Whether you are an investor or a member of a corporation, when you hire a production company to provide production services for a motion picture, original television project or original online content, there are several things to think about before and after signing that production services agreement.
Make sure the agreement is specific The agreement should specify exactly what services (and to what standards) the production company is responsible for performing and should include the total amount of the production budget. The production budget would ideally be broken down by account and included as part of the agreement.
The less specific the agreement is, the more flexibility the production company has in straying from your project concept, running over budget and missing a step in the production process due to it being unclear whose responsibility it was to perform this step.
You may also consider including a provision that any transaction over a specified dollar amount and/or any unusual, extraordinary transactions require your prior, written approval.
Other items to include In addition, the agreement should:
• Equipment rentals: Include a provision that if the company providing the production services will be renting their own equipment to the production, such equipment rentals should be priced at fair market value and third-party comparable costs should be provided. These will help to ensure that the production company will not grossly overcharge the production for the use of their own equipment.
• In-house Services: Include a provision that if the company providing the production services will be charging for the use of its in-house services, they will be charged at fair market value and comparable costs should be provided. In the same line as the above point, these will help to ensure that the production company will not grossly overcharge the production for the use of their own in-house services.
• Overhead Costs: Include language that the costs must be actually paid or incurred, and directly related to the production. You may even consider disallowing the charging of overhead items in the cost of production. Examples of overhead costs are the rent of the production company’s office(s), the salaries of the production company’s employees and the water, electric, trash, etc. services of the production company’s office(s). These costs are not relevant to the production of the project and may already be reimbursable to the production company by way of a separate overhead flat fee and/or percentage.
• Related-party Transactions: Include a provision that all related-party transactions should be performed at arm’s length. This helps to ensure that there is no collusion between the related parties and that the quality and standards that would be expected by those more willing to “shop around” will be met.
• Petty Cash: Include a provision that sets restrictions on the use of petty cash. Some examples are:
1. All petty cash forms need to be complete (including all receipts and an explanation of who or what the expense was for) 2. Transactions over a certain amount would be run through accounts payable and not petty cash 3. The lack of a receipt for petty cash items would require approval of the accountant/supervisor on the production 4. Reimbursement for personal items should not be allowed
• Tax Credits and Rebates: Include a provision that all available production tax credits, rebates and other similar incentives are being taking advantage of and are being reported. Several cities, states and foreign territories now have production tax credits/rebates available to qualifying projects. The value of all production incentives should be deducted from the cost of production.
• Right to Audit: Include a provision that grants you the right to audit the production company’s books and records relating to your project(s). This will provide you with the opportunity to verify whether the production company followed the stipulations of the agreement.
Looking at fees Once the numbers are in:
• Actual Spend: Compare the budget against the actual amount spent. As stated above, ideally, the budget would be broken down by account, and when comparing the actual amount spent to the budgeted amount for each account, it is easier to identify the area(s) where any excessive expenditures occurred and whether or not they had been approved.
• Costs vs. Accruals: Be on the lookout for actual costs vs. accruals. Sometimes accruals are charged to production cost and for whatever reason, are not reversed even when the actuals are booked to the production costs. In other instances, some accruals may never become an actual cost; however, the accrual is never removed from the production costs.
• Legal Costs: Take a closer look at legal costs. Make sure they are actually related to the production of the project and are not an allocation of the production company’s overhead legal costs or are personal legal costs of someone involved with the production and are not directly related to the production of the project. It also can be included in the agreement that any legal transactions require your written pre-approval.
• Hotel and Food Charges: Hotel and food expenses can be costly on a production. Clarifying valid charges in the agreement can help in ensuring that these types of expenses do not get out of control. This can be done by setting a maximum dollar amount for individual food purchases or by setting a fixed per diem. It can also be included in the agreement that all individual expenses need to be supported by a receipt and need to be approved by the accountant or supervisor on the production. It should be made clear in the agreement that no personal items are to be charged through the production.
• Production Costs Post Release: Be aware of production costs that are booked after the content has already been released. It is normal for some costs to come in late, like music costs and insurance costs. However, be aware of any costs that are charged several months or even years after the project has been released.
• Asset Disposition: Once the production of the project is complete, request the asset disposition information from the production company. This would include a list of assets purchased and how the asset was disposed of (i.e. sold, given away, put in the production company’s storage, etc.). If the asset was sold, the sale amount should be deducted from the production costs. It is likely that some assets were purchased rather than rented and these assets would be your property if you have paid all of the production costs.
Our team at GHJ has extensive experience in auditing production costs and performing other forensic accounting services. If you may benefit from our auditing and/or consulting services, or if there is any other way we may be of assistance, please reach out to myself or any of my colleagues at GHJ. We will be happy to help in any way that we can.
Sherri Carstens, CFE, joined GHJ in 2007 when her previous firm (owned by Steve Sills) merged with GHJ and has more than 30 years of auditing experience, with a focus on the entertainment industry. Her specialty includes profit participation audits on behalf of talent, investors, producers and…Learn More
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