Paying Designers

Cabinetmakers discuss their relationships with designers. April 4, 2011

I own a small cabinet shop and have been in business for four years. Most of our work is mid to high end kitchens, bathrooms, entertainment units, etc. So far all of our customers have been homeowners or GCs. I never have any contact with any designers and recently I got connected with one. He referred his client to me and we sold the client an entertainment unit. Before I gave the price to the client, the designer asked me to put 5% in it for him. I did all of the drawings and the designer together with the client had some input when it comes to colors and general look, but nothing else. I did agree to that and this is a small job and not a big deal. Now this designer is talking about big referrals coming my way and I wanted to know is that normal in our industry that we are paying a referral fee of 5%? Any input would be appreciated.

Forum Responses
(Business and Management Forum)
From contributor K:
You said it yourself - you "put in" 5% for the designer. I am assuming this meant that you added 5% above what you normally charge. So, if that is the case, the client is paying the 5% and you got a job and future business coming your way. As long as you add the 5% above what you normally would charge, sounds like a win-win to me.

From contributor J:
Try not to fall into the trap of thinking in terms of what the designer deserves based on how much real work they did. If the designer delivers you an easy sale and helps to keep the customer happy, that's worth quite a bit regardless of how much actual designing the designer does.

From contributor O:
We do a lot of work for designers - they are great for your business. Some we send our price and never know how much they mark it up. Others prefer us to deal directly with the customer as far as pricing and ask for a percent. The amount varies from job to job and by designer. We have added as much as 10% on top of kitchen pricing.

Don't forget to charge what you would if there was no designer. Your costs do not change and, in fact, depending on the designer/homeowner, they may go up. We have made endless color samples for some designers.

The biggest hurdle now is to learn how to ignore the fact that the designer is making $X amount while you do the drawings and all the work. I have learned over time to put some of the work back on the designer.

From contributor R:
Please tell us more about putting some of the work back on the designer.

From contributor B:
Like having the designer collect the money.

From contributor R:
If I am already paid in full before installation, then the designer can collect the balance. More often I am still owed at least the last 10%, so I collect that before leaving the site. I don't mind having the designer collect progress payments or sometimes the deposit before scheduling a job, but when I am done it's time to be paid in full.

From contributor D:
There are a few ways of looking at it. First off, if the referrals are for jobs you would not normally get, then it could be considered found money and a new source of business - 5% may be cheap.

If the client has hired the designer and paid them to design, then in theory the designer already got paid once, and then a small residual from you as well. It may be no different than if we do the kitchen and then refer the tile man and ask for a little kickback or residual. Depending on how busy your shop is and what the future looks like, any referrals may be a good thing.

On a fairly large job the GC asked me to bid on a gun cabinet for himself. He then asked me to add it to the job price. I said here is the price of the cabinets, and here is the price of the gun cabinet - do whatever you want, but I'll have no part in it.

From contributor M:
We do a good bit of work through referrals by designers. We usually pay at least 5% simply for the referral. If the designer gets involved with choices and color selections and other things that actually end up making our job easier, we pay up to 10%. It they make us work harder or prove to be difficult by confusing the flow of information, we stay away from them. It takes some time to determine which category a designer fits into - some jobs they contribute more, some less. You have to work with them for a season so you can get to know each other and the expectations that you have of one another.

I had one designer tell me I did not need to pay her a referral as she was already charging the client for her time. We stopped paying her and I have noticed her referrals have slowed down, but maybe it's just the economy. I do have some tell me on certain jobs not to include them so we can give a better price to the customer. Sometimes we just ask the designer what they expect from us in terms of payment.

If a designer expects more than 10%, we tell them that for this to happen, they need to be in the billing process and get the order on their books. In other words, I quote and sell the order to the designer. I then work for her/him and expect payment from their business, not the end customer. Also, when this happens I do not end up being the bad guy for overquoting and losing the job so neither of us get paid anything. If the job gets over quoted, it is the designer's doing, not mine.

