This is part of a series of book excerpts from The Independent Filmmaker’s Law and Business Guide: Financing, Shooting, and Distributing Independent and Digital Films
designed to introduce filmmakers and others interested in creating content on the legal issues involved in the filmmaking process.
Though sometimes it is the most creative part of a film, a carefully crafted budget provides the pivotal road map for the entire film project. Whether the film is expected to cost $2,000 or $200 million, its budget must account for every dollar to be expended on the production. In addition, the budget serves as a comparative tool, assuring that all the pieces of the film are proportionate or at least carefully planned. If each cast member receives tens of millions of dollars, then the film should not have homemade special effects.
The budget will be shaped by the filmmaker’s specific choices: locations, size and prominence of cast, stunts, and the effects needed both during and after principal photography. For independent and guerrilla filmmakers, 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 certain special effect defines the film, then that element should be identified early 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 continues from the 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, print and advertising costs often equal the production costs, and for an inexpensive film, they may greatly exceed those costs.
There are excellent software programs to assist filmmakers with the detailed budgeting and accounting process, including EP Movie Magic Budgeting and Jungle Software’s Gorilla. These programs can handle a great deal of detail and generate extremely helpful reports. The approach to the budget, however, must come from the filmmaker rather than the software.
The budgeting process is important for a number of reasons, both internal and external. The screenplay may be the most important filmmaking tool, but only the budget can set the financial framework for all the decisions regarding the film. It provides a material foundation on which every party involved in the project relies.
An accurate and complete budget must be provided to the investors, the lenders, the completion bond company, and the unions.
Once the filmmaker obtains a commitment, few significant alterations can be made without their approval. A filmmaker may not unilaterally decide to film for an extra two weeks to capture the light, no matter how artistically compelling it may be. Nor can she drop a name star to pay for those two weeks, unless she has the permission of the lender and the completion bond company. Even investors might get upset by such changes, so the documents must be very explicit regarding which budget decisions are subject to change and which are not.
Many of the recipients of the budget will undertake an independent review of its assumptions. For instance, if a low-budget production seeks to use WGA or SAG reduced-scale agreements, the proposed budget is part of the document package provided to the unions. They assess the anticipated cost of equipment, locations, cast size, and number of days, and may reject the budget if they do not believe it accurately reflects the cost of the shoot. In addition, the unions will require the actual expenses to be submitted at the end of principal photography to ensure that the filmmaker has stayed within the financial limits of the low-budget agreements.
The completion bond company will also review the budget carefully, in combination with the script, to determine the feasibility of delivering the film within the projected budget. The company will only be willing to provide a completion bond if it believes the budget is reasonably conservative in its estimates of cost and schedule. Since the completion bond is a requirement for many entertainment lenders, this budget review can make or break a production.
The film company is required to provide the investors with a series of disclosure documents that are accurate, complete, and sufficient to give the investor a full understanding of the risks involved in the production. No document is more important for this purpose than the budget. It details the costs to complete the film and acquire a distributor. If the film company seeks to raise substantially more money than this, the additional money raised will likely go into the pockets of the filmmakers. If the film company does not raise enough money to meet the budget, then the filmmakers must explain what combination of loans and personal funds they are committing to the film. Otherwise, the project is doomed from the start.
Investors have no information other than the budget to understand the relationship between their potential investment and the costs of producing the proposed film. Despite the ease with which the filmmaker can adjust the presumptive costs in the budget software, the filmmaker must understand that the budget represents a commitment to those parties who have relied upon the document.
Because a budget is an important source of information for investors, the time to adjust and experiment with the budget is before they have committed to the film. Until the budget has been presented to investors, lenders, or the completion bond company, it represents nothing more than numbers on a page.
Budgets often are changed 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 financial outcome. Like a modern theatrical writer, the filmmaker writing a low-budget film must treat the financial limitations as a structural framework around which the story is crafted. If no flashback to the Eiffel Tower is possible, a close-up of a toy replica in a store window might do the trick.
If an independent film will be made on a minimal budget, then certain expenses must be eliminated. Because the budget cannot accommodate travel expenses or other costs, the movie may be filmed locally, or in areas that can easily double for other locations so that multiple scenes can be shot without moving. A high-speed car chase may need to be revised to take place on foot or on bicycles. The science fiction genre has become so effects laden that low-budget science fiction films have nearly disappeared.
When studios or production companies review scripts for possible purchase, the script is put through a coverage review. The result is a two-to-five-page report in which the potential purchaser quickly summarizes the project, assesses the strengths and weaknesses of the concept, story, and writing, and provides an estimated cost of production.
The estimate reflects what this particular production company believes it should spend to bring this script to the screen. Embedded in this analysis is the production company’s choices regarding the quality and budget for lead cast members, scale of special effects and visual effects, and approach to international locations. A studio or major production company with a roster of A-list talent and films will incorporate those types of costs into the analysis and coverage. A small art house will assume a different pool of actors from which to choose and different strategies for managing costs. Each will provide budget coverage for the script that is accurate for that company’s production, but that coverage will not necessarily be relevant to any other producer.
The majority of the coverage process is focused on the script rather than the budget. The coverage report will separately rate the script and the writer, as well as the key elements of the content: concept, plot, story structure, characters, dialogue, and visual impact. This grading, along with the company’s own synopsis, will become the document used to assess the film.
Although many parties to the financing of the film will rely on the budget, the filmmaker may not find it helpful to disclose budget figures when selling the distribution rights in a film market or film festival setting. The film company is seeking the largest possible advance for the rights to the film, because a large advance provides cash to the film company and motivates the distributor to work diligently to recoup its investment in the film. The distributor, in contrast, rarely wants to provide an advance greater than the budget of the film. Since the filmmaker would be violating her duty to negotiate in good faith were she to lie regarding the budget, the best strategy is to keep information regarding the budget secret and refuse to respond to inquiries regarding the budget during the negotiation process.
Nonetheless, no-budget films, such as Kevin Smith’s Clerks or Robert Rodriguez’s El Mariachi, do create a certain rough ambience about them. Even modest success can often result in large-percentage returns, which bolster the credibility and bankability of the filmmakers. In contrast, high-budget films must be blockbusters to justify the expense, resulting in ever more lavish productions and increasing expectations. As a result, while independent filmmakers often want to create the impression that their film cost more than it did when selling it, they frequently understate the cost once the film is being exhibited, to suggest that they are more creative and resourceful than the actual budget would suggest. For example, it was rumored that while the reported budget of The Blair Witch Project was only $30,000, Artisan Entertainment spent close to $1 million to finish the film.
Deferred compensation represents income earned but not paid to cast, crew, or other parties. In reality, deferred compensation represents a form of an unsecured loan made to the film company by its employees. If the film company does not obtain sufficient funding or earn sufficient income, then the employee will forgo this portion of her income.
Deferred compensation is an expense, and like all expenses it should be included in the budget, itemized in the appropriate category. If a film has cash needs of $200,000 and deferred compensation of $300,000, any contracts or other provisions reflecting return to investors would be based on a $500,000 budget amount rather than the $200,000 cash needs, so the budget should make this clear.
However, the budget should also identify deferred compensation as such. The average investor will be much more likely to respect additional royalties paid to the deferred income participants if he can see that it reflects the risk that they will not receive their $300,000 in earned income.
* Jon Garon is admitted in New Hampshire, California and Minnesota.
Adapted from Independent Filmmaking, The Law & Business Guide™ for Financing, Shooting & Distributing Independent & Digital Films, A Capella Books (2d Ed. 2009) (reprinted with permission).
Jon Garon is professor of law, Hamline University School of Law; of counsel, Gallagher, Callahan & Gartrell.