Interior Designer Referral Fees

      Referral fees charged by "interior designers" are a frequent source of misunderstanding. April 20, 2007

Question
I have completed my first job for an interior designer. She is now requesting a 10% referral fee. I stumbled across the designer while networking with another customer. She was in need of my services when I met her and gave me some very rough drawings (napkin) and rough sizes. I gave her an estimate and a rendering (computer generated) and she talked with her client. Then she put me in touch with them and told me to contact them. She was fairly sure they wanted to proceed. From there I met with them and got my contract signed and a deposit and since completed the job. Now after the job is done, she is requesting her "usual" referral rate. I am not opposed to paying her for the referral, although for the amount she participated (no technical drawing, no signed contract, no deposit), I canít see paying her 10%. What are you paying for this type of service?

Forum Responses
(Business and Management Forum)
From contributor S:
Nothing wrong with 10%. To tell you about it after the fact is horse flies. I prefer to give my price to the designer and then they can mark it up as much as they see fit. But for her to expect you to take it out of your margin is crap. You might suggest that this time you will give her $200 or whatever, and on the next project you will add 20% for her, or give the price to her and let her sell it.

I think that the value of a designer, from my end, is that they have the customer and they make the sale. I have found that they will often sell for much more than I would have. If you have to set the price and make the sale, then their contribution is limited.



From contributor H:
I would explain to her that you did not realize that was what she expected and did not allow for it in the price of the job. Offer her 5% for this job. If the job was good as well as the client, no hassles, agree to pay the 10% on any future job she sends your way. ButÖ big but hereÖ If the same client calls you again for more work without her direct involvement, she has earned no fee. Referrals are not a lifetime contract.


From contributor D:
Contributor H has it right. From now on, be sure to get this kind of stuff out on the table early on. You will be best served by developing your own policy so you can state it at the initiation of the conversation. We handle it different ways: We offer to sell directly to the design firm (gets rid of the paint and wallpaper ladies), bill the customer in full, with a line item "Designer Fee," or bill the customer in full with no line item if we do a lot of business with the design firm. The real design firms will pay us directly and then bill the client for whatever they want. It sounds as if you got one that realized after the fact that she could/should make a percentage off the deal.

I'd send her flowers with a sincere thank you note and follow up with a visit to explain your naivete at the referral fee. Some people might call this a kickback. Oh yeah, now that you read it, that bit of information costs you $45.00. You can send it to the address on my website. Net 15 days, please.



From contributor K:
You mean 10% of the net, right? Because if you mean 10% of the gross, you are losing a lot of money, as it is most likely 30-50% of your profit, which is obscene, and one heck of a referral fee.

Some fictitious numbersÖ
$2,000 Gross sale
-$ ,600 COGS (materials, shipping, sales tax to supplier - 30% of gross, could be more or less)
-$ ,350 Overhead (17.5% of gross - to cover percentage of shop insurance, health insurance, vehicle insurance, gas, rent, electric, heat, federal taxes, state taxes, percentage towards debt if you have any, etc.)
-$ ,140 Sales tax (7%)
-$ ,700 Labor (35% of gross... you did plan on making a living, right?)
_________________
$210 Gross Profit to Company (approximately 10%)
-$200 Proposed 10% referral fee off Gross (or 95% of gross profit to company)
_________________
$10 Net Profit to company

This now means that in essence, the company made no money! No money towards investments in new machinery, emergency fund, software, R&D, bonuses for employees, etc.

Now does 10% of the gross still seem reasonable? 10% of the gross is still an over-simplistic way of looking at this. Plug your own numbers in for the actual project, and you will most likely find the end result is still unreasonable.

My guess is that she took the rendered drawings you created from her napkin drawing to your shared client, which made her look more professional, since she was unable to produce this capability herself.

She didn't price the project, sell the project, service the project, or warranty the project... all she did was provide a number to a potential customer. If she wanted 10% of the gross, she should have made you aware of this ahead of time and you would have built this fee into your pricing and made the client aware of this.

After sharing this scenario with her, unless she is going to be intimately involved in selling and servicing the account, which is what salespeople are paid 5-10% commission on average in this industry, a much more appropriate referral fee would be a flat rate for referrals. Don't forget, she is most likely already getting paid from the customer for her design time (you know, the money most in our industry leave on the table when working with clients). Anything you give her is a bonus and should be commensurate with her involvement in the project. Personally, based on what you told us her level of involvement was, I would probably give her $75, which would cover the approximate hour of her involvement. $75 an hour... not too bad!

