Agency Billing Practices

Have you ever wondered how your PR agency comes up with the costs that appear on your invoices? You are not alone. Below is a guide on how to better understand the invoices that you receive from your PR agency.

In order to effectively manage budgets and maximize ROI from your PR agency, it's crucial to understand the agency's business model and the basis for their budgets and invoices. It's important to have an open discussion about your agency's billing practices before you sign on the dotted line. And, if you don't already know your agency's billing practices, it is never too late to ask.

Key billing practices to evaluate include:

Hourly Rates (Professional Fees)
As detailed in an earlier Maximizing Agency ROI column about agency business models, most PR firms generate their revenue by billing for each hour of service they provide - much like a lawyer does. Typically, every account person in an agency is responsible for completing a timesheet at the end of each day to indicate how much time he spent providing services for each client. Most agencies require their account people track their time in 15-minute increments - so every 15 minutes they spend working on a client's business, whether it's writing a brochure, coordinating event logistics, writing a plan or participating in a meeting, gets recorded and billed to their clients.

How does this process of tracking time equate into your PR agency costs? Your monthly invoice will reflect the total hours worked by each account person on the team, multiplied by each individual's hourly rate. Each account person's hourly rate is determined by his title in the organization and his experience level. For example, at a national or international agency an account coordinator/account executive in Toronto, who might have a year or two of PR experience, and often a PR diploma in addition to a bachelor of arts degree, might have an hourly rate of approximately $100/hour. At the same agency, a vice-president, who typically has 10 or more years experience and leads a practice team, might have an hourly rate of more than $200 an hour. Rates vary across the country and from agency-to-agency.

Prior to beginning any project, you should have a clear understanding of the experience level and hourly rate of every member of your proposed account team. Your agency account manager will work to ensure that the right person is being used to perform the right task (i.e. it doesn't make sense to have a VP stuffing media kits at a rate of $250/hour) but it's valuable for you to understand the billing structure and each team member's hourly rate so you can double-check that the right team member is being assigned to the right task for maximum value.

When comparing agencies and their hourly rates, it's also important to compare account staff based on experience and job description - and not just titles alone. An "account manager" at one agency can possess different levels of experience versus an "account manager" at another agency - so when doing a competitive analysis on rates it's important to understand the experience level and responsibilities of people/titles at each agency in order to compare apples to apples.

Admin Fees
On top of the professional fees, some agencies charge an additional administrative fee to compensate for a variety of factors including storage, electronic communications, telecommunications, etc. Some agencies build these admin costs directly into the fees while others separate this cost over and above the published hourly rates. It's important to understand if an agency charges an administrative fee, and if so how much (it's usually a percentage on top of fees), in order to accurately compare agency costs.

Mark Up
Most agencies will also include a mark up of between 15 - 20 per cent on top of out-of-pocket expenses incurred on behalf of their clients i.e. for catering, venue rental, third-party suppliers, etc. A standard practice, this mark up covers the administrative costs of handling and paying the invoices, compensates the agency for covering the costs in between getting invoiced by the supplier and being paid by the client, and generally acts as a disincentive to encourage clients to pay for significant out-of-pocket costs themselves to avoid significant cash outlays and the agency "playing banker" on behalf of their clients.

If you have a project with considerable out-of-pocket expenses and if you (and your accounting department) can process the supplier invoices in a timely fashion it's worthwhile to request that third-party supplier costs be invoiced directly to you - if your agency is amenable to this arrangement. This should be done with the agreement that the agency will still supervise all supplier costs to ensure they are delivered within budget as part of their overall project management.

On projects with significant out-of-pocket expenses arranging for direct-to-client supplier invoicing can significantly reduce the overall budget - and this money can then be shifted to other activities that will deliver actual results and a higher return on investment.

Travel Time Expenses
If your mandate requires extensive travel, whether it's numerous cross country trips or frequent trips to your offices for meetings, inquire how your agency bills for travel time. Agency policies for travel time varies - some bill it at full rate (so if they spend 4 hours on a plane traveling to a meeting you get billed for 4 hours of their time) while others partial rates for travel time. Understanding how your agency handles travel time will help you to better manage your agency budgets. With this information in hand, some clients will go to their agency offices for meetings - to avoid spending their budget on local travel and focus their resources on getting results.

Policy for Budget Overages
We've all heard the horror stories of suppliers coming to their clients after a project with invoices significantly higher than the original project estimate. And while we never think it will happen to us, there can be times when projects can go over budget so it's important to identify in advance how budget overages will be treated to avoid any billing surprises. For large projects it's good to build a contingency line item into your budget (for example 10 per cent of the total budget) to cushion any unexpected expenses. Ideally, the agency should monitor the project and let you know at the first sight that the budget and/or scope of work might be exceeded - so you can evaluate and re-direct the project as required.

Investment/Business Development Time
In an effort to understand their clients' business and provide maximum value, many agencies invest time (a.k.a professional fees) into their client relationships and it's worthwhile to inquire what investments your agency makes in your business - for example, will they attend business update meetings or industry conferences at no cost? Do they create proposals and contribute ideas as part of their investment in their business? Some agencies do this as a normal course of their business so it's valuable to understand and appreciate the investment your agency makes in your business - and help to direct it where you believe it will provide the most value.

While it's important to understand agency billing practices, it's equally important to understand that most agencies are genuinely focused on delivering excellent work, generating results and developing strong, long-lasting relationships with their clients. Just as you likely wouldn't continue at your job if your employer took your paycheque away, an agency wouldn't be able to survive if they weren't compensated for the work they do. Creating an open dialogue about how your agency is compensated helps everyone to better manage the relationship, avoid any unnecessary budget surprises, and structure the relationship with a focus on value.

Published in PR Canada in 2005