It is quite common for creative agencies to bill clients under a monthly retainer agreement. In fact, it’s preferable to billing clients under a time and materials contract. The agency gets paid up front on a recurring monthly basis, so they know the revenue will be there and can manage their client projects accordingly. And the client receives a chunk of time granting them access to designers, developers and other creative types.
When a creative agency enters into a monthly retainer contract with a client, they are selling units of time — a precious and limited resource. Therefore, the time spent on each client project needs to be closely tracked and managed. If your creative agency is going over — or coming in under — the hours contracted to each client, you need to know.
How you manage the time allotted under a retainer agreement depends on your agency’s billing methods. Some agencies will allow their clients to roll unused hours over to the next month. Other agencies will bill for overages and expire unused hours. And some agencies simply just wipe the slate clean each month and start afresh with a new bucket of hours. Do whatever works best for your agency.
More important than how you are billing a client for a monthly retainer is whether or not you are tracking your time. Tracking your time on each monthly retainer can answer the questions that commonly plague agencies. Are you going over, or coming in under, the allotted hours on any monthly retainers? What is the actual hourly rate on this project? Can creative team take on another monthly retainer?
Are you over or under the allotted hours?
The worst thing that can happen to a monthly retainer is repeated overages. One month is okay. Every month? Not okay. If a client is taking advantage of your agency, or if you underestimated the amount of time required, it needs to be addressed. The upside to a monthly retainer is that it can be renegotiated each month. The number of hours and the dollar amount are subject to change. The downside is the client may decide not to renew the monthly retainer.
Tracking your time on monthly retainer agreements will quickly identify which client projects need to be addressed. It may be a simple conversation with the client, explaining to them that the number of requests needs to be reduced to more accurately reflect the agreed upon hours. But it may also require renegotiating the contract to reflect the reality of the client’s current workload.
What is the actual hourly rate on this project?
When you repeatedly go over the agreed upon number of hours, without billing for the overage, you dilute the value of your billable time. Your team can only work so many hours in one day, so it makes sense that you would want to bill the highest reasonable amount for that time. The data you accumulate from time tracking will tell you exactly how much you are billing per hour.
Time is the most valuable asset your agency has to offer. Each hour over budget on a project dilutes the value of the hours already worked. Go over on enough projects and this dilution of time will start cutting into profits. For example, if my hourly rate is $100 per hour on a monthly retainer for 50 hours, a 5 hour overage reduces my hourly rate to $90/hr. Ouch. As with any small business, it does not make much sense to do more work if you are not getting paid for it.
Can you take on another monthly retainer?
Working with clients on a monthly retainer is one of the best ways for creative agencies to regulate cash flow and build recurring revenue. They are so effective, in fact, that you will find yourself wanting to take on more and more of them. But, should you? Can your creative team take on more hours, or do you need to consider hiring someone?
If you’ve been tracking your time, you will know how many hours your team can bill, on average, per month. Just pull up a report in your time tracking app and run the numbers. If your team of four can bill 600 hours a month, and you’ve already committed to 550 hours a month, you will need to be careful how many more hours you commit to a new monthly retainer.
Monthly retainers are a great way for a creative agency to bring in recurring revenue. But if you aren’t tracking how much time your agency is spending on these contracts, you may find yourself struggling. Projects may lose money by repeatedly going over their monthly budget. The team may become overworked and start falling behind. You might diminish the dollar value of your billable time.
All of these potential scenarios can be easily avoided, simply by using online time tracking software. Want to get started tracking your time? Try a free 30 day trial of our online time tracking app, Intervals.