What does the term “costs of action” mean in a film budget? What is profit and what exactly does markup mean? Understanding a calculation for film or video requires a concentrated level of expertise.
Following an inconsistent practice for calculation and budgeting in film leads, in the worst case, to the suspicion that instead of cost truth, one is dealing with what Hollywood calls voodoo accounting, not without reason. When reading Budget, it’s like discussing camera types: a lack of knowledge quickly leads to black ice.
Therefore, this two-part article uses Best Practice and application examples to show what is meant by markup, cost of action or profit. We hope this will shed some light on the jungle of concepts of video calculations.
- There are three ways to calculate a budget. One can (1) show a lump sum; or (2) show profit and action costs separately; or show action costs and profit in one amount as (4) markup.
- It is rather unusual to offset costs of action / profit against internal or external unit prices.
- The representation by means of markup is common in the English-speaking world. It is also common practice when it comes to Production Services.
Action costs, profit and markup in the film budget
Depending on the sender, the budget does not only contain a total sum, but it also partly contains additional expenses that seem to be detached from the actual film production.
These are added to the production costs as costs of action, profit or as so-called markup (“mark-up”). Many clients wonder what exactly these costs include and why they are not always shown, and if so, why they appear under different names.
The term markup, on the other hand, which comes from the English-speaking world, is unfortunately often used in film budgets as synonym for action costs. This is wrong.
In the following explanations, markup (also called mark-up) is the sum (the total) of action costs plus profit in the video budget. For the recipient of a calculation, which only shows a markup, it is hardly possible to estimate how the two summed up items in the film budget actually relate to each other. Conversely, the markup is also the difference between cost and selling price.
Schematic representation of a budget for a moving image production with markup:
How a film calculation for a moving image is structured in detail is explained here.
Film budgets with markup are particularly common for films and videos that use the cost-plus mode. Cost-plus means that all effective expenses are disclosed to the customer and passed on with a percentage surcharge.
For this reason, such calculations never have the character of a lump sum budget, and the markup is only binding in its percentage amount. Because the absolute amount of markup to be paid is only determined after the project is completed, the risk of cost overruns lies with the client.
Because bearing risks only makes sense if the experience for risk and project control is available at the risk bearer itself, the markup model is used in the film industry in the video budget almost exclusively where partial orders of the project are passed on to subcontractors. For example, for filming abroad. They are the exception rather than the rule.
As an alternative to markup, profit and action costs can also be shown separately in a video budget.
2. action costs in the film budget
Action costs are defined differently depending on the industry. In a trading company, these are the costs incurred to provide a trading service. The purchase price and handling costs are the cost price. In production companies, action costs follow different rules. In this case, action costs are administrative overheads, possibly together with sales and/or acquisition costs. Action costs and project costs result in the production costs.
The typical plot costs in a film budget include a percentage of the administrative and infrastructure costs that are required for the production of a film but which have not previously been allocated to the project as individual costs. Typical cases for handling costs are office rent, financial accounting, contract management or copying to the machinery for image and sound processing.
Display of a film cost estimate (sample):
|Costs of action||10 %||1||20.-|
What in this example is summarized as a package (service package) covers many details in a calculation for video or film in reality. A schema for the structure of a detailed cost estimate can be found here. How much does a film cost (including a table with guide prices) and how much does an image film cost is explained in separate articles in FILMPULS.
Calculations in the film with stated action costs / profit are the most transparent form of budgeting. Those who calculate their film in this mode not only act professionally, they also convey to their customers a sense of security, long-term orientation and follow the dictates of sustainability.
Only business romantics would assume that a company without clean cost accounting and adequate profit would be able to stand up for its own performance promises in the event of a disaster.
Conversely, the professional producer must be able to justify the figures used in the calculation to the customer at any time in a comprehensible manner. Not only underpinned by experience and possibly third-party offers, but also in terms of production value and impact.
Profit is defined in the budget without exception as the surplus of income over expenses. Its comprehensibility is cross-industry. The sum of project costs and action costs plus profit results in the price offered to the customer.
Action costs and/or profit do not necessarily have to be shown as a percentage rate.
Calculations for smaller projects often add action costs and profit in the film budget directly to the individual project costs. This always makes sense if either the simplicity of the project guarantees transparency anyway (for example, in the case of web video series) or if the production offers the customer a flat rate and thus takes a risk.
Schematic representation of a calculation:
In the market for commissioned films, there are always calculations that tragically do not show costs of action or profits (or markup) in the film budget because the sender lacks the necessary basic business knowledge. It is therefore not surprising that around 40 % of the newly founded video and film productions have already disappeared from the market five years after their foundation.
Nevertheless, surprisingly, even internationally active corporations repeatedly rely on projects and providers with dubious offers. This was done in the mistaken belief that the company’s own legal department would, in the worst case, enforce the implementation of the contract. However, anyone who wants to enforce claims against a contractual partner that no longer exists or is no longer tangible will quickly learn that even lawyers cannot work magic.
Determine film costs online as a benchmark
With the Online Film Cost Calculator from Filmpuls, you can easily determine guide values for the prices of a video. Enter the length and genre and the calculator will show a guide value for both the cost and the time required for production. This is calculated backwards from the time the film must be completed.
Film calculations not only have a price, but also a value. Agreed, a film budget is a planning instrument for the allocation of funds. But not only. The film budget shows whether the abilities of the film partner go beyond the artistic and cinematic craft. It is therefore an important indicator of professionalism. And that’s right: communication is also part of the budget: in plain text communication is essential for understanding a film calculation and the future of commissioned films.
Films are projects and they have a price, which firstly can be negotiated and secondly may be negotiated. But the reverse is also true: If you, as a customer, turn the costs of action and the profit of your supplier through the most popular tool of the sausage industry, the meat grinder, you cannot expect a beef tenderloin in return.
Not only the question What does an image film cost or how expensive a CEO video may be is important. But also how these costs are made up. At least so far there is agreement: there are no expenses in the film, neither from the point of view of the purchase nor from the point of view of the producer. In the budget there are always only costs.
Film budget: continuation and further contributions
The continuation of the article series “Between Voodoo Calculations and Cost Truth” will soon be published in Filmpuls. Part 2 of the series on voodoo accounting in video and film (film costs) will explain how to read a film budget correctly and also explain what a film and video budget can and cannot achieve. The concluding last part (video calculation example) explains classic stumbling blocks in the application of a film calculation. The question how much do movies cost? is explained in a separate article.
An example of a calculation scheme presents the three-part Filmpuls series on budgeting.