Web Design, Digital & Social Media Marketing in Singapore

To reduce or not to reduce?

// June 7th, 2009 // Agency Management

If you are in client servicing, part of your job will require to prepare proposals to clients. More than often, you will have to face requests to reduce the fees to meet budgetary limitations. So the question is – To reduce or not to reduce?

Honestly, it is not about thee fees. It is about the agency’s base costs. Just like any other businesses, there are costs to run the business. Only by knowing these costs can the agency derive a formula to calculate it’s base cost for taking on each project. This is how I have done it.

1. Establish daily rate of each headcount
Assuming>> CD – $8,000/month ; AD – S$6,000/mth ; AM – $4,000 ; AE – $2,500 ; Programmer – $3,000
The formula to calculate daily rate is [(monthly rate x cpf rate x 14)/12]/22
CD’s daily rate = [(8,000 x 1.15 x 14)/12]/22 = $488

2. Estimate each headcount’s involvement
By scoping up the requirements, you should be able to estimate who should be involved in which part of the project and how long it will take. The amount of man-days required per headcount should be based on working on the job full-time. Seek help from seniors and even the respective headcounts to get a more accurate estimate.

3. The Base Cost
Add all headcount costs and that’s your Base Cost. This Base Cost gives you an indication that your project fees cannot go lower than this. Base Cost already exceed client’s budget? – Go to Pt 6.

4. Margins
With the Base Cost derived, multiply it with margins at 1.6x. This 60% margin is added for creating a buffer for miscalculation of man-days, underestimation of scope and clients’ change of specs. If the client’s budget is tight, stay at 1.6. If there are rooms to play, go all the way to 2.2.

5. Use this to monitor profitability
Assuming the project is awarded, PMs need to use the estimated man-days as a gauge to monitor productivity / profitability. Remember – overruns will erode the margin!

6. Be Flexible
There are many occasions that Base Costs already exceeds client’s budget. Be flexible to review the man-days estimation, evaluate the importance of this client vs margins, explore alternative development methods and sources, reduce scope with client, etc. There are many areas that can be trimmed so Base Cost can be reduced. Key is to be flexible and make a continuous effort to everyone’s expectations.

So you see, only when you know how much it costs you to take on the project can you then decide how much to charge, and then know how much you can earn. The question is not really about to reduce or not to reduce.