Tuesday, May 13, 2014

Mysteries of Underbidding in Visual Effects: Underbidding for Effect and by Mistake

Part one of this series is here.

In part one of our series on the “mysteries of underbidding in visual effects”, we discussed some of the reasons why a vfx production company might deliberately underbid a project where underbidding is defined as charging less money than they theoretically “ought to” have.

I realize that I had left out a very important type of “deliberate underbidding” in part one and that is “underbidding for marketing” or perhaps "underbidding for effect".  It is the phenomenon of bidding at one price but fully intending to spend more money than budgeted in order to achieve a certain level of quality. Robert Abel & Associates was famous for doing this. Every year, at least one project and generally more than one, was given this special attention. The studio would work extra hard on that project and of course it would go over budget, but generally when we were done we had done work that no one else in the world (or very few) could do. The result was that we had excellent, recent work on our reel which we could use to get the next year's worth of work. And of course we had a very happy client, one would hope. Another fringe benefit of such a project is that it helped with recruiting and keeping artists and technical directors as they knew there was a good chance that they would be working on some of the best work of its type in the world. Of course, Bob was considered crazy for doing this, but it worked well for him for many years.

But there are three other categories of “underbidding” and they are (a) underbidding because of a mistake (misunderstanding the scope of work), or (b) underbidding because of coercion, or (c) the project was not particularly underbid at all, except maybe in retrospect, because there are politics going on above and beyond merely getting the work done.

We discuss the “By Mistake” phenomenon in this post.

First, lets recall what a “bid” is. It is essentially an estimate for what a facility thinks they can do a project for, in conjunction with a schedule and other terms and conditions of a contract. It is the facility's combined judgment about what it will take them to do the work described by the client in storyboards, the script, discussions about the project and knowledge that the facility has about what it is like to work with this client and do this type of work. That judgment includes calculations of overhead, of labor, of capital improvements (e.g. computers) as well as opportunity costs and so forth. If the new company has to move during a project (and many new companies have to move), that is also included implicitly in the budget and schedule. It also has built in ideas about the kind of service that the facility will provide and the client will receive. It will not surprise you to hear that a new company will rarely be able to charge the same sort of fees that an established player with many projects to their credit can charge.

Now when a facility is new, they may not have their costs and production processes completely understood. Often new facilities are started with “enthusiasm” and “optimism” which usually means that they have naively underestimated what some of the costs are. Or they may have made some clever arrangements to keep their costs under control but discover that those arrangements do not work out in the real world as well as they do when they are being conceived. Or any of a hundred things that can occur when you are doing a startup.

Also, all leading edge companies in visual effects and other types of advanced media are doing R&D at the same time. If they are not, then they are in the process of going out of business, or at least ceasing to be a leading edge company. Some of this R&D is leaking into the production process in what is hopefully a sane and rational way, but sometimes not always. Some of this same R&D is then lied about, I mean used, in the marketing for the film. Why it may even be that a famous director will claim to have invented some technique that has been in use for 20 years. The point is that a new company in particular is doing R&D and writing software and so forth and that is part of who they are, and has to be paid for.

In terms of startup capital, visual effects companies come in three categories: No startup money whatsoever, a few million from an inheritance, or giant gobs of money from a large corrupt, international media corporation.  For examples of the "startup by inheritance" look at MidOcean Motion or R. Greenberg and Associates and a probable few others in the early days of computer animation that I am less certain of.

Those without any money pay for everything out of production fees, which is a particular form of semi-insane self-destructive behavior. Extraordinarily hard to do, yet always unrewarded, these companies pay for everything out of their fees, and if there is a problem with getting paid they are out of business.

But if they are financed by a large corporation, see for example Sony Imageworks, Digital Domain, the Secret Lab, WBIT, etc, they may gleefully dump millions, possibly hundreds of millions, down the toilet having nothing to show for it but a bunch of cold machines and hot people. Those lucky companies (not me, folks) can now proceed to try and make a profit paying back the interest and principle on those millions of dollars. You see, that money they spent turns out not to be a gift, it was a loan, and intended to be paid back.   How could they have known?  (1)

Therefore, if an unfinanced production company new to the field, bids on a visual effects project and by mistake underbids it, they are faced with some grim choices very quickly. They can either return the project to the client giving them all work done to date, apologize, walk away, and hope they do not get sued. They can try to finance the shortfall through other projects going through the shop which happen to be more profitable. They can try to get the client to accept lesser work. They can fire everybody and the founders can try to finish the project on their own in their garage without pay (usually the founders are not paid anyway).

Therefore, I think you will agree with me that the unfinanced production company rarely makes that kind of mistake twice. It would be better to not get the job than to underbid it and have to make it up somehow. Life is too short.

Of course, the well-financed company can simply choose to spend money they have received for startup purposes in getting the client's work done. To the best of my knowledge, every single well-financed visual effects production company has done exactly that when starting out. I don't think that is a particularly good use of their investors' money, but that is just me.

Therefore, I propose to you that underbidding by mistake rarely happens outside of a new production company, at least in the case of one that is not well-financed.

The real reasons you often hear about underbidding in the context of some sort of problem during production probably is not because they made a mistake bidding the project, except in one glaring circumstance, which is the subject of our next post.


1. Now you are a vice president of another division at the company, only you are expected to make a profit with the money you are allowed to spend, whereas the idiots in visual effects, just *spend* the money and never make a profit, not a profit as it is defined in real business.   Do you suppose that some ungrateful wretches at such a company might try to kill the stupid visual effects department that just loses money?  What do you think?

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