Lately we are finding that designers across the board are finding it more difficult to make the markups that had become the norm. They seem to be more content and thankful for these smaller fees coming in. Currently we have only two designers that buy and resale our product. They work extremely well with me and pay on time. They actually appreciate what we do and try to make my job as simple and easy as they can. The remainder of the designer business we do is through straight referrals. For instance, over the weekend a lady just faxed me the customer name and phone number for a potential client. We will today set an appointment, go measure, quote and hopefully get the order. If we get the order, I will bill the customer for both a deposit and the balance when through. I will then mail or deliver this designer a check for 5%, after completion. I can not find or advertise to get good qualified leads for any less. The great part is each order pays this fee for me. When I advertise, I have to come up with the money, and I still may not get my money's worth.

From contributor O:
At the start of my career with designers I was doing drawings, site measuring, providing sample after sample. All of this was adding too much time to the jobs. I still do drawings but I do not create the design - the designer must sketch out what they want and I will refine it.

The first set of measurements is given to me so I save a trip to the site. Before final drawings are signed off I personally check site conditions and measure. We still make color samples for each customer but have more samples to start with. Before the customer's samples are made we are much closer.

From contributor T:
5% is a bargain if that's all you have to add for a designer. A designer I've worked with wants 10%, which is also fine, as long as: 1) adding that 10% to my costs doesn't push the price out of the client's desired budget; and 2) the designer does her job and actually designs the project, including resolving design conflicts that arise with the client. I've found that I hem and haw with myself when adding that 10% to a project price because I don't want to lose it. Bear in mind that most designers are charging by the hour for their services, including designing the project. So in many cases they are double-billing. I wonder if reciprocity will kick in when I refer a client to a designer - will I get 5 or 10% of all their billings?

From contributor M:
Another thing I have found when working with designers is that when they see that they can either work with us on a project, or there is a possibility that we will go direct with the homeowner, they give us a little more respect. For years I bowed down to the designers in my area and I believe they could tell I would not go around them to get an order. Once I realized that none of them were sending me enough business to take this backseat approach, I started selling to the same people (homeowners) that were going to the designers. This can be a dicey situation - I probably lost a couple of designers, but the better ones understand I have to have a certain volume just to stay in business.

That said, if I have been working with a designer that I like, and her client calls me, I either step aside or bid really high. I encourage my designers to let me know ASAP about possible upcoming projects so this does not happen. In 20 or so years, I have beat out two of my designers when bidding the same work. One threw a hissy fit and that ended our working together, the other said "well, that is bound to happen" and is still my best designer customer.

From contributor G:

Eleven years ago I found a way to get around the fees I was paying our best designer. I married her! We send each other quite a few jobs and work together on a lot of projects. It's been great for business!

From contributor A:
As long as it is a 5% markup, there should be no ill will for the client, the designer, or the fabricator. It is the same for GC's. Problems (read about them in past WOODWEB threads) occur when the party architect, designer, or GC demands you to reduce your cost to make room for their markup/fee. The customer should be aware that GCs markup approximately 20%, architects 10%, and designers 5-10%. The customer is paying for the consultation of these so called professionals. The client pays, not you! All of this billing should be in plain site on invoices. It is essentially cost plus billing, which is common in the construction/manufacturing sectors.

From contributor T:
In my case it is not above the table. The client does not know the designer is getting a percentage of my charge, and that is why I'm uneasy about it. It's a classic kickback in my opinion, because I bill the client directly, and write the designer a check after final payment, unbeknownst to the client. In many higher end markets, designers take on the role of contractor vis-a-vis the client and add exorbitant markups to the cost - even 100% if they think they can get it.

From contributor G:
I might add I would not pay designers an extra fee. I learned the hard way a couple of times that when they added too much, we would lose the jobs. What worked for us was to pay the 10% and just take it out of our price. I looked at it as a salesperson on commission. That way I controlled the pricing and no customers got upset because they found out they were paying extra.

From contributor K:
The designer referral fee is just another expense you have to add to recoup to get the business that is above your normal cost of getting the business. In the same way you would have to recoup the money from a home show by adding the costs above your normal pricing if you don't have an advertising budget that already accommodates this, you would need to do the same with the referral fee, and yes, the client pays.

Now, if the designer is getting a fee already from the client for a project they are referring to you, and wants the 5% on top of this, you should absolutely list it as a line item, as it is considered double-dipping, and a way for the designer to seem less expensive while passing their pricing along to you to make the client pay in the aggregate. Additionally, if the designer is doing the design work, the argument could be made that you should adjust your pricing to reflect this.

Now, if the designer is not getting a design fee from the client, then it is a referral fee, and what you pay people to secure a deal is your business, and yes, the client pays, as it is the cost of the project.

Something to think about... There are only two people who pay in the end - you or the client, and if you don't want it to come directly out of your family's pocket, you would then have to pass that expense along to future customers. Would you then add that expense as a line item?

From contributor S:
You can try to justify this practice anyway you like, but it's basically dishonest. The designer is hired and paid by the end customer, and in addition to a design fee probably has an agreed markup on work they provide. What they extract from the cabinetmaker is only the portion of their compensation that they don't want their customer to know about.

I have coworkers on the job that all try this too. The painter has a client that wants some cabinets; he wants me to add in 10-15% for him just for a referral. Funny, he has a problem remembering me if I send him a referral! I refer him because I know that the job he does will reflect well on me for making the referral, same for him when he refers me, that should be enough.

From contributor N:
How much advertising would you have to do to get access to that market? It doesn't really matter how much work the designer does on the job. The fact that they turned over a job to you is what you are paying for. Try selling furniture through a gallery where they take 40% of the price that it sells for.

From contributor P:
It's more straightforward if you give the designer your real price and they mark you up to the client. I'm not sure what the legal difference is between a kickback and a referral fee or design fee.

As for the double dipping issue, I'm not sure there's anything wrong with that. If the designer is acting as the GC, they're assuming more risk and have the hassle of dealing with the client. Some designers I work with often charge no hourly rate, and make all of their money via markup of products/services. Others only charge an hourly rate and refer subs directly to the client.

I could envision a hybrid model where a designer charges a modest hourly rate (compared to the designer who only works off an hourly rate) and marks up products/services to achieve their desired income. It's not necessarily gouging.

From contributor O:
When a designer takes on the role of GC, are they liable for the insurance and all the same paperwork a GC is liable for? Seems to me like designers get to charge for being the GC without taking on all the responsibility.

We get a kickback on Cambria tops we refer to our top shop. It is no different than if I use my showroom to sell it and mark up the price. In the end we do no work on the tops but get a 25% cut on top typically. It appears there is better money in stone tops than woodworking these days.

From contributor Z:
Most of my work comes either from one or two particular designers or through those 40% markup galleries contributor S mentioned. Personally I don't care what the designer adds to the job cost because I wouldn't have that work without her. My bids go to her and then on to the customer with whatever markup she wants to add. She does all the initial meetings, initial design work and is present at every significant point in the project. She really does earn whatever she is adding and I don't know what the number is but it's somewhere between 5-15%. She does also charge for her time on the jobsite and any other time she is working on the project - I think her rate is $125/hr. We had a meeting before our first job to lay down the ground rules, one of which was that the clients she brings me are her clients for life and that I am expected not to sell to them without her involvement, which is 100% fine with me because, again, I wouldn't have the exposure to them without her.

I used to work with a designer that did no design work, didn't attend meetings and put me in direct contact with the client. She asked for a kickback to be added to the price on a big job and I did add it to my price. That particular client contacted me later on for several other jobs at different sites where he was not working with the designer and I happily did the work. I think in this case the designer was thinking only of the current job and not trying to isolate me from the client in any way so no isolation was expected moving forward.

As for the galleries, they provide the other half of my workload and their 40% is harder to factor into my pricing because the work simply won't sell if I insist on getting 100% of what I really want for a piece before they add their commission. The pieces in the gallery do generate additional commissioned pieces which are more likely to handle higher costs but the gallery commission is still 40% even on those pieces.

For the 40% the gallery collects the money, has all contact with the client (eliminating any potential for me to sell directly to the client, which I would not do anyway), does a varying amount of design work (sometimes significant and sometimes not), and pays for a nice showroom to display my work to clients that wouldn't otherwise know I exist. In the end I think it's worth it for the exposure and sales.

Without the galleries and designers, some of us might not be in business; partially because we come to depend on them to generate work for us that maybe we should be out trying to generate on our own.

From contributor K:
Referral fees are typically paid for opportunities brought to you that result in a sale to your company. This can be a designer, a former customer as part of a referral program, a real estate broker, a countertop supplier... whomever. Referral fees are common in many industries.

In this case, where it becomes an issue is if a designer secures business by dropping their percentage only to recoup it through your company. If they are not involved in the transaction (i.e. - no fiduciary responsibility), take as many referrals as you can from them, pay them the referral fee, and move on. If they are involved, you are simply better off selling your product to the designer and letting them mark it up to whatever, or adding it as a line item expense. If it were you, and the designer charged a fee already, you wouldn't be upset to learn that you paid more for a product the designer recommended because he was getting more money for designing your product when you are already paying him? That's like a business consultant working with your company recommending a plywood shop, and you have to pay more for the plywood to accommodate for a referral fee paid to him when you are already paying him. I don't see a designer as any different.

That said, just remember - someone has to pay for it. You have to decide whether it comes out of your pocket or the customer's. It is not some ethereal fee that disappears.

From contributor P:
For my own conscience, as long as the designer is not misrepresenting anything to the client or doing anything illegal, I'm okay with whatever pricing model they dream up. If you gain a lot of business through designers, it's reasonable to give them a better price if you factor in your lower customer acquisition costs. Sales/marketing/advertising can be very expensive (and worse, not very effective).

I'd rather work for a designer over a typical GC any day. In my experience, they're less likely to beat you down on price, better at paying on time, and more appreciative of the quality of work that I do.

From contributor V:
Ask not about this one, send the 5% and a dozen roses. Establish your terms before you quote the next one and put it in writing and do not judge how they run their business. Treat each differently - some you will have to hold their hand, others will be holding yours. In my part of the country designers have to pass a course to put the letters behind their name and belong to an association. Always treat them professionally and if you fall into the right group you may never have to sell or draw again.

From contributor V:
And ask for a deposit.

From contributor X:
5% commission for sale (not referral). Sale means they pitch you to the prospect and convince them you are the man for their project. Not just give you a phone number and expect you to do everything and send them a check. 2% or a small flat fee for that - maybe.

5% commission for project management. Pre/post sale, they go between you and the client on all things. They keep client on track to keep meetings, samples, etc. to a minimum.

5% commission for design. They get the concept going, spec/approve your finish samples to client as well as your engineered shop drawings. 5% commission for CAD drawings. Good enough for sign offs. 5% commission for shops. We have never gotten drawings good enough from a designer to pay this. Once from an architect.

These things should already be built into your standard pricing so you don't charge more. You are either paying an employee to do it for you, or you are doing it yourself (and probably doing it for free).

Charging a client more than they would if they came to you direct and paying a kickback is immoral and illegal. Paying someone a commission out of your normal pricing for services rendered is okay and the way business is done.

These are my numbers based on what I think it is worth to me. Your mileage may vary. But for fact, there is a value there for any or all of the services they do for you. We have long term designers who submit all paperwork, get checks and hire no one but us for all their jobs. There are some clients we have never met or talked to ever, before, during or after a job. When you get one like that, treat them like gold and hold onto them forever, whatever it takes.

From contributor Q:
I view the 10% kickback that is added to the cost as somewhat unethical for the designer to do but not for the vendor. I think a better and more ethical incentive is to give them 5% for the first $100000 in business, 7.5% for $150000 and cap it at 10% for $200000 or whatever numbers fit your business. Make it a volume incentive paid annually and it is not only legal but also a common and ethical business practice.

From contributor U:
What happens if an employee of the client (a decision maker) also wants 10% along side the designer/architect, the total outflow being 20% on a job of $200,000 and above order size?

From contributor Q:
That would not happen if you control your offer. A volume discount is spread across all customers of the client over a year and the check goes to the company, not an individual.

From contributor H:
In my personal opinion, if you are working with a designer, you should add 20% to your bid because these projects require additional time and effort. You are not only trying to please the homeowner but also the designer. Then you can offer the designer a 10% designer discount and you are still covered. You have a 10% fudge factor for those last minute changes the designers want to make but never want to pay for.