By Jon M. Garon
Gallagher, Callahan & Gartrell, PC
This is part of a series of book excerpts from Independent Filmmaking, The Law & Business Guide for Financing, Shooting & Distributing Independent & Digital Films designed as an introduction to the many legal issues involved in the filmmaking process.
Although sometimes the most creative part of a film, a carefully crafted budget provides the pivotal roadmap for the entire film project. Whether the film is expected to cost $2,000 or $200,000,000, the film budget must present a spending plan for every dollar to be expended on the production. In addition, the budget serves as a guide that the pieces of the film are proportionate to one another. If each cast member receives tens of millions of dollars, then the look of the film generally should not have home-made special effects.
The budget will be dictated by choices that may change dramatically depending on locations, size and prominence of cast, stunts, and the effects needed both during and after principal photography. For independent and guerilla filmmaking, the key is to identify the cornerstone elements of the film and build the budget around those items. If a particular location must be used to tell the story, a particular cast member becomes essential to the financing, or a special effect defines the story, then that element should be identified and its costs determined. Thereafter, the remainder of the budget can be structured to keep the production in harmony with that item.
The budget process runs from inception of the project through the completion of the finished negative. Neither the prints used to show the film theatrically nor the advertising and promotional budget are included in the budget numbers used for production. For studio films, prints and advertising often equals the costs of the film production and, for an inexpensive film, may greatly exceed that cost.
Purpose and Usefulness of the Budget
The budgeting process has a number of important internal and external purposes. It sets the framework for all the decisions regarding the film. For example, if an independent film will be made on a minimal budget, then certain items must drop close to zero. The movie will be filmed locally or in areas that can double for other locations simply because the budget cannot accommodate travel expenses or other costs that will not ultimately appear on the screen. The science fiction genre has become so effects-laden that low-budget science fiction films have nearly disappeared.
1. Direct Consequences of the Budget
First, the budget sets the tone of the picture. Broad categories of no-budget, low-budget, medium-budget, and high-budget each set in motion assumptions about the film. No-budget films, such as Kevin Smith’s “Clerks” create a certain rough ambiance about them. Even modest success can often result in large percentage returns. At the other extreme, high-budget films must be block-busters to justify the expense, resulting in ever-more lavish productions and increasing expectations. Independent filmmakers often want to create the impression that their film cost more than it did to improve the advances made when sold, but understate the cost when shown to suggest that the filmmaker is more creative than was suggested. For example, it was rumored that Miramax spent close to $1 Million to finish the $30,000 Blair Witch Project.
Second, the scope of the budget will directly affect the amount of money needed to be raised. As discussed earlier, certain investment strategies are based on the total amount of funds sought. If a movie is financed using one of these fundraising techniques, then the filmmaker must pay close attention to the financial caps placed by the securities regulations.
Third, many of the collective bargaining agreements between the industry unions and the filmmaker base minimum payments on the size of the budget. The lower the budget, the lower the required minimums will be to use SAG actors.
2. Hollywood’s Budget Magic
“Driving Miss Daisy,” a film modestly budgeted, worked as an award-winning off-Broadway play with a budget of thousands rather than millions of dollars. Many television shows two-episode season openers would work just fine as feature films. Both Star Trek and X Files have had more compelling television productions than some of their films.
The union fee structure has something to do with the budgeting sequence. Because payments are based on medium and length, the same directing or acting job must pay higher for a feature film than for television. If the minimums go up, then the other fees are ratcheted up as well. The net effect is an absurd situation whereby a $30,000 student film may get theatrical release while a $3,000,000 studio financed project may be impossible to release theatrically rather than on television.
The Ultimate Use of the Budget
Despite the importance of a budget, it is a planning tool that may be changed often during the planning stages of the project. For an independent filmmaker, there may be a variety of budget scenarios, based on best-case financing and worst-case financing. Certain scenes may be noted for possible revision based on the budget consequences. Like modern theatrical writing, the filmmaker writing a low-budget film must treat the financial limitations as a structural framework into which to craft the story. If no flashback to the Eiffel Tower is possible, a close up of a toy replica in a store window might do the trick.
Once the financing begins in earnest, however, the role of the budget changes. Ultimately, the budget plays a pivotal role in identifying the costs of every element of the project to the financial participants of the project. This includes the investors, the lenders, the completion bond company, and the unions. Once a commitment has been made, there can be few significant changes without approval. No matter how artistically compelling, a filmmaker may not unilaterally decide to film for an extra two weeks to capture the light. Nor can he drop a name star to pay for those weeks, unless he has permission of the lender or completion bond company. Even investors might get upset by such a change, so the documents must be very explicit regarding which decisions are subject to change and which are not.
Anatomy of a Budget
Those fees which set the pricing tone of the project are described as the “above the line” costs. These include the leading cast members, the director, script, and producer’s fee. In the studio world, these are often negotiated in coordination, so that star salaries are proportionate and the director has a deal somewhat similar to the other above the line participants.
The remaining cast, locations, sets, costumes, permits, equipment rentals, and other expenses are itemized below the line. These costs tend to vary considerably less. The cost of a location permit, for example, does not change based on the fame of the cast. The budget must also reflect the postproduction, including the editing, sound, addition of special effects, and titles.
A budget is comprised of the summary page, known as the top sheet, and a series of department by department itemizations for that budget. Even if a film tops $200 Million, every roll of tape must be budgeted, receipted and credited to its particular account. The numbers may get large, but the attention to detail rarely diminishes. Throughout the course of the production, the actual expenses are compared to the budget to calculate the production’s accuracy in planning and to make those adjustments that are needed to keep the project on time and on budget.
Insurance and Completion Bond Requirements
In addition to the cost associated with the mechanical process of the filmmaking, certain expenses are part of the risk management for the production. Except for the tiniest of productions, each film company must carry a variety of insurance, including as workers’ compensation insurance, cast insurance, liability insurance on the negative and videotape, sets, equipment, and property, and errors & omissions insurance to cover problems with the script such as defamation or copyright infringement. The budget should have a contingency amount, typically of ten-percent of the total budget.
Finally, for many films, the project must be protected with a completion bond. The completion bond company agrees to pay those fees in excess of the ten percent contingency. The cost for this insurance is expensive in both financial and practical terms. The completion bond company retains veto control over cast and crew, and can take over the production if either the shoot begins to fall behind schedule, or re-shoots are necessary. The concern is focused on the budget, so an aesthetically bad but efficient production has little to worry about.
To obtain a completion bond, the production company must have full financing, complete, unambiguous ownership of the story and script rights, full insurance of the production, agreements for use of the primary locations, and a feasibility study or coverage showing that the script and budget balance. The steps necessary to obtain a completion bond make it significantly less likely that it will be needed, so the process serves as a good exercise in planning for many film projects.
Deferrals and Contingent Fees
Royalties, profits and residuals come out of income, so these are not included in the budget for a typical film. For independent filmmaking, however, deferred compensation reflecting income earned but not paid to cast, crew or other parties, are expenses incurred as part of the negative cost of the picture. These should be included in the budget but separately identified. A $50,000 film may have a deferred compensation of $30,000 and cash needs of $20,000. Any contracts or other provisions reflecting return to investors would be based on the $50,000 budget amount rather than the $20,000 cash needs of the project, so the budget should make this clear. Structured in this fashion, any additional royalties paid to the deferred income participants reflects the risk of not receiving their $30,000 in earned income and is therefore much easier for the average investor to respect.
* Jon M. Garon is admitted in New Hampshire and California