Put it this way - if you tell the designer that you will build her 10% of the gross fee into any pricing and make the customer aware of this (just like you do with sales tax - you know - like 90% of us tell our clients, Uncle Sam wants his share; well, so does the designer), and she balks at doing so, it will give you an indication that she knows she doesn't deserve 10% of the gross as a referral fee, as she would be embarrassed by the customer knowing that they are paying the designer already and that they are then paying you to again pay her 10% of the gross. After all, where does the designer think the 10% is ultimately going to come from? If the customer objected, I would tell them to take it up with the designer.

Come to think of it, for the designer, it sure is a quick way to increase her prices without any market risk. If she is not hip with either adding the 10% to your pricing and informing the customer, or a flat rate for a referral, I would simply provide her with your pricing and she could add 10% of the gross onto that and present and sell it to the client. You have your costs to cover. Having your company's net income decrease to increase her company's net income, while you do all the work, just doesn't seem equitable to me. Especially when she didn't tell you upfront it would cost your company so much money to take this work on.



From contributor T:
It's worth noting that anyone can call herself a designer (unlike an architect, let's say) and have little or no relevant skills. I had one such person come into the picture after submitting my own design for a corner TV built-in that was a bit complicated. She made verbal suggestions to the clients, who wanted her for other stuff like picking colors and going on shopping trips to NYC. I said her ideas may have some value, but if she sketches them out, she'll discover some of the same problems I already resolved or made compromises with. She explained she didn't really do drawings. I ran from that job and cut my minimal losses.

I work with another designer who is a member of the American Association of Interior Designers (ASID) and she's worth everything she earns. Does drawings, knows millwork, works out problems in advance, a total pro. Now, she bills by the hour for every hour she spends working with and for a client - I'm guessing in the $100/hr range, which is not out of line for someone with that professional designation, which requires continuing certification. After a couple jobs together, she informed me she'd like to have me add a fee into my price, along the lines of 5%. I'm sure she meant 5% of job cost, which will typically be in the $15k to 30k range, so $1500 for a $30k job. If I can add that on to my bid and still get the job, I'm all for it. (I even offer a finders fee of 2-3% for colleagues landing me a job, and send past customers $100 gift certificates when they provide casual referrals that land jobs. Hey, any work is good work when compared to no work!)

A question I haven't broached yet: Shouldn't that fee be disclosed to the client in the contract, so it's clear where their money is going, especially since the designer will continue to get some billable hours in as the project moves to completion? Otherwise a client could say the designer is double-dipping. On the matter of expecting 10% percent after the fact without clear prior agreement, that's unprofessional on her part at least, and very high to boot. If you want to keep the relationship, negotiate both a long term agreement for future work and something for the completed job. But if she wants 10% on top of every job, you risk losing the jobs anyway. If there's no future to be had, you owe her only a token finderís fee.



From contributor C:
I agree with all points contributor H has made. This after the fact stuff isn't kosher. You should have known about it, so it becomes an added cost of doing business. It should not come out of your pay. I have some designers who do the drawings, and sell the jobs, etc. They mark my work up 50%, .65 multiplier. Itís their business to get what they feel the project is worth. It allows me to increase my margins when I deal direct to the marketplace.


From contributor B:
This is pretty common in our market (Midwest). When there's a designer involved, we simply increase the sale price by 10% to cover their piece. If the client asks why, we tell them.


From contributor L:
We sell some of our work through design firms. They deal with the client; we make shop drawings that are used in the contract, not the design drawings. It is up to the designer to be sure the client understands what they are getting and it is also up to the designer to collect. We are selling to the designer, not their client. The designer takes our price, adds any other costs, their markup or whatever the market will bear, and gives it to the client. Actual design firms are generally savvy about how things work; curtain and wallpaper decorators, no thanks Ė theyíre just a PIA waiting to make a mess of the job. Iíve worked with some very good designers and they have been receptive to learning how things are made, why they cost what they do, and are willing to take suggestions. Iíve also been involved (for one job only) with designers who are extremely arrogant and donít care that what they have designed is sure to fail.


From contributor R:
How to tell if it is a kickback or not... Get all of the parties involved in one room. Explain the prices and who is getting what fees. If one of the parties storms out of the room, itís a kickback. If everyone is cool, itís a fee. A fee is usually a set rate that is determined before the work is done. Designers like this have a bad habit of not doing any of the work, making 10% off of you and 10% from their customer as well.


