owners mark up as much as 30 percent. It’s very common to see a 17.65 percent markup. Many clients wonder where this odd figure comes from. Actually, 17:65 percent of a vendor’s cost billed to the client as markup is the same as a 15 percent commission from a vendor. Traditionally the ad industry received a 15 percent commission on the cost of clients’ advertising space. If the amount charged to an advertiser was $1,000, the media outlet would pay the ad agency $150 as a commission. This is the same amount of return that the agency would receive from markup of an outside vendor bill by 17.65 percent. (If the actual cost of an outside vendor’s charge was $850, and the agency added a 17.65% commission to that when billing the client, the total client bill would be $1,000.) Both methods yield 15 percent of the combined total of the vendor expense and the agency commission.

The key question is why agencies mark up expenses in the first place. Some agency owners would answer this candidly (not publicly), “Because we can.” PR agency executives think of this amount as gross margin and build it into the agency’s billing systems as a way to assure overall profitability. I believe most agencies would forego the markup if they could charge for every hour spent on a client’s behalf, including negotiating vendor costs each year, checking each bill, and doing the bookkeeping to pay the vendors and then bill the clients. But it’s impossible to capture all of that time and assign it fairly to each client.

There is also the issue of cash flow: we receive some bills literally the day after we incur a charge. We collect all outside expenses and bill them to clients once a month, and our clients typically take 30 days to pay us. By the time we get reimbursed, it could be eight weeks after we pay the vendor. Many agencies offer to forego the markup if the client will receive and pay the bills from vendors directly. But most companies don’t want to do that. We get a better deal on the rates we pay because we have a bigger volume of business for these vendors. Also, corporate staff aren’t the ones dealing with the service companies, we are.

When do PR agencies bill and what are usual payment terms?
Typically billing is done once a month, and most firms bill “net 30 days.”. For projects, most firms bill some of the fee and estimated expenses up front, some in the middle, and some at the end after work is complete. It isn’t unusual for an agency to bill monthly base fees for ongoing work in advance, so that the payment is due while the work it covers is still being done. We do this at Bridge.

I hope that this Q&A will be helpful the next time you negotiate billing with a public relations firm. Often clients don’t know what questions to ask prior to starting a working relationship with an agency. The unpleasant surprise of getting charged for something unexpectedly can be damaging to the agency/client relationship.

Lucy Siegel

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