As a profession, interior design has its own unique set of fee structures that are specifically designed to suit the particular nature of the business. While the basic set of possible fee structures represents an overall industry standard, the individual components can be separated, combined, and customized into an endless stream of possible ways to charge for goods and services.
Due to the highly specific way interior design billing methods correspond to the function being performed, plus the wide range of methods that might be applied within one business, generic business software does not come close to responding to the specific needs of interior designers. Therefore, industry-specific support is an absolute necessity. This article will explain how Design Manager supports each of the common interior design fee structures and how easy the software makes staying organized as you combine and customize billing methods across your projects.
Common Fee Structures for Interior Designers
The following is a summary of the standard fee structures used by interior designers:
Fixed Fee: A set price for all design services defined in the scope of work
Percentage of Construction Costs: A fee based on the overall cost of a project’s construction
Calculated Area Fee: A fee based on a specified price for design services per square foot multiplied by the area of the project site (more common in commercial design)
Hourly Fee (Time and Material): An hourly fee for time spent by the designer on the project plus the cost of presentation materials
Cost Plus: A fee based on the designer purchasing products for clients at a wholesale price plus an additional specified markup
Flexible Fee Structures To Suit Your Specific Needs
The majority of designers employ a combination of the above fee structures, most commonly a pairing of Hourly Fee and Cost Plus. Caitlin Rutkay of CR Interior Design explains why this billing method suits her business needs, saying, “Regarding fee structures, we employ a combination of time and a customary markup of goods because it is good for cash flow and it protects trade pricing, giving me the ability to earn profit on product that I buy at a wholesale price” Brad Shark, an accountant and bookkeeper who has been working in the field for over thirty seven years, understands that interior designers have to adjust the amount of markup they charge to accommodate their business needs across different scenarios. He advises, “When considering mark-up percentages, I go by a simple rule of thumb- the higher the overhead of a design firm, the higher the mark-up is necessary to cover the overhead.” While some elements of overhead costs are relatively static, others can vary from project to project, so it is important to have flexibility in your formulas when employing Cost Plus fee structures so that you can always meet and exceed this moving target.
Design Manager offers three primary methods of pricing goods and services for your clients that are designed to meet the specific need of each fee structure, all of which are interchangeable and can be configured as a company or project-wide default setting:
- The first is a straightforward version of Cost Plus, which involves entering the vendor’s cost and adding an additional percentage of that cost as your fee. When entering the data in Design Manager, you can always control the outcome of a calculation, even if you have already set default markup or discount percentages for all of your projects. For example, imagine that in one of your product entries, or items, the base price plus your markup equals $2,400, but you want the total on the client invoice to round up to $3,000. You can manually adjust the sale price number to $3,000, and the markup field will adjust to show the difference.
- The second is a reverse method of Cost Plus, called Discount off of List. This suits scenarios where vendors provide a retail price that clients can see on a price list or website. Your fee method is to offer clients a discount off the retail price. In Design Manager, you simply create or open the component of the item you are charging for, set the type to discount and enter the discount rate, if not automatically populated per your settings. Calculations are adjustable, just as they are in the first method.
- The third is the Designer Purchasing Fee. This method is commonly used by design firms that are acting as purchasing agents, where the clients, often commercial, are paying vendors directly. The design firm makes money by procuring and processing the orders. The fee is a percentage of the cost itself, even though the client is paying the cost directly. The fee that is calculated is only a fraction of the base, because the client is only paying you a procurement fee.
If you set any of these to be your default, Design Manager will automate the components you create for billable items to reflect your desired pricing structure. You also have the ability to set different markups for merchandise, freight, crating, install/labor, and design fee. Alternatively, each component you create, even within the same project, can be set to a different pricing structure, allowing for maximum flexibility.
Time Billing & Retainers
Time as a billing component also has the same advanced settings options. This is the method of charging a flat hourly fee for your time, plus the cost of your presentation materials. In order for time billing to be profitable, you must keep track of all company time spent on a project, down to every last phone call. Peter Lang, The Designer CPA, is an accountant and tax consultant who specializes in working with interior designers. With over fifteen years of experience, Peter’s advice comes from his extensive first hand knowledge of the most common business mistakes made by interior designers. He says, “The most important thing for deciding how to charge is making sure you are charging enough! It is important for each designer to keep track of all of their time and bill at an hourly rate that they deserve.”
Managing time billing is a breeze with Design Manager. The process for creating an entry for billable time can be done through our iPhone app, time import, or just like entering any other component in Design Manager. You can create an entry for just time to be invoiced, or you can add billable time to another invoiceable item, again, at adjustable rates. While a breakdown of the charge will be saved in your Design Manager back-end, you can decide how much detail to show on the invoice you generate with the software. With this advanced feature, you can factor in the value of time without directly charging a separate fee.
Design Manager is even more customizable when it comes to time entries because Pro Cloud allows designers to bill by Activity or by Employee with tiered rates and override options for each.
If consulting fees are part of your pricing strategy, you can also set Design Manager to automatically create time billing items for a set period of time (i.e. weekly, monthly, etc.), again with customizable rates. It can even create automatic time entries with more specific data by using the timer function, which enables you to start and stop the clock on a timer while working through emails, meeting with a client, or doing other project-specific tasks.
Also, it is common for designers to begin each project by collecting a retainer, a portion of the design fees, from the client. Collecting a portion of expected fees at the start of a project helps to protect you as a business owner in case your client is unable or unwilling to meet their financial obligations as a project progresses. With Design Manager, you can easily account for retainers and integrate them into your billing methods. If you want to apply a retainer while you are making an invoice for a client, there is a place at the bottom of the “New Invoice” window where you can enter the amount of the retainer to be deducted. If you need to apply a retainer to an invoice or proposal that is already in progress, Design Manager has also got you covered.
Why Industry-Specific Software is a Necessity
Whichever fee structures you decide best suit your service offerings and business needs, one thing is clear: you’ll need an industry-specific accounting and project management software to keep your data organized, maintain standard billing processes, and produce reliable, clearly formatted invoices. Because Design Manager was created to address the specific and integrated billing and project management needs of interior designers, it’s the perfect tool to help you stay in control of your business. Not only will it record and organize your data according to your customizable fee structures, but it can also create branded, easy-to-read client documents that will help you provide a smooth experience for clients. It can also provide useful financial and project management reports, making the most of the data you enter to help you understand the bigger picture.
The unique business model of interior design and its variety of possible fee structures call for business tools designed to address your industry-specific needs. After all, your passion is design, so the more you can count on software such as Design Manager to keep your business in check, the more you can focus on doing what you love.
If you enjoyed this blog post, please let us know in the comments below and check out our Markups, Discounts and Fees Webinar for more tips on pricing.