Underbidding Visual Effects
One of the most problematic issues in the VFX industry, besides subsidies, is underbidding
This is where a company knowingly underbids what the company estimates it will actually cost to do the proposed work. It's also known as 'buying a project'.
This isn't done by just up and coming companies. Large, well established companies even in subsidized areas underbid frequently.
It doesn't take a financial wizard to see intentionally losing money on a project is not a good long term plan. In fact it's not even a good short term plan.
Why do companies underbid?
If a company in a location with no subsidies is bidding against a company located in an area with a subsidy (paid by a government) then they will likely have to underbid just to have a competitive bid to make up for the 20-60% difference. It's not like there's a 40-60% markup so that reduction has to come from the actual costs. Even companies in subsidized areas have to compete against other companies in more subsidized areas. That 20% subsidy looks good until you need to compete against a company with a 40% subsidy.
Currently there are too many VFX companies for the amount of work available. If there weren't then most would be busy most of the time and would have no need to underbid. That's why the notion a lot of people have about starting a VFX company because they're not working, is flawed. And too many VFX companies in turn means that there are too many VFX professionals. Those considering a career in VFX should rethink because the odds are very much against you, despite what the for profit school ads may say.
3. Poor management
Many running VFX companies have no business training or background so will make these types of decisions based on a feeling of desperation. They'd rather be bailing water rather than considering fixing the leak. Rather than try to make decisions based on long term issues they are making rash decisions.
Companies think they need to underbid the work to make sure they have work. They look at the dozens or hundreds of people at their company and the large cost that incurs. Larger companies can be burning through $1 million dollars a week in payroll costs alone. So the thinking is even if they lose a few million on the project it's better than losing even more by not doing so. The money offsets a large portion of the losses.
And underneath the decision to underbid is the notion that somehow they can make up for it. The crews can work a bit harder, they can be a bit more efficient and that things will go well on this one project to turn an underbid project into a break even project. That never happens. Directors do not stop changing or adding shots until someone with authority (the client) tells them they can't due to time or money. What ever budget and time allowed will be filled.
The hope is also that even though they are losing on this one they can make it up on the next one. That type of thinking can work in some industries where there are very big hits to offset some losses (films, products), but in visual effects there are no big hits. A company may be in the black on the next project but the tight margins in visual effects are hardly enough to fund that one project, impossible to make up for losses on one or more other projects. And that means any profits that might be made on the current project have already been spent on the previous project just to cover the losses.
And unlike some industries (contractors to the government) it's impossible to make up for the loss from underbidding with change orders and extras. Most vfx companies are reluctant to even submit valid change orders, the fear being if a client feels they were charged more than they expected, that company will never get work again from that client.
Impact of Underbidding
No company can continue to lose money indefinitely. While underbidding may seem like it's slowing the bankruptcy of the company, it is still going bankrupt. At some point the investors or the creditors will have enough and make radical changes or will simply close the company.
Some people think that's up to each company and if they wish to underbid where's the harm in it other than the company that goes out of business. But it certainly affects more than just the one company.
When a company goes out of business it likely will mean the workers will not only lose an employer, they will likely lose at least one pay period, possibly more. Any accrued health care, vacation or other benefits will be instantly gone.
When a company goes out of business because its been operating in the red it is likely do so at a very inopportune time such as the middle of a project or even worse on the major crunch period right before completion.
We've seen this scenario played out and affecting both workers and clients a few times just in the last year or so and it's a painful process for the workers.
When companies underbid it not only affects that company, it affects all other companies and the people who work for them. A company that underbids erodes good companies who are attempting to operate a visual effects company as a real business instead of a lemonade stand. A company that is bidding using actual numbers is now losing business not due to true competition but because a business is choosing to commit long term bankruptcy. A good company can only lose business for so long before they close.
And that's when other companies start jumping in with the same idea. Now instead of one desperate company, underbidding may be creating a half dozen companies that are getting anxious. Once they start doing the same thing, which some are, the quicker the race to the bottom happens not only for those companies but the entire industry.
Clients also get a very skewed sense of what the actual cost of doing visual effects is when companies underbid. Some clients will assume the company knows what's its doing and others will be aware but will feel compelled to take full advantage of the situation while they can. Money is a compelling substance and can cause loss of reasonable thinking on both sides.
What can be done
1. Don't underbid. Even Kansas arborists have a code of ethics that prevents them from learning other bids from clients and underbidding each other. No such ethics exists in the visual effects business. It's been said some companies have a 'we'll beat any bid' agreement with the studios. If managers can not operate a company morally then they should not be running a company.
2. Operate the company as a real business. Any idiot can run a business and lose money. When millions are at stake along with hundreds of workers, it can no longer be run by the seat of pants and wishful thinking.
3. If the company is unable to make money then the owners and investors should examine the problem and consider making improvements or they should consider closing or merging. Taking other companies down with you to bankruptcy is not a plan.
4. Lay off workers when there is no work for them. Keep a small group of key people to keep the company running between projects. The reality is film and other media work are project by project. The studios do not keep crews employed between projects. If the company is located near similar companies (real VFX hub) and the industry is healthy then the workers would likely be able to find other work as it shifts from project to project. It's when companies set up in a distant location or when the actions of a few make for an unhealthy industry that this becomes a problem. Now it may seem to be better employing the workers and get some funding but that is simply eroding the industry and its better to have workers make a short term change rather than trying to work long term in an unsustainable industry.
5. Have the visual effects companies form a trade association like other industries. Put aside petty, non-business issues and work together to stabilize the industry. Have a basic code of conduct and ethics for companies to abide by.
The same problem of underbidding happens with individuals. Graduates and those starting out think they have to work for free simply because a company posts a job offer saying so on Craigslist. Too much competition makes them more than eager to work for nothing which in turn causes companies to consider lowering all wages. When companies start dropping experienced professionals to hire cheaper labor (another poor business plan) then what do the newer workers think will happen to them in a few years?
Some workers go out on their own with the intention of truly being independent contractors but these people almost always underbid as well. Frequently they charge less than they were making while working for a company. Some may choose the same rate but they fail to understand even the basics of business. When you're working for a company it costs the company more than simply your pay check. Most of the time there are benefits, taxes or other costs that you may not be aware of these. These may be another 20-40% above your pay. As someone working for themselves now all taxes will need to be paid by you along with health insurance, your computer, software, etc. It starts adding up quickly. Vincent Laforet has written about the cost of doing business as an independent photographer.
Place a value on what you do. Do not underbid. Consider the long term consequences. If both companies and individuals are only focused on being the cheapest above everything else, then the quality and the creativity will fail along with the business.