From contributor I:
Here's how it works. The designer buys it from you and sells it for whatever they like, or you sell it direct to the customer and pay whatever fee you agreed to when the designer first contacted you. To come back now looking for you to pay a fee, when you had no idea you had to build the fee into your sale price in the first place, is a pant load.


From contributor U:
Live and learn. Did you know about this fee before you started the project? I had the same problem before, years ago, and I learned the hard way. And it also made me learn to always talk to the designers or GC's or whoever is referring me to any jobs about what they expected in return for the referral.

Contributor K, I totally disagree with your statement of making the client aware of the "inside" fees that might happen. I think it is very unprofessional to let the client know of our internal company's issues. The client(s) have no business knowing how we decide to conduct our business with our interior designers, GC's or builders. That is between our companies and the people that referred us to the end user.

It is up to us to make sure that we take care of our fees or whatever it might be for the people that got us the jobs in the first place, not for the client to find out that they have to pay extra because we are getting a job. We just add it to our final quote.



From contributor K:
I agree to an extent that our internal pricing is only for our eyes, but this is not a normal, nor in my opinion, ethical business transaction. My point was directed to the designerís obscene request for not only 10% of the total project in general, which as you can see by the above example, dramatically affects the company's profit, but for requesting it after the fact, after the customer was already charged, thereby not giving the questioner a way to recoup or charge for a line item in his expense report. The point about informing the customer of the fee was to stress the fact that the designer, who is most likely already being paid by the customer for this project, is now charging the customer on the back end after the fact. If you feel the questioner should acquiesce to the designerís request of 10% of the gross after the fact, exactly where do you think the money is going to come from?

If anyone is to live and learn in this situation, it should be the designer. I have no problem with paying referral fees, and building it into the pricing (which the customer pays for as an added expense), but if you don't have a problem with 10% of the gross, even though all the designer did was provide a name and number (even though the questioner converted her napkin drawing into a professional drawing), why not 20%? Not saying they don't exist, but I don't know any pro shop that would suck this up. You are also forgetting that if the designer was being paid to find contributor M, he is a supplier.

In any case, if paying the 10% after the fact is okay with you, then why would it not be okay for a sales person to come to you retroactively and double their commission? The reason why a salesperson couldn't do that is that not only was it not what was agreed to prior to the salesperson selling it, but because the cost of this was not built into the pricing structure provided to the client. The request by the salesperson, who would have done much more work in this scenario, would appropriately be turned down.



From contributor Z:
Very simple solution as I see it. Touch base with the desecrater and inform her that you would be happy to pay her "commission." Only problem is you were unaware (through her own omission of business practices) and that those funds were totally used in the course of producing the work involved.

Hence the client will be made aware that there is an additional, after the acceptance of work and payment rendered (which was agreed to beforehand), balance due of ten percent. This is due now because the job was designed and executed professionally and within the standards of the industry as well as to the clientís satisfaction. Also inform her that when asked why, the truth will be forthcoming to where the funds are allocated and what necessitated the additional charge. Have her set up the meeting and make yourself available at her disposal.

Operate in a professional manner at all times and ask how this situation could possibly be avoided in future dealings. Give no reason whatsoever to let her bad-mouth you to others with justification. If she is a nut job, you will never hear from her again, and thatís okay. If she is a professional, she will admire your professionalism and it could start a fruitful relationship.



From the original questioner:
Thanks for all the insight. So you can see how this has been progressing, here are our emails back and forth. I am currently waiting on a response. It sounds to me as though she is trying to double dip and the reason she is not marking up my price herself and acting as the GC is because she does not want to be held accountable, although she still wants 10%.

Dear Mrs. H
Yes, I believe we can come to an agreement. I am not sure what your current arrangement is with a 10% referral fee, however industry standard for our current type of arrangement tends to be 3-4% of the selling price or a $50-100 flat fee. The percentage or fee is also directly related to the amount of involvement on your part. A designer that sells the whole package, including scale shop drawings with exact measurements (takes financial responsibility for incorrect measurements), all final design elements (takes responsibility for design errors), estimates the job (takes financial responsibility for an underbid job), collects the deposit, follows the job through to completion (deals with directly with customer) and is responsible for collecting the final payment (responsible for any payments not collected) typically receives 10% or more of the selling price.

I apologize for being so frank on this matter, however I have not yet had a customer be dissatisfied and I do not want to compromise my customersí satisfaction due to a misunderstanding. At this point in time I would like to keep the referrals as is (rough measure, rough sketch, contact info, and your confirmation of my customer satisfaction). I believe that if you do what you do best, and I do what I do best, the customer will be dazzled by our service.

For a referral similar to the ____'s (rough drawing and written details, rough measurements and contact info), I pay a flat rate of $75 upon completion. This typically covers the hour it takes to jot down the measurements and details. I am not opposed to the 3-4% of the selling price either on this arrangement.

Contributor M,
I stopped by ____ís house this evening to see your work. It is really quite lovely and they are pleased. You did a commendable job and the end product is worthy of your skills and talents.

I understand your comments, and perhaps you will understand mine. Yes, you are a craftsman and you do nice work, you are neat, prompt and have good customer service skills. Those are admirable traits and rather rare in today's world.

Like you, I in my job strive for the same skills. I spend many hours developing good relationships with clients, marketing myself and my talents. I function as a project manager/coordinator, designer, procurer of services, advisor/consultant for financial matters, negotiator for contracts and price/cost, and the list goes on. So when I refer someone to undertake a portion of a design project, I am putting all of that on the line. I take a tremendous responsibility when I refer a subcontractor... I can spend a long time developing a good client and have one bad contractor do permanent damage to that relationship and ultimately to my own reputation, as each subcontractor reflects upon my judgment and service to my clients.

I don't work like most designers in as much as I freely allow my subcontractor to be paid directly by my clients. It gives them an opportunity to expand their client base on the marketing and development skills I have utilized. Most designers would have taken your price quote, marked it up a minimum of 25% and some as much as 50%+, and quoted that price to their clients. You would have not been paid by the client, but by the designer, and most of them would also have asked for a non-compete contract with you. So perhaps now you can understand why 10% is not such an outlandish referral fee. I have carpenters, painters, artists, flooring specialists, furniture reps, etc. that all freely pay the 10% referral fee, most offering it to me and not the other way around. We have done a lot of business together... It is good for all of us. It is not unusual for me to take a client in and drop $10-30,000 on just furniture for a new house. A good small to medium size oriental carpet can run as high as $10,000. My subs have been with me for a long time and I think this is part of the reason why. Perhaps my subs just figure that 10% into their quotes to me and if so, I don't mind. I just want a firm quote for my clients and a delivery of good products and services.

I don't take just any job... I choose the people I want to work for. I am semi-retired and want the good solid jobs. I hope we can continue to work together, as your work is exceptional and I believe my clients will appreciate your skills. Thanks again for a job well done.

Mrs. H,
I am sorry if you had assumed I was going to pay you for any previous referrals. Not that I donít appreciate the work, but typically the details are worked out prior to a job, not upon completion. Like you said, typically when I submit my quote to a contractor, they mark it up as they see fit and sell it to their customer, collect payment and then pay me as per my contract with them. When the quoted price is marked up by the contractor, it has no impact on the amount that the sub is making; it is over and above what was quoted and is added by the middle man as their payment for the amount they charge for that service. I work with contractors of various types on a regular basis, all of which do business the same way. You either work directly for the client or the contractor is your client. The contractor as your client takes full responsibility for the job. I have also had many contractors refer me directly to their clients to which I worked solely for the end customer and have never been requested or assumed that there were fees to be paid for the referral. I refer others to my clients and I have also worked very hard to gain their trust. I donít expect my clients or anyone else to pay me for referring them to my clients, as I only refer entities that I 100% completely back and trust with my reputation also.

Like you said, you are providing a service(s) to your client, as am I, and in order to insure customer satisfaction, someone must be accountable.

I will quote you off of your measurements for a $150.00 design fee; you can then submit a quote to your client. I require a 50% deposit on my quoted price and a signed contract from you on the details of the job. Upon completion I require immediate payment of remaining balances.

Or, once your client is ready for my services, you refer them to me or vice versa, knowing that I uphold the highest quality, craftsmanship and customer service. Once the job is under contract, I will pay you the $75.00 referral fee.

I am also very selective about with whom I work for and with, and as long as we are in agreement, I believe we will have a wonderful business relationship.



