Ethics of Working with Interior Designers

      Another long discussion about a perennial sore point for woodworking professionals: transparency and fair dealing in the relationship with designers. April 18, 2015

Question (WOODWEB Member)

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This past year, I have been approached by 6 "designers" that have laid out this pitch. "I have a great client that needs a kitchen and house full of custom work. You, the cabinetmaker will consult and handhold them, coordinate with a third party contractor and his subs, design, fabricate, install and invoice the customer. You will include 15% for me."

Now, I need a reality check. If I pay them 15%, are they working for me? Is it not incumbent upon them to at least have an overall design concept? The 15% they ask for seems to be the same 15% that would account for design/coordination, yet they are pushing this off to the tradespeople.

So, the 15% is a marketing fee. Why don't they call themselves sales people? Upon digging a little and chatting up some of the prospective customers, I have found that four of these designers are charging them hourly rates. I only talked to one contractor and he was asked for a 15% "kick back" also. Isn't this double dipping against the law or something? It does not serve the customer well. Have you come up against this same issue? How have you dealt with it? In the end, I did not even bid on any of these projects. I like to sleep at night.

Forum Responses
(Business and Management Forum)
From contributor R:
Fifteen percent for a kitchen and lots of custom work doesn't sound that bad to me. Guess you have plenty of work.

From Contributor M:
Fifteen percent is pretty customary, and while we don't do custom cabinetry - furniture design and build is our market - it's clear the 15% is a commission or referral fee. Normally they will come to us with a pretty specific idea, but it's not required.

From contributor C:
When a designer asks me for a kickback I give them my price for the job and they can do whatever they want with it. They are then free to charge whatever markup they feel they can get. Often times they know the customer’s budget and we don't.

From Contributor J

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Our numbers are smaller, but we invoice the designer that contracts us. Whatever they add on for 'design-fee' or whatever is between them and the end user. A 15% referral hand-off seems kind of steep.

From the original questioner

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Contributor C and J I think you are giving me an answer that I can work with. I should, just give the designer my price. If they add 15% or 100%, I really don't care. They will know the budget and market price. This would make most sense to me. I will not be hiding a mark-up in my price and if issues arise during the job, I can answer directly to the designer as they are the ones paying my invoice. This is the way it works when subbed from a contractor, so why reinvent the wheel?

From Contributor J

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Thanks and best of luck. I think that some designers don't want to churn the bigger sub-contract numbers through their accounts - nor be the last in the line for the sales tax papers and such. They just want to grab their commission and go.

From contributor D:
It used to be that 2% was standard for a finder’s fee, which, after all, is what they are doing. I don't know how you can include a 15% cut off the top. What kind of profit margins are you working on? That 15% really comes off your bottom line net, doesn't it? Or do you just inflate your pricing to cover it? I also think you should give the designer your price and let them deal with the client at whatever markup they want.

From contributor F:
I think that a lot depends on the specifics of your situation and your area. I rarely mark up my bids for anyone’s percentages. I have been asked several times but my answer has been the same as what the others said, here's my price, add whatever you want to it.

Architects and Designers get paid for their design work. Contractors get paid to organize other trades. Contractors mark up the work as they are the ones doing the finding, scheduling, and organizing of the other trades. The added percentage is their paycheck for running the job. In my opinion designers are not entitled to a percentage unless they are doing something to earn it. If they are the ones your meeting with, making phone calls to, and making all the decisions, then they are entitled to be compensated for their time. However I prefer they bill the client directly, (more transparent), but as I said, if they want to add to my established quote that's fine as well.

Contractors also add to your quote, you should not be setting aside your money for them. People will try to bend you over for money any way they can, best bet is to avoid those people if possible altogether. I now work with several contractors, and a handful of designers and architects who I consider legit. By that I mean they never ask me to add a percentage for them, nor do they do anything that is outside the client’s best interest. Though every once in a while something comes up that is too good to pass up - usually a job with a very high budget and for me a high profit margin.

