Wednesday, April 23, 2014

Mysteries of Underbidding in Visual Effects: Deliberately Underbidding

This is the first in a series of posts on the psychology and process of bidding in visual effects.  In this first series, we look at the issue and problems associated with the so-called "problem of underbidding in visual effects" in which it is alleged that visual effects companies go out of business or get in trouble by underbidding a project.   There are at least four different categories of underbidding that does take place, perhaps, and they are when a visual effects company deliberately underbids, when they are coerced to underbid, when they accidentally underbid and finally, when they have not really underbid at all but the client is being an asshole.

A studio executive recently asked me why visual effects companies underbid projects. The context of the question comes from the commonly held belief in Hollywood that visual effects companies go out of business because they underbid projects and if they didn't do that then they would not go out of business.

Could it be as simple as that?   I guess all those visual effects dummys would have to do to avoid going out of business would be to raise prices.  See!  That wasn't very hard and now the problem is solved, right?

No, not really.

Usually the next words out of a typical director's or producer's mouth, after glibly talking about underbidding that causes industry instability which annoys them,  the next thing that they complain about is that visual effects is way too expensive.    “Oh my god, I cant believe how expensive these nasty awful ugly horrible visual effects companies are”, they say.  "In fact, what should happen is that the visual effects company ought to do the work for free.  Its the least they could do if they werent so ... well... greedy, awful, selfish!"

So we are going to examine this thing called "underbidding" and when we are done I think you will agree with me that it is a symptom of a much larger problem, that problem being that visual effects is a stupid business to be in.  You may quote me.

The first fact of life that one must realize about bidding on visual effects is that the visual effects facility is a “work for hire production service facility”. The facility bids to do certain work for the production at a fixed price and the money it receives on delivery is generally the last money that the facility will see for that project. When the project is over, if the facility does not have another project it must live on its profits and reserve, or just lay everybody off.

So what does underbidding mean?     Rather, what does underbidding mean to people who casually throw that word around?   It means that they think that the facility deliberately and willfully charged less money than they "should" have, and then got into trouble.   Are there any reasons why a facility would in fact deliberately charge less money?    Yes there are, and here are a few of them.   I think you will see that while not necessarily a good idea, that there are legitimate reasons that it happens from time to time.

It might be because they are using the project to get the work and expect to make a profit on other parts of the project. The technical term for this is “loss leader”. If you are bidding on a $1M compositing project and the film needs a few visual effects elements from your 3D group then you very well may underbid those shots to get the whole package.   In an area distinct from visual effects per se, pretty much all digital intermediate facilities are associated with a film lab and "back in the day" would do the DI work for less than cost in return for getting the work to make the prints for exhibition and other services.

Or one might underbid a project in order to break into a different part of the business, perhaps this might be your first feature film project, or your first character animation project. You might underbid the project to give a deal to the production so they will go with you although there are other facilities with a track record in that area that are also bidding.

Or it might be that you bid the project at more or less break even to be certain that you will have any work at all going through the shop because otherwise you will have to lay everyone off.   Running a visual effects or computer animation production facility is a lot like juggling for months or years at a time.   It is quite an art to keep enough work going through a shop so that you don't have to fire everybody.   Thus, a facility might bid a project at less than its full rate to guarantee that it has a certain amount of work going through the shop during that period.  

On a darker note, one might want to drive a competitor out of business so you take their work away by underbidding the project, knowing that you have other lucrative work to make up the difference and they don't. Then of course when you drive them out of business and steal their people, you raise your prices again. This doesn't happen all that often, only just when a facility thinks it will work, then they do it.  (Yes I am being sarcastic again).  In fact the business is filled with nasty players and people do this all the time, as well as using other techniques to try and drive their competitors out of business such as slander.  Every fucking day of the week.

Or one might deliberately underbid because you want to give the filmmaker your best price because you want to work with him/her, or you want to help them get their movie made.  Yes its true, there are such situations where a services company will try to help a small film production.  Pacific Title used to do this all the time, I believe. 

Or one might underbid (or bid at cost) because the client asked you to, promising that one can make it up with overages and change orders, a topic we will discuss in more detail later.  Again, this is very common.

Or you might underbid the project also because the client asked you to, but promised to work with you to keep the costs down and make it work for that amount of money.   Ha.

Or there is the ancient tactic of lowballing a project to get it in the door and then nickle and dime the client in order to make up a profit.   A facility that does this will get a reputation for doing it, and I have one or two in mind as I type this paragraph.

All of these reasons exist in the real world and I have seen all of them in play at one time or another.  I personally, or facilities that I have managed, have bid a project less than we should have for three of these reasons (because the filmmaker was a friend of the partners and we wanted to work with him and help him get his film done, to be considered for a project when we were new in the business and because the client promised to work with us and make the project work for the money available).

You are probably bored by this topic already, but that is just too bad.  Because now we go into the actually interesting stuff: when a facility is being coerced, when they actually make a mistake and what they should do, and when the client is just being an asshole and trying to drive them out of business or put the blame on the production company when it properly lies with the director or the film.

revised 4/25/2014
revised 5/9/2014

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