From contributor W:
As I understand the designerís response, all she wants is a referral fee of 10% on any job she sends to you that you do and collect your money on. That's no big deal. Just figure in an additional 10% for her and after the job is done and collected for, give it to her. This is a standard percentage and has been for years. If she wanted to, she could add 25-50%, as she stated. But she doesn't want to do that. 10% is reasonable for the owner to pay, versus 25 or 50%, and trust me - that happens. The only thing missing here was that she didn't tell you up front that is what she expected. So tell her that you will pay her 10% in future, as you now understand that. In the meantime, work out what you can for the done job.


From the original questioner:
I donít feel that she is earning 10% by just calling me and saying here is a pretty hot lead. A small built in starts at $1500. Thatís $150 for a phone call. She will make a minimum of 150 up to the sky for a phone call. Sheís not taking any responsibility, or doing any work other than a referral. I told her for the referral only I would pay her 75. If this wasnít sufficient for her, she can take the other route where she can mark it up however much she wants and sell it to her customer. She knows what she can get out of them and what the job is worth. Then she is accountable for getting me my money and providing the client with the product they purchased. But it seems to me she wants to do as little as possible and remove herself so she is not accountable for any transactions, but will still be receiving the full 10% of the selling price. We are in a small area where word spreads quickly. A lot of my clients know each other or have mutual friends/associates. First of all, I price my work very fair. I do make a good living, but I work hard and my customers get what they pay for. Now if I do a job for Joe for 1500 and next week do a very comparable job for Jane through a referral for this designer and have to mark it up on my estimate, it doesnít look good, and I donít feel comfortable putting that on my quote. I believe she should be marking this up on her letterhead and presenting it to them. On top of all that, she is getting paid for her time by her client to provide them the service of designing and finding people to complete the design.


From contributor K:
10% for a name/lead is just not an equitable business arrangement. To make the point clear, does anyone with a warm referral base cut a check to their existing clients for 10% of the gross for a referral? After all, your client, just like the designer in this case, provided a name/lead, and is not responsible for anything else. The only difference is that your client who provided you with a referral has already made you money by being a client, which is more than the designer can say. I highly doubt that anyone is paying their clients a 10% of the gross referral fee, except maybe the ones who are always complaining about how little money they are making.


From contributor A:
If I know the 10% is what the designer needs for a referral fee, then I can factor the 10% in my price quotes. I would have no problem with this going forward. I would try to come to an agreement with the designer on this job that is fair to all. Have lunch with each other and figure it out. Lunch is an informal meeting and people tend to let their defenses down enough to see the otherís perspective.

Of course all this depends on if you want or need any additional work. If the jobs are good and the profit margin is good enough (her admission, since she said most designers would up the price 20-50%), I'd take them. Knowing the 20-50% information, I'd up my prices for her bids to at least 20%, since she is telling you your work is worth that to her clients! I would try to find out who her other subs are and call them to find out how well the arrangement works for them. I'd find a way to make it work.



From contributor P:
I have done two jobs for a contractor (not a designer.) The first was his own house and the second a small project. The client paid me directly and the contractor didn't get a piece of the pie. On the current job, he proposed this approach. I figure my price to him, and then add 15%, and then I deal with the client directly with that price. The client pays me. When the job is completed, I pay the contractor the 15% of the total job cost. Is this a viable way to go, when dealing with a contractor? He considers me a subcontractor.


From contributor X:
It sounds to me like she knows what she is doing and has a lifetime of experience. Rather than write her off by sticking to your $150 price, I would negotiate with her for a lower fee this time because you honestly did not know how she operated - perhaps 5%? It may be worth it to pay that for future business.

Or you could ask her to postpone the payment of the 10% till you had a next job from her so you could build some of the expense into that job. Just thinking outside the box. Just being honest with her and saying you simply don't have that kind of money to pay the fee would be a possibility.

Depending on how she responds will determine whether you should continue to work for her in the future. If she will not bend, then that, in my opinion, would be your answer.



From contributor M:
I've agonized over this myself. You probably shouldn't be basing your decision on how much value the designer is adding to the project when you say 10% is too much. (It's okay to gripe about it here, though ;) Rather, you should ask yourself how bad you need the business and whether 10% is a reasonable amount to pay for getting the sale. Remember, you're not paying her for each lead, only the ones you win. I definitely agree that you should not pay the 10% on this job, only future jobs. I am curious to know what the real legal definition of a kickback is, however. If she is in a position to evaluate and recommend contractors for the client, while secretly favoring those who are willing to give her the best fee, that sounds questionable to me.

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