Sunk Costs, Budget Plummet and Houston

by seanlow on September 1, 2017

Although it might not appear parallel, the unbelievably horrific events that happened in Houston and surrounds and reducing budget for a creative budget all center around a firm understanding of sunk costs.

As every finance course will teach you, any investment analysis of a future project has to begin with ignoring sunk costs. Easy enough when you are looking at a spreadsheet and doing a math problem, not so much when you bring humanity into the equation. Nonetheless, the rule still applies. Salvage value is all that matters. What can be transported over to the new project DIRECTLY and SPECIFICALLY. Sort of maybe could use and the unusable are completely irrelevant to your thought process.

First, Houston. To overstate the obvious, there will be a massive disruption to the creative business in Houston. Events will be cancelled, design projects delayed and/or cancelled. Think about all of the events that are to happen between now and November 1st and what is going to have to be done to reschedule, relocate and/or assess the damage. How many homes under construction and/or in the middle of a redesign (a – the house likely is flooded, b) the storage facility too, and c) getting your sofa from the port is likely not priority one for the Houston government). Yes, there are Act of God provisions abounding so hopefully nobody is specifically on the hook, but still. Imagine if you are a planner (or any other kind of event professional) who has a huge wedding this weekend or next and your final payment was due last Friday when the storm hit. You have literally done everything you were contracted to do, save put on the wedding. If you were ready to install your interior design project this weekend and were expecting to get paid beforehand, probably not happening. Good luck getting that last payment. Yes, this is what business interruption insurance is for, but I am guessing most creative professionals do not have (or even know they could have) this kind of insurance. So both creative businesses are out a huge part of their fee for work already done. And the examples will abound for just about any creative business in Houston and surrounds.

What happens when the couple wants to reschedule the wedding for next year or the client decides to redo the design in their home? Is the creative business owner going to demand that she gets paid for what she did last time before she moves forward? You all might say, of course not, sunk costs, and you would be right, but also lying to yourselves. All of that work, hours upon hours, to be right at the finish line and then nothing. Yet, sunk cost is the answer and the creative business owner has to move on. If there are specific plans and details that directly and specifically carry over, then there might be some salvage value the client should pay for, otherwise, start over.

Harsh, painful, infuriating? Yep. Scream in your pillow, but move on. Here’s why? A new designer does not have the baggage and will not impute sunk costs (financial AND emotional) so will be in almost every way better for the client. No one said sunk costs were fun. They suck. But it does not make the rule any less true. You can only look at where you are and what is asked of you, your art and your creative business to complete the project requested. Budget plummet provides even more insight.

When the budget plummets because of whatever reason, the same approach as delays/terminations holds. You have to look forward and analyze whether the new project in front of you is worth it. A quick example will help things. If your minimum square foot price is $100/sf for a design project or if your per person price for a wedding is $600/pp or $120,000 for a 200 person wedding, this number does not change. So the first step is to make sure the new budget fits this rule. Let us say this was an awesome project to start and you were working at $200/sf for the design project or $1,500/pp for the wedding and they had to chop the budget to $150/sf for design and $800/pp for the wedding (go from $200,000 to $150,000 for the design project or go from $300,000 to $160,000 for the wedding). Still possible and the conversation can continue.

If it were $75/sf (i.e., $75,0000) or $550/pp (i.e., $110,000), you are done. Remember sunk costs. The work you have done to date is irrelevant. There is nothing to be accomplished by you finishing. The project does not make sense. You can try to collect the balance of your fee (good luck with that), but most important is that you are done.

Moving on though. Let’s assume the $150/sf or $800/pp and 25% of your work is directly salvageable for the new design (maybe floorplan stays the same) or new wedding (perhaps invitation design is set, even though calligraphy changes, guest list is the same, etc.). If your fee was $30,000 originally, we start with a $7,500 credit (presuming you have been paid for this work, if not, no credit). Now it is straightforward, what would it take for you to do a $800/pp wedding in the time left to get to the same date. If there is no time constraint, meaning no time crunch, then your fee is $22,500 and off you go. And if you work by percentages, live by the sword, die by it. If you get 15% of the budget (including fees) for the wedding with no minimum and you were paid for your previous work that you will directly salvage, your price is $24,000 less $7,500 or $16,500. For design, the percentage is likely higher (i.e., 35%) but the thought is exactly the same.

Of course, you have to manage lower expectations and be completely forthright in the idea that the two designs or weddings are not the same, but both are ones you would sign your name to (see above paragraph). Usually though, time is a constraint and you are asked to perform in a much tighter time frame. Again, still math. If your premium for time constraints here is a 40% premium to your usual price, then if you get 15% you would now charge 21% or $33, 600 less $7,500 or $26,100. Again, higher percentages for designers, but same thought. And, of course, the more the time constraint, the more you and your vendors have to charge. If this pushes below your floor of what you are willing to sign your name to, you have to quit no matter the emotional consequence.

Which is worse: feeling bad about walking away from a client that has literally pulled the rug out from under you (regardless of why they or nature did it) or signing your name to a project you will forever be judged by (and judged poorly by the way)? Not close for me. Respect your floor.

When you fully embrace ignoring sunk costs on every level, you will be able to put yourself in a position to decide what is best for you, your art and your creative business. Like everything else, when you get trapped in the past it is almost impossible to see yourself today, let alone create a future that will be the full embodiment of what you envision for you, your art and your creative business tomorrow.

One last thought on tragedies and disasters like Harvey. All of us want to do whatever we can to ease the pain and help those in need where we can. Whether those who we see suffering from afar or our clients who have had their dreams shattered. However, you and your creative business are not the same. If your creative business does something for $10, when the price should be $20, you have to account for the $10 investment made by your creative business somehow. Call it marketing, good karma fund, whatever. Because when you account for it, you can cap it to the limits of your creative business. There has to be a number you assign to this investment and you are not allowed to exceed this number. This avoids creating enduring, lasting, even terminal pain.

You cannot give indefinitely and certainly what your creative business does not have. We all need you, your art and your creative business to not only survive, but thrive. What you are willing to do personally, that is utterly and completely up to you. Please though, let your creative business stay in the notion that the air it breathes is not free and if you do not tend to your creative business consciously, it will suffocate. To be plain as day clear, nobody wins if your art dies in the name of goodwill. Let your creative business give what it can, but only what it can – that will always be more than enough.

Leave a Comment

Previous post:

Next post: