Film Production Completion Bond
A motion picture completion guaranty is a written contract that guarantees a motion picture will be finished and delivered on schedule and within budget. The majority of films produced and fully financed by the major Hollywood studios are, in effect, self-guaranteed. However, most independently financed films, including many that are released and distributed by the major studios, require a completion guaranty. The completion bond marketplace has consolidated in recent years and the remaining surety companies will not consider a submission under $5,000,000 without an equal amount of collateralization.
A producer usually secures a completion bond guaranty for the benefit of the bank or other financiers who agree to make the necessary production funding strike price available to the producer.
In general, a completion bond guaranty assures banks and financiers that:
- The producers will complete and deliver the film in keeping with the screenplay, budget and production schedule that the bank or financiers approved; or
- The completion guarantor will complete and deliver the film in keeping with such pre-approved screenplay and production schedule, and advance such sums in excess of the pre-approved budget necessary to do so; or
- In the event production of the film is abandoned, the completion guarantor will fully repay all sums invested in the film by the bank or financiers.
The “strike price,” or the “production price” as it is sometimes referred, is the amount that the completion guarantor believes will be needed in order to complete and deliver the film. The strike price will generally comprise (1) the budgeted “above the line” and “below the line” production costs, including fringes and insurance costs; (2) interest and financing costs, if applicable; (3) the completion guarantor’s fee; and (4) the contingency allowance. For the completion guaranty to be effective, the full amount of the strike price must be made available for production of the film.
The first proceeds from distribution will go to pay off any loss of the bonding company.
In order to determine whether a proposed film project presents an acceptable production risk, the completion guarantor will carefully examine and evaluate all significant factors facing the production. This process begins with the producer submitting to the completion guarantor the following main elements: script, budget, shooting schedule, résumés of key crew and descriptions of the project’s financiers and their respective financing commitments. Generally, completion guarantors prefer that the film’s distributors and financiers approve these key elements before they are submitted, however AFIG Entertainment is prepared to thoroughly evaluate them beforehand.
After reviewing these main elements, the completion guarantor will want to meet with members of the production team, such as the individual producer, director and production manager, to obtain their views about the production budget, shooting schedule and other production matters. Sometimes, the producer chooses to adjust elements in light of recommendations made by the risk manager. On the basis of these meetings and the final materials submitted, the completion guarantor determines whether the production can be produced, completed and delivered as presented. If the submission is approved, the completion guarantor will prepare the completion guarantee agreement and other necessary legal documents.
Once the completion guarantor determines that the production can be produced, completed and delivered as presented, the producer will need to enter into a producer completion agreement. In this agreement, the producer makes representations and agreements concerning the production and grants the completion guarantor certain rights to monitor and oversee the production to ensure that the film will be completed and delivered in accordance with the approved screenplay, budget, production and delivery schedules. If there are conflicts between the rights and obligations of the producer, distributor, completion guarantor and financiers under the various contracts relating to the production and delivery of the film, those parties will usually enter into an inter-party agreement to resolve such inconsistencies. The inter-party agreement, if applicable, is usually prepared by the principal financier’s legal counsel. The producer will be asked to furnish certain required documents and contracts to the completion guarantor for its review and approval.
The completion guarantor will require the producer to include an adequate contingency allowance in the budget. The contingency allowance may be a flat sum, but in most instances it is a fixed percentage of direct production costs (i.e., all production costs other than the contingency, interest and finance costs and the completion guaranty fee). Various factors will determine what amount the completion guarantor will find adequate for any particular film, however the contingency is normally 10% of direct production costs. The contingency allowance will be included in the strike price and accordingly, the completion guarantor will only be responsible for cost overruns after the financiers have made the contingency allowance available to the producers to cover the budgeted cost of production, completion and delivery. In certain situations, producers and others may agree to defer all or part of their fees if needed to fund the contingency allowance.
The completion guarantor must be satisfied that the production stays within budget and on schedule. Accordingly, the completion guarantor is given certain rights to monitor and oversee the production of the film. The producer will be required to furnish the completion guarantor with cost reports, production reports, cost projections and other customary motion picture measures of progress.
If at any time the completion guarantor expects that the film will not be produced, completed and delivered as promised, it may place a representative at the production site. Or, usually as a last resort, the completion guarantor may assert its right to “take over” some or all aspects of the production in an effort to minimize the risk of incurring liability under the completion guaranty. If a production is not progressing within budget and on schedule, AFIG Entertainment will strive to take a course of action that is least intrusive to the creative process of producing the film. In most cases, the course of action taken is determined only after meeting with the filmmakers and there has been an open exchange of ideas leading to sound, collaborative solutions.
Before determining the fee for a particular production, the completion guarantor considers several factors, including the director’s and production team’s experience, the film’s budget and associated production risks. As such, fees vary from film to film. Though sometimes a flat sum, the guaranty fee is normally expressed as a given percentage of direct production costs (i.e., all production costs other than the contingency, interest and finance costs and completion guaranty fee).
Some completion guarantors charge an up-front fee and agree to rebate a portion of it to the producer if no claims are made after the film is delivered. This is sometimes referred to as a “no claims rebate.”
Long recognized for delivering superior service AFIG Entertainment support policyholders through its global network of loss control and claim professionals. Our loss control specialists have a deep knowledge of the entertainment business. They identify potential hazards and help mitigate or prevent losses. They can provide invaluable advice in fire prevention, disaster recovery planning, equipment maintenance and premises safety. The AFIG Entertainment & Media Division provides entertainment insurance coverage on a worldwide basis for Motion Pictures, Television and D.I.C.E. productions.