2 October 2010
Most contractual arrangements between event organizers and their clients include one or more advance payments from the purchaser (client) to the seller (event company), known as deposits. These policies, however, can vary widely depending on the size and configuration of the event business, the scope of products and/or services the event company is selling, the type and scale of the event, and nature and frequency of the client.
For example, many special event companies are selling a complete package that includes the venue rental, décor, food and beverages, entertainment, and all the other elements needed for the event, plus their design and management fees. In this case, the event organizer is sourcing, selecting, contracting with, and paying each individual vendor, and providing the client with an all-inclusive price.
Other event organizers may only be selling their design and management services wherein they will develop the event experience plan, source and select the vendors, and prepare the budget, but the client must then execute the contracts with and make payments to each individual vendor.
Many event organizers require a deposit of 50% of the all-inclusive price (or management fees) upon signing of the contract, followed by one or more deposits leading up to the event. Some require payment of the final balance 30 days, two weeks, or 72 hours prior to the start of the event move-in and set-up; some require the balance due payment upon arrival and set-up (after a walk-through with the client); and some allow 10, 30, or 60 days for final payment.
There are several things to consider when developing your deposit policy.
Time is money...
Whether the event organizer is offering an all-inclusive event price or only his/her design and management skills, taking on an event project consumes the event organizer’s time. Many organizers itemize their design and management fees as separate line items within their proposed budget; others (who offer an all-inclusive package price) may cover this fee by means of adding a percentage onto the price from each vendor (known as cost-plus). Once contracted to provide the event, the event organizer now has “lost opportunity costs” because he/she cannot commit to another client if the event agreement is cancelled, particularly if at the last minute. Also, event services are not a commodity. Costs cannot be recouped by selling that particular event to another customer.
I only spend YOUR money...
Each vendor used for the event will most likely have deposit requirements, as well as balance due payment prior to or at the event. These must be paid, either by the event organizer or the end client, in order to secure their goods or services. Some event organizers will structure their deposit schedule and amounts accordingly. This is a cash flow issue, ensuring that there is sufficient income from client payments to cover the costs of vendor payments.
I’m not licensed as a banker...
Clients who ask (or require) that the event organizer cover all the costs of the event until it has occurred are, in essence, asking the event organizer to extend them credit; in other words, they are seeking a loan. When individuals or corporations seek credit or a loan from a bank, they must show the lending institution their credit worthiness by providing their financial records. Many event companies do not have the resources to conduct financial background checks on potential clients. (And, frankly, their financial resources are typically far less than those of the client–especially for corporations–and they cannot afford to make this “loan.”) Of course, long-standing clients may be extended special terms or pricing because they have proven themselves to be a valuable (and profitable) customer.
What happens if…
Those event companies that do extend this credit (either as standard procedure through credit policies or under duress because they really want this piece of business) must carefully consider the financial consequences should the client cancel the event or default on payments. For example, given the economic climate, it is certainly conceivable that a corporate client could file Chapter 11 bankruptcy, in which case the event company would surely find itself at the bottom of the list of creditors. Even those event organizers who require deposits and pre-event final payments have received “bad” checks that they are unable to collect on, which is why many require payments several weeks before the event so that the deposited check will have time to clear through the client’s bank into theirs. (Note that the seller also has an obligation to protect the buyer's deposits from loss due to "non performance" on the part of seller. Deposit policies must be married to cancellation and refund policies for the protection of both parties.)
The start of something big…
Some clients ask an event organizer or company to extend credit or reduced pricing to them with the promise that, if the event is successful, they will be providing the event company with considerable (and lucrative) future business. (Skepticism is advised.) This often occurs when the client asks the event company to provide their goods and services as a “showcase” because there will be numerous other potential clients in attendance. Unless there are contractually-specified guarantees (such as in a sponsorship agreement), this should be considered pro bono work (Latin: “for the public good,” undertaken voluntarily and without compensation). These decisions should be based upon the event company’s marketing strategy or the event organizer’s personal charitable inclinations, and not unsubstantiated promises of future business by the client.
Payment schedules and cancellation fees (pro-rated according to your out-of-pocket, level of effort, and lost opportunity costs) should be clearly specified in both your proposals and your contracts. It is a good idea to discuss these policies in your initial discussions with a potential client so that you can either explain how you conduct business to an uninformed client, or to qualify a prospective client familiar with procuring events. Although some government or corporate clients have differing terms and conditions due to their internal procurement department policies, you have the option to decline that piece of business or decide to accept those terms. But this is a business decision. Make it an informed decision!