From contributor K:
The designer is likely not licensed as a contractor, and can't legally contract work on their client's behalf. I don't think that there's anything wrong with paying a finder's fee, but for me a finder's fee is 5%. At 15% it's going to have to be pretty special to be worth it. For example, on day one, you receive a $10k design deposit because this designer's recommendation is law for the project. Or, the designer agrees to pay your fees if the proposal is rejected. Not saying that any of these things should work for you, but when presented with an opportunity, I tend to look for ways to make it a good opportunity.

From Contributor O:
Does anyone want to define:
Referral Fee
Finder's Fee

Specifically, if kickbacks are illegal, then what is it that makes them different from a Referral Fee? How can anyone ever be charged with taking kickbacks? If I sell (invoice) to a designer (or anyone else), they can resell at any price they want. If they ask for a commission I include it as a line item on the invoice to the client unless they ask that it not be separated. Needless to say, the commission is the cost of doing business with this person, and is not out of my costs - I merely tack it on to the quote and present it as a total.

From Contributor M:
Here are your definitions from a sales guys' perspective:

Finder's Fee and Referral Fee are the same - a small payment for sending a potential customer your way. Usually that customer must purchase something, but not always – it depends on the business.

Commission - is a reward for effort, usually based on the sales price of an item. For example, if I sell one of your products for you, you might pay me 10% of the sale price as a commission (the customer is sending you the money, not me.) Normally there's a prior arrangement implied and more effort on the person to actually help the customer select and buy the item.

Kickback - if your profession has some kind of legal, contractual or moral standard that makes any of the above inappropriate it's called a "kickback". If I'm a designer and send you a customer that buys directly from you, you can send them a finder's fee or referral fee. If I help the customer design the product and work closely with you, you might pay me a commission. If I work for the city and send/do any of the above when the customer is a City agency, that’s a kickback.

From contributor F:
I don't know how specific a definition one needs for the purposes of this conversation but Referral Fee, Finder’s Fee, and Commission are all normally spelled out to the client and are used in many business situations. There are many legitimate fee based businesses in existence and it is a well-established way to operate. Everyone involved knows what being charged for and why.

Kickback infers a hidden fee meant to be kept from the client, (or public in terms of government business), which by its nature makes it very problematic whether legal or not. When you actively try to hide something from a party you’re doing business with you’re usually treading on dangerous ground, at least in my opinion.

From Contributor O:
I offer to invoice two ways: Direct to the design professional. They can pay me and sell the item for what they want, or pass the invoice on to their customer that then sends me payment. Or I'll invoice the designer's client directly. If this is done, I ask if there is to be a commission paid to the designer once we are paid in full. If so, this is then quoted back to the designer, and added to the total of the project and invoiced to the client. I have commission set up as an item just as I do finish or hardware or any other component of the project. I have had situations where I believe a person in the decision process is asking for a consideration of some sorts, but I am nervous about offering anything - what if I interpreted it wrongly? Also, once you start buying business, where does it stop?

From contributor A:
Regardless of the terminology rewarding someone for generating sales is normal and if you want to have an arrangement then have a contract that defines what each party does and how they get paid. Designers sell furniture and fabrics and other times at list and get a discount when they purchase it, they are trying to interject the same sales process into a market that generally doesn't have a list price and a discount price. For 15% I would expect the designer to influence the customer to accept my methods and to help in the selection and hand holding process as well the approval process.

If they are being paid hourly by the customer then representing a shop for a commission could be a conflict of interest and the customer would surely expect the designer to work in their best interest. So if the designer discloses to the customer that they earn their money hourly and on referral fees built into the product prices the customer pays it would be okay. The designer should just modify their contract to include 10 or 15% of items purchased at the best price the designer can get plus x dollars per hour, then the customer pays and knows. I would have expectations that they bring me a sale and manage the customer to accept our standards, that's how they earn the commission.

If you are selling direct you can include the commission in your price, if you are selling to a GC and he has a budget and uses multiple shops adding 15% won't get the job and the job probably doesn't have 15% to give up. I don't have a problem paying a referral fee if it’s an arrangement I have predefined or a commission for sales that generate work and help in the sales process. I can't see paying a 15% referral fee unless you can recoup most of it in the sales price.

From contributor L:
We only have two ways we deal with decorators. If they are an established firm we will sell directly to them and they deal with the customer. If they don't fit the above we will bill the customer directly and the decorator has to charge a fee to the customer. Most small timers don't want to do that. The small time, limited experience decorators have been a problem for us and I will avoid them when possible. I won't conceal anything from a customer. I think they deserve to know what they are paying for. I prefer working with architects (most of the time.) We work to AWI standards and they are generally familiar with them.

From the original questioner

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Thanks again everyone for the thoughtful comments. The bitter taste is going away, knowing that this is an issue that many of you have had to work with. I much prefer the cards-on-the-table approach, where there are no hidden fees for the customer. Maybe I am spoiled from working with architects, as they seem to understand contracts, detailing, standards and other above board means of conducting business. Don't get me wrong, I have worked with some great designers in the past and they provided designs, support and billed the customer directly for their talents. I was becoming somewhat bitter due to the recent rash of "shady" requests I was getting and feared that the profession was adapting new standards. It’s my own fault for not checking for ASID membership.

From Contributor J

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Great thread by the way. It helps to see how folks face the same issue. We have one in the works where the designer is twisting in the wind that we won't inflate our price to conceal his markup fee (we increase our price by his fee, get paid directly by the client, then pay him his fee from that) – and it may cost us the job.

From contributor G:
We are exclusive to the trade and deal only with designers for custom furniture. The designers either get an hourly fee and sell the furniture at dead net cost or an hourly fee plus a markup on everything they buy for the client. We charge what we charge and they can do what they need to. If one asks for two different invoices for the same purchase so they can make even more from the end user we decline as that puts us in the category of fraud.

From contributor F:
Contributor G, you can give them an invoice with standard terms and then separately offer them a x% discount on all orders if they do x, y and z with x volume a year.

From contributor T:
If a designer hires me and bills a client to include whatever mark-up they want, then they are responsible to the client for the project. I deal with the designer, not the owner. That's why most designers don't want to go that route. They want the mark-up on the sly, and want you/me to be 100% responsible for the project to the owner. If the designer is also getting paid for every hour they work on/bill for the project, it is a double dipping situation. I am willing to accept this if the amount in question is in the finder's fee range of 2-5%, (it's a bonus on top of their billable hours, right?) but I start to balk when it gets into the 10-15% range. After all, I always have to engineer the project and provide shop drawings. Hey if we can both make money on a project, great. But adding 10-15% for a designer may lead you to lower your price in order to get the job.

From contributor A:
If the Interior Designer is getting a fair price for the design work it seems morally right to me that they work in their customer's interests and do not increase their costs further. However, in a competitive market, perhaps they have to offer their services to their customer cheap and rely on referral fees to top up and get by. Fifteen percent does seem excessive. In my own situation as a cabinetmaker, not an internal designer, two situations can arise, connected but not the same. One type is where I get more work than I can cope with so I recommend another cabinetmaker to the customer. The other cabinetmaker gives me a finder’s fee of say 5% which they knock off the cost to the customer because it has saved them advertising costs and the 5% is to reimburse me for my own advertising costs or goodwill value. It should not impact upon the cost to the customer.

Likewise, if I recommend a worktop company to a customer, I would expect a small commission from the worktop company and for that company to not inflate costs to the customer but to pay my commission out of what would have been their advertising budget or the differential between what they might have charged me as a trade price compared to a retail price.

The bottom line is that the customer must not be ripped off, that the commissions are either visible to the customer if they cost them extra, or they are absorbed by the trade parties promotional budgets if they are not visible to the customer. It gets a little more complicated where effort and risk is involved, (survey and sketches), and measurements to save a party an extra journey, normally with cost saving to the customer as a motivation. Actual legalities will surely vary from place to place, but this seems morally right to me, being customer focused and working in their interests predominantly, but being fair to everyone else as well.

From contributor L:
Contributor G, "If one asks for two different invoices for the same purchase so they can make even more from the end user..." - that comes up fairy often. I decline, but they can easily scan in an invoice and modify what they want to show their customer. Digital is great! The other thing that comes up quite often is another shop having us make a project and then they represent it to their customer as if they had made it. I don't really care, I get my price and they mark it up to whatever the market will bear.

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