Budgeting and Forecasting Film and Television Residuals

Residuals are often one of the most expensive line items in a production budget. They’re also one of the most complex things to calculate. Below, I’ll explain how to build accurate residual payment estimates into your production budget and how to forecast residuals. First, let’s take a look at a couple of definitions.

The difference between budgeting and forecasting

Budgeting and forecasting are two key processes production accountants use to calculate residual cost estimates accurately.

A production budget, created in anticipation of a project’s initial release, is used to calculate the dollars and cents needed to bring a project to life and get it out into the world. Residual payment calculations are an important line item in every production budget.

Forecasting is used to determine residual costs when a content owner is looking to sell content for a second run or re-air. Forecasting tells you what it will cost to give content that already exists new life on a different platform, network, or streaming service. Forecasting is used to estimate residual payments for any historical content on new media. That is, any media produced in or after 1971 that is not brand new that will be sold to a streaming platform.

Now that you understand when and why each of these methods is used to estimate residuals, let’s talk about how each one works.

Budgeting for residuals

Step one of accurately estimating residual payments is to determine whether your content is considered low-budget or high-budget. This is important because high-budget content rates are based on a fixed formula, whereas low-budget rates are based on the total amount of money received from the platform via a licensing fee.

These budget tables can help you determine where your content falls

If your content is high-budget, your next steps are to:

• Identify accurate Subscription Video On Demand (SVOD) base rates
• Determine accurate SVOD yearly rates 
• Verify the subscriber tier rate that applies to the platform you plan to release on
• Take these numbers and apply the formula: SVOD Base x Year 1 Rate x Platform Subscriber Rate

If your content is low-budget, your next steps are to:

• Know that you get a 26-week ‘free window,’ during which time no residuals are owed.
• Assess all applicable guild fees that will apply after the 26-week window expires.
  Rates are currently 1.2% for the Director’s Guild of America (DGA) and Writer’s Guild of America (WGA) and 3.6% for the Screen Actor’s Guild (SAG), but these rates change periodically. 
• The industry standard is to allocate half of the license fee to the free window and the other half to the pay window. So, divide your total episodic license fee by two, then multiply the remaining half by the appropriate guild’s percentage rate to calculate each applicable recipient’s residual payment for year one.
• Once you calculate residuals for each recipient, add them all together to get a total.

This quick explanation provides a good general overview of the budgeting process, but there’s much more to learn. Read this post for more details on calculating residuals for low-budget and high-budget new content on new media.

Now that we've covered a broad budgeting overview, let’s look at how forecasting works. 

Forecasting for residuals

Forecasting involves calculating residuals for historical content – or content that’s not brand new. This process is used when content owners shop second-sale opportunities, and production accountants must use data from the content’s original production budget to forecast residuals.

Here are some of the key details you’ll need to forecast residuals for each content type:

Step 1: Assess budget thresholds

Get a copy of the latest production budget from the line producer and use it to determine which threshold your content falls into: high-budget, free-window, or low-budget.

High-budget content includes 20-35 minute programs that cost at least $1.3 million to make, 36-65 minute programs that cost at least $2.5 million to make, and programs that are 66 minutes or longer that cost at least $3 million to make. If a program is less than 20 minutes long, it’s not considered high-budget, regardless of cost.

Free-window content is any content that doesn’t qualify as high-budget, but falls above the threshold for low-budget.

Low-budget content includes programs that cost less than $25,000 per minute to produce. To break it down, that works out to be a half-hour show with a budget of less than $750,000 or a one-hour show with a budget of less than $1.5 million.

Step 2: Follow the appropriate formula

If your content falls into the low-budget category, you owe no residuals for the initial platform it streams on. However, if you plan to release the content on other platforms in the future, you’ll be subject to a regular supplemental residuals rate. That means you’ll be obligated to pay a percentage of all applicable license fees on every dollar you receive after the first 26-week free window on the new platform.

If your content isn’t high-budget or low-budget, it falls into the free window. Free-window content has a 26-week period when no residuals are owed. After 26 weeks, you’re obligated to pay the percentage of the license fee to all applicable guilds in perpetuity. To calculate those costs, you must look up current guild rate percentages.

If your content falls into the high-budget category (most will), move on to step three.

Step 3: Determine which guilds you owe

To figure out which guilds you need to pay residuals to, you need to carefully examine the production budget and look for keywords. For example, the word ‘story’ refers to writers, so if you see that word in your budget, it’s safe to assume you owe residuals to WGA. Similarly, if you see the word ‘director,’ you owe residuals DGA. SAG residual obligations come from principal players, supporting cast members, and daily and weekly players.

Once you identify all the guilds you owe residuals to, it’s time to figure out the guild minimums for each. Guild minimums are outlined in guild agreements, which can be found online at each respective guild’s website.

Here are links to the basic agreements for the three major guilds: WGA | DGA | SAG

Please note: New rates come out every three years. If you have questions about how to find the most up-to-date rates, contact our residuals team, and we’ll point you in the right direction.

Tips for successful residuals forecasting

When forecasting, your ultimate goal is to accurately calculate residual payment estimates for each player and to add up scales appropriately. What steps can you take to ensure accuracy?

Here are a few helpful things I’ve learned along the way:

• Rely heavily on your production budget: It’s always in your best interest to use a production budget to substantiate forecasts because everything recorded there gives you a way to quantify your estimates. The budget will tell you how many actors the project uses on average, which directors are involved, and how many series, weekly, and daily players to calculate for.
• Show your work: I highly recommend you always pair your forecast with a production budget so anyone reviewing it can see your math. Using a standardized template so all your estimates are consistent is also a good idea.
• Put everything in writing: If anything unique comes up in your contract negotiations, always get it in writing. The same is true for recording details of your license contracts. As an example, it’s smart to list which markets you’re covering in contracts, so guilds can reference that information if a dispute should ever arise.
• Build in a buffer: Include a fringe amount to account for pension, health, welfare, taxes, and handling fees. Be sure to add more for taxes to protect yourself from complications brought on by utilizing loan-out talent who don’t incur taxes.
• Pay attention to details: There are lots of little things that can slip past you and cause residual calculation errors. For example, forgetting that the foreign distribution formula is only applicable if released in certain markets. Or using the wrong guild minimums for the monthly payment you’re calculating.
• Seek legal counsel when necessary: If you’re ever in doubt about any details of a contract, call an attorney. A labor and relations lawyer can offer legal counsel if you have questions, or if any issues arise.

Since minimums, SVOD rates, and yearly rates can differ for each type of residual payment being made, forecasting can become quite complex. Luckily, you can call in the experts!

EP is here for you

Entertainment Partners has a team of experienced in-house residuals experts available to help shoulder the residuals burden for you. Send us an email, or click the green 'contact us' button on the website if you have any questions. If you’re already an EP customer and you have a project set up with us that you want to shop around, let us know. Our team can help with everything from initial budgeting for residuals to forecast second-sale opportunities, and more!