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Business of Design

Hourly, Markup, or Flat: What is the Best Fee Structure for Interior Design Projects?

Maury brings over 20 years of experience of working with interior designers and bookkeepers. He brings his passion and respect for the arts to Fuigo, where he wants professional interior designers to have the tools and community to help them build successful and impactful businesses.

When choosing a fee structure for your design firm, you should factor in both short-term revenue, which relies on a profit-maximizing fee structure, and long-term growth, which depends on happy clients and referrals. The three most important questions to answer when considering your fee structure are:

  1. Can I sell it? Does my client understand the value of charging for my services this way?
  2. Am I protecting my business from losing money in the event something goes wrong or the project goes longer?
  3. Am I maximizing my profitability?  

Let’s use these three questions to analyze the most common fee structures in our industry: hourly, markup (cost-plus), and flat-fee.

 

Charging hourly: Mixed ability to sell, high protection, low profitability

Charging hourly: Can I sell it? Does my client value it?

In general, while hourly projects may be easy to sell to clients initially, they often end up causing resentment. On the positive end, hourly is very easy for clients to understand—they’re going to pay a set rate for every hour you work on their behalf, and you can give your client a projected hour budget and cost for their overall project plus furnishings. It’s just like every other service provider who charges based on time. Sounds easy, right?

Unfortunately, hourly pricing has the notable downside of requiring you to constantly justify your hours spent. Clients have no idea how long something takes, and what seems like ordering a “simple sofa” to them could take hours on your end. You are forced to continually explain what you spend your time on, and they may think that you’re being intentionally slow (as to bill more), or even worse, that you’re a bad designer who takes too long. Clients also dislike how hourly is utterly unpredictable—while you may give a decent estimate of how many hours a project will consume, the second you go over that budget, clients will start complaining about how much the project is costing them. There can seem to be no end in sight for clients, causing the relationship to spiral downwards.

 

Charging hourly: Am I protecting my business?

As long as you set an hourly rate that considers your labor and overhead costs, yes. If you are charging hourly, you should be billing your client weekly or biweekly, meaning if the project is cancelled after a month or two you still got paid for your work. You can easily put in provisions that halt the project if a client hourly invoice remains unpaid for longer than a few weeks, protecting yourself from unresponsive clients. If your client decides to order products directly from vendors, you still get fully paid for the work you put into the design. If your client uses less than their hourly projection, that frees you up to work more on additional projects. And as an additional bonus, your client has an incentive to make quick decisions, as they’re being billed for every hour of indecisiveness.

 

Charging hourly: Am I maximizing profitability?

Definitely no. Charging by the hour is an unscalable model—the amount of money you make is limited by how many hours are in the day. You have no upside at all—given that the hours spent are equal, a project with a $100k budget has the same profitability as one with a $10M budget. While your revenue may be relatively predictable, charging only on an hourly basis means that  each hour you don’t work is lost income. Your business should be making you money whether you’re directly putting in hours or not.

 

The best fee structure is one that maximizes your profit, aligns everybody’s incentives, provides predictability to the client, and provides protection to the designer.

 

Charging markup: Hard to sell, low protection (can be improved by also billing hourly), high profitability

Charging a markup: Can I sell it? Does my client value it?

Charging markup (a.k.a. cost-plus) is probably the hardest method to explain and sell to a client. Instead of a collaborative relationship, charging markup can create an adversarial merchant-customer relationship with your client. Designers charging markup have a financial incentive to specify the most expensive furnishings, while clients being charged markup have an incentive to buy items without telling you to avoid paying your fees. Your clients may see you as someone constantly trying to sell them the most expensive item, as you make more money that way.

With the transparency created by the internet, it’s easy for a client to look up the retail price of comparable furnishings and question your fee. Charging a markup invites the dreaded question, “Why am I paying you 30% more just to buy this thing?” Now, we all know that the 30% really isn’t to pay for simply buying a specific item; it’s to compensate for designing all items, tracking all items, consulting with the client, overhead, etc. While your client will probably readily understand your 30% fee for the custom rug you designed and specified from Nepal, they will question why you deserve the same 30% profit for a stock chandelier bought at Urban Electric.

If you also charge an hourly fee, clients may question why they are paying you markup on top of paying hourly for your services, viewing it as “double-dipping”. Successfully selling an hourly + markup contract to a client requires some sort of phasing in your fee structure. For example, Fuigo co-founder Bradley Stephens of Stephens Design Group charges hourly for ideation and design work but only charges markup for activities related to the specifying and ordering of furnishings.

 

Charging a markup: Am I protecting my business?

If you are only charging a markup, then definitely not. While your time is mostly spent up front, with specifying and designing, you don’t get paid until you actually purchase. If the client cancels the project before you get to the purchasing phase (or cuts the purchasing short, below expectations), you lose out on profit. There is little relationship between when you work and when you get paid—you might spend 40 hours speccing a rug, but if the client changes their mind at the very end, you get paid exactly $0.

Charging only a markup gives clients no incentive to make decisions quickly. As your time is free to clients, they will take as much time as they want to make decisions. And if your client is taking too much of your time, you miss out on revenue from other projects you could have potentially taken.

Additionally, since charging markup only pays out when your clients make a purchase, if your firm does not also charge an hourly or flat fee, you open yourself up to the risk of non-compensation in the event a client cancels the project.

A good way to protect yourself is to charge an hourly fee for any services you perform (e.g. meeting with contractors, supervising installation, preparing drawings) and a markup percentage for any purchasing-related activities (e.g. shopping, specifying, and ordering). Another good protection strategy is to collect a fee retainer ahead of time that will cover a large portion of your expected markup fees.

 

Charging a markup: Am I maximizing profitability?

Generally speaking, yes. Charging a markup is scalable, as the amount of money you make is directly correlated with how much your client is willing to spend on their project. You do not need to put in extra hours to make more money—all you need to do is find a project with a larger budget.

 

Using your fee structure to align both you and your clients' incentives makes for a better and more collaborative process all around.

 

Charging a flat fee: Easy to sell, protection level is based on your contract, profitability is based on good estimates and protection

Charging a flat fee: Can I sell it? Does my client value it?

Charging on a flat-fee basis is the absolute easiest thing for clients to understand, and it gives clients what they truly want—predictability. Clients get an exact number for what your services will cost, plus whatever they want to spend on furnishings. Everybody’s incentives are aligned and you can work harmoniously with your client—your client feels no pressure from you to buy high-priced items, and you feel no resentment from your client for going over any budgeted number of hours. You can pass on your trade discount to your client with no strings attached. Your client can even take your design advice and then go buy that item themselves—you’re getting paid regardless.

 

Charging a flat fee: Am I protecting my business?

Flat-fee billing can give you predictability, but unless you put in protections and boundaries in your contract, you open yourself up to risk. Alan Siegel’s post on The Journal mentions a few protections that every flat-fee project must have in order to remain profitable. At a minimum, your contract should protect you from situations where a project runs longer than initially agreed upon or when a client takes too long to make up their mind for a specific item.

With properly structured contracts, flat-fee projects should allow you to collect money from your client on a weekly or biweekly basis, regardless of whether items were purchased or time was spent. This creates a predictable cash flow that gets you paid whether or not the client ever buys anything.

 

Charging a flat fee: Am I maximizing profitability?

Definitely, as long as your estimates are accurate and you have built in protections into your contract. Alan Siegel’s post talks about this as well—your flat fee should be based on your expected markup, and you should put in protections so that you get paid more if your client exceeds their budget.

 

What is the best fee structure?

The best fee structure is one that maximizes your profit, aligns everybody’s incentives, provides predictability to the client, and provides protection to the designer. In fact, the best fee structures blend the positive attributes of hourly, markup, and flat fee billing. The most successful fee structure I’ve seen has the following attributes:

  • An upfront fee explicitly based on the client’s furnishings budget, with additional markup collectable for budget overruns. This gives the client predictability and control over their budget while maximizing your earning potential.
  • A fixed length of the project or predetermined number of design revisions, with additional fees collectable for time overruns. This protects you so that every hour you work is paid time and ensures you get compensated for client indecision or unexpected delays.
  • Monthly or biweekly billing, with protections that halt design work if bills are more than 2 weeks overdue, and with all work billed in advance.

Using your fee structure to align both you and your clients' incentives makes for a better and more collaborative process all around. I'm confident that with proper planning and well-written contracts, you too can charge for your services in a way that makes your projects a win-win for everybody